<PAGE> 1
A MESSAGE TO SHAREHOLDERS
FELLOW SHAREHOLDER:
The stock market's extraordinary rise continued during the first half of
Windsor Fund's 1996 fiscal year, which ended on April 30. Your Fund
participated fully in the advance, providing a return of +13.8%, precisely
matching the market average.
The table below compares Windsor's total return (capital
change plus reinvested dividends) for the period with that of the average value
(growth and income) mutual fund and the unmanaged Standard & Poor's 500
Composite Stock Price Index, the basic benchmark 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, 1996
- --------------------------------------------------------------------------------------
<S> <C>
VANGUARD/WINDSOR FUND +13.8%
- --------------------------------------------------------------------------------------
AVERAGE VALUE FUND +13.7%
STANDARD & POOR'S 500 STOCK INDEX +13.8
- --------------------------------------------------------------------------------------
</TABLE>
The Fund's return is based on net asset values of $15.55 per share on October
31, 1995, and $15.90 on April 30, 1996, with the latter figure adjusted to take
into account the reinvestment of a semi-annual dividend of $.26 per share from
net investment income and an annual distribution of $1.38 per share from net
realized capital gains. Both payments were the result of our operations during
1995 and were made on December 18, 1995.
THE PERIOD IN REVIEW
The stock market, as measured by the Standard & Poor's 500 Index, provided
positive returns in each month of the semi-annual period--a very strong showing
indeed, as reflected in the table above. Stock prices initially seemed to get a
lift from falling interest rates from November through mid-January. And yet,
surprisingly, the stock market shrugged off the subsequent sharp reversal in
long-term interest rates. (The yield on the 30-year U.S. Treasury bond rose
from below 6.0% in mid-January to 6.8% by the end of April.) In short, it was a
period during which both "good" and "bad" economic news were interpreted as
good news for stocks, suggesting that a speculative spirit is abroad in the
land.
In any case, the result was a robust gain for the Standard & Poor's
500 Index for the past six months. It was exactly matched by Windsor's return
of +13.8%, which in turn was a smidgen above the return of +13.7% for the
average value mutual fund. Windsor's solid gain was particularly noteworthy in
that it was achieved despite the fact that our adviser, Wellington Management
Company, maintained a relatively defensive posture.
The Fund's position of about 16% in short-term cash reserves muted our
total return relative to the fully invested Index and our competitors. Standing
alone, our equity holdings enjoyed a total return of +15.4% during the period.
This fine return on our equity holdings was achieved in part from our
substantial underweighting in the utilities sector (12.2% of the Index versus
0.9% of the Fund's assets), which was among the market's laggards. We also
profited from good overall stock selection in the consumer cyclical and
financial sectors.
It's a bit unusual for Windsor's return to parallel so closely the
returns on our comparative benchmarks. Typically, our returns have diverged
sharply (both up and down) from those of the market indexes and competing
growth and income funds. This divergence has occurred largely because Windsor's
pursuit of "value" leads us, characteristically, to have heavy concentrations
in industry sectors and in individual stocks (40% of our assets are invested in
our ten largest holdings). For this reason--not to mention the market risk that
accompanies any investment in common stocks--we urge Windsor Fund shareholders
to focus on the long term in pursuit of their long-term investment objectives.
As always, we will do our best to live up to your realistic
expectations for Windsor Fund and provide returns that are fully competitive
with
1
<PAGE> 2
comparable mutual funds. We look forward to reporting to you in further detail
in our 1996 Annual Report six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
/s/ JOHN J. BRENNAN
- -------------------
John J. Brennan
President
May 9, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
2
<PAGE> 3
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND (PERIODS ENDED MARCH 31, 1996)
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 +27.38% +15.84% +12.61% +7.65% +4.96%
</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.
3
<PAGE> 4
REPORT FROM THE INVESTMENT ADVISER
Our performance in the first half of the fiscal year matched the S&P's 13.8%
rise. In the forepart of this period, the market was hesitant about the
direction of the U.S. economy, and our large cyclical position underperformed
the market accordingly. At the same time, the consumer nondurable/health-care
sector, which represents 23% of the S&P 500 versus none in Windsor because we
consider it overvalued, outperformed the market, as money flowed into these
"safe havens" during this period of economic uncertainty. Since March of this
year, however, this "double whammy" has reversed somewhat, with cyclicals
outperforming and consumer nondurables underperforming, as evidence comes in to
confirm our case that the economy still has room to grow.
Specifically, we would cite the improvement in both auto and general
merchandise sales that we started to see in February, and that has been
sustained through April. Homebuilder orders, the best leading indicator of
housing demand, continued strong in April. All in all, we think that the
consumer is coming back to life after a 3-4 quarter snooze, which should carry
1996 real GDP to our 2.5% to 3% forecast, and that this kind of overall
economic growth can be sustained for a good period beyond 1996, as well.
The cyclical component of our portfolio--the autos, as well as
chemical, steel, aluminum, and paper producers--remains our largest, at about
37% of the Fund. The financials--banks, insurance, and S&Ls--have been reduced,
by sales, mostly at full realization of our targets, from 25% last October to
19%. We continue above market weighted in energy, at 14% of the Fund, with a
particular emphasis on U.S. natural gas. The final noteworthy concentration is
technology, which has been increased from 3% to 9%, taking advantage of the dip
in these stocks late last year and earlier this year.
Our equity ratio has increased from 81% last October and 80% at the
end of December to about 86% at the end of April. We are intent on increasing
this ratio further, albeit in our usual low PE, bargain- hunting,
well-researched fashion.
Finally, on a personal note, let me express my pride in being asked
to continue the tradition of "doing something out of the ordinary" with your
money. In this regard, I am always quick to take note of the current, very
talented and experienced Windsor Fund team of Jim Averill, Jim Mordy, Dave
Fassnacht, and now Brian Ferguson, that I have the pleasure to lead, and the
contribution you can be sure that they will make to this quest.
Respectfully,
Charles T. Freeman
Portfolio Manager
Wellington Management Company
May 15, 1996
4
<PAGE> 5
SPECIAL NOTICE TO SHAREHOLDERS
NEW AGREEMENT TO REDUCE INVESTMENT ADVISORY FEES
We are pleased to announce that the Board of Directors of Vanguard/Windsor Fund
has reached an agreement with Wellington Management Company (WMC), the Fund's
investment adviser, on a revised investment advisory agreement. The revised
agreement involves a reduction in the annual rate of advisory fees to be paid
to WMC. At the Fund's current asset level of $14.9 billion, the dollar amount
of the annual fee would decline from $23,191,000 to $18,607,000, a reduction of
$4,584,000. The new effective annual fee rate would equal 0.125% of the Fund's
current net assets and would decline further if assets were to continue to
grow.
Under the terms of the new agreement, the Fund will pay WMC a basic
advisory fee at the end of each fiscal quarter, based on the Fund's average
month-end net assets during the quarter. The quarterly rate is applied
according to the following annual fee schedule:
<TABLE>
<CAPTION>
- ------------------------------------------------------
ANNUAL BASIC
NET ASSETS FEE RATE
- ------------------------------------------------------
<S> <C>
FIRST $17.5 BILLION 0.125%
OVER $17.5 BILLION 0.100
- ------------------------------------------------------
</TABLE>
Both the current and revised agreements provide that the basic fee may be
increased or decreased by applying an incentive/penalty fee adjustment based on
the investment performance of the Fund relative to the investment performance
of the Standard & Poor's 500 Composite Stock Price Index. The table to the
right sets forth the incentive/penalty adjustment to the basic advisory fee
payable by the Fund to WMC under the new advisory agreement.
This revised investment advisory agreement replaces the Fund's
current agreement with the adviser dated June 19, 1985, and will go into effect
on August 1, 1996. (Under the interpretations of the Securities and Exchange
Commission, the new
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
CUMULATIVE 36-MONTH PERFORMANCE PERFORMANCE FEE
VERSUS THE S&P 500 INDEX ADJUSTMENT*
- ---------------------------------------------------------------------
<S> <C>
FOR FIRST $17.5 BILLION OF ASSETS:
LESS THAN -12% -0.67 X BASIC FEE
BETWEEN -12% AND -6% -0.33 X BASIC FEE
BETWEEN -6% AND 6% 0.00 X BASIC FEE
BETWEEN 6% AND 12% 0.33 X BASIC FEE
MORE THAN 12% 0.67 X BASIC FEE
- ---------------------------------------------------------------------
FOR ASSETS OVER $17.5 BILLION:
LESS THAN -12% -0.90 X BASIC FEE
BETWEEN -12% AND -6% -0.45 X BASIC FEE
BETWEEN -6% AND 6% 0.00 X BASIC FEE
BETWEEN 6% AND 12% 0.45 X BASIC FEE
MORE THAN 12% 0.90 X BASIC FEE
- ---------------------------------------------------------------------
</TABLE>
* For purposes of this calculation, the basic fee is calculated by applying
a quarterly rate based on the annual basic fee rate using average assets
over the same 36-month period over which the performance is measured.
incentive/penalty fee will not be fully operable until the quarter ending July
31, 1999; until that date, the fee will be calculated according to certain
transition rules.) Until the effective date, the adviser has agreed to waive
its advisory fees to the extent necessary to abide by the new fee schedule. For
the fiscal year ended October 31, 1995, the Fund paid approximately $26,774,000
to WMC for investment advisory services.
The adviser, located at 75 State Street, Boston, Massachusetts, is a
professional investment advisory firm which globally provides services to
investment companies, institutions, and individuals. Among the clients of WMC
are 12 investment companies of The Vanguard Group. Under the terms of its
investment advisory agreement with the Fund, the adviser agrees to manage the
investment and reinvestment of the assets of the Fund and to continuously
review, supervise, and administer the Fund's investment program. The adviser
discharges its responsibilities subject to the control of the officers and
directors of the Fund.
5
<PAGE> 6
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, 1996. 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 Fund S&P 500
Value with Income --------------------------- -------
October 31 Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Return
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1972 $ 8.99 $ .57 $.29 $ 9.86 + 9.9% +3.4% +13.3% +21.9%
- --------------------------------------------------------------------------------------------------------------------
1973 7.61 .14 .32 8.85 -13.8 +3.6 -10.2 0.0
- --------------------------------------------------------------------------------------------------------------------
1974 5.51 -- .31 6.74 -27.6 +3.8 -23.8 -28.7
- --------------------------------------------------------------------------------------------------------------------
1975 7.48 -- .32 9.55 +35.8 +5.9 +41.7 +25.9
- --------------------------------------------------------------------------------------------------------------------
1976 9.48 .22 .38 12.89 +29.7 +5.3 +35.0 +20.1
- --------------------------------------------------------------------------------------------------------------------
1977 9.28 .56 .40 13.93 + 3.8 +4.3 + 8.1 - 6.1
- --------------------------------------------------------------------------------------------------------------------
1978 8.86 1.01 .48 15.50 + 6.2 +5.0 +11.2 + 6.3
- --------------------------------------------------------------------------------------------------------------------
1979 9.21 .85 .53 18.52 +13.5 +6.0 +19.5 +15.3
- --------------------------------------------------------------------------------------------------------------------
1980 10.00 .79 .59 23.01 +17.2 +7.0 +24.2 +32.1
- --------------------------------------------------------------------------------------------------------------------
1981 9.62 1.49 .69 27.14 +11.1 +6.9 +18.0 + 0.6
- --------------------------------------------------------------------------------------------------------------------
1982 10.00 .99 .62 32.88 +14.2 +7.0 +21.2 +16.3
- --------------------------------------------------------------------------------------------------------------------
1983 11.50 1.03 .70 43.59 +25.3 +7.3 +32.6 +27.8
- --------------------------------------------------------------------------------------------------------------------
1984 12.12 .48 .76 50.76 + 9.6 +6.9 +16.5 + 6.3
- --------------------------------------------------------------------------------------------------------------------
1985 13.39 .74 .79 62.58 +16.6 +6.7 +23.3 +19.4
- --------------------------------------------------------------------------------------------------------------------
1986 13.85 2.59 .85 80.92 +22.8 +6.5 +29.3 +33.2
- --------------------------------------------------------------------------------------------------------------------
1987 14.22 -- .30 84.66 + 2.7 +1.9 + 4.6 + 6.4
- --------------------------------------------------------------------------------------------------------------------
1988 14.13 2.21 .87 107.53 +18.9 +8.1 +27.0 +14.8
- --------------------------------------------------------------------------------------------------------------------
1989 15.17 .55 .63 125.86 +11.9 +5.2 +17.1 +26.4
- --------------------------------------------------------------------------------------------------------------------
1990 9.72 .85 .75 90.71 -31.8 +3.9 -27.9 - 7.5
- --------------------------------------------------------------------------------------------------------------------
1991 12.79 .32 .74 131.25 +35.7 +9.0 +44.7 +33.5
- --------------------------------------------------------------------------------------------------------------------
1992 12.37 .84 .57 143.45 + 4.3 +5.0 + 9.3 +10.0
- --------------------------------------------------------------------------------------------------------------------
1993 14.95 .38 .39 184.04 +24.6 +3.7 +28.3 +14.9
- --------------------------------------------------------------------------------------------------------------------
1994 14.55 .89 .37 195.71 + 3.7 +2.6 + 6.3 + 3.9
- --------------------------------------------------------------------------------------------------------------------
1995 15.55 .86 .44 230.55 +14.2 +3.6 +17.8 +26.4
- --------------------------------------------------------------------------------------------------------------------
1996(4/30) 15.90 1.38 .26 262.39 +12.0 +1.8 +13.8 +13.8
- --------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL +2,916.0% +1,720.0%
- --------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +14.9% +12.6%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes reinvestment of income dividends and any capital gains distributions
for both the Fund and the Index.
Note: The initial net asset value was $8.70 on October 31, 1971, 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.
6
<PAGE> 7
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
April 30, 1996
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (85.7%)
- --------------------------------------------------------------------------------------------------
BASIC MATERIALS (25.3%)
- --------------------------------------------------------------------------------------------------
CHEMICALS (5.8%)
Bayer AG ADR 165,000 $ 5,280
(1)Freeport-McMoRan Resource
Partners LP 5,702,900 109,068
(1)Geon Co. 2,480,000 65,720
(1)Georgia Gulf Corp. 3,494,800 128,434
(1)Lyondell Petrochemical Co. 7,375,000 216,641
Norsk Hydro AS ADR 1,650,900 75,942
Rhone-Poulenc SA 7,604,600 183,461
Union Carbide Corp. 1,868,900 85,035
METALS & MINING (4.4%)
Alcan Aluminium Ltd. 535,400 17,066
*Alumax, Inc. 1,452,600 48,662
Aluminum Co. of America 4,001,400 249,588
(1)(2)Reynolds Metals Co. 6,225,800 334,637
PAPER & FOREST PRODUCTS (11.1%)
(1)Bowater Inc. 3,500,000 140,000
(1)Champion International Corp. 6,300,000 303,975
(1)(2)Georgia-Pacific Corp. 8,684,400 675,212
(1)Stone Container Corp. 9,470,000 160,990
(1)(2)Union Camp Corp. 6,855,900 372,790
STEEL (4.0%)
(1)AK Steel Holding Corp. 2,580,100 98,689
*(1)Bethlehem Steel Corp. 6,495,800 88,505
British Steel PLC ADR 5,438,800 164,524
*Geneva Steel Class A 1,309,500 8,675
Inland Steel Industries, Inc. 1,929,200 47,507
(1)LTV Corp. 7,302,600 100,411
*(1)National Steel Corp. Class B 1,932,500 26,330
(1)Rouge Steel Co. Class A 1,877,000 41,998
*WHX Corp. 203,700 2,343
*(1)Weirton Steel 3,719,500 15,343
------------
SECTOR TOTAL 3,766,826
------------
- --------------------------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (2.1%)
- --------------------------------------------------------------------------------------------------
Case Corp. 770,000 38,885
(1)Continental Homes Holding Corp. 687,900 15,736
Lone Star Industries, Inc. 300,400 10,777
MDC Holdings, Inc. 498,600 3,490
*(1)Owens Corning 3,931,600 158,247
(1)Ryland Group, Inc. 925,200 15,266
Southdown, Inc. 341,600 8,028
(1)Standard Pacific Corp. 1,750,000 11,156
*Toll Brothers, Inc. 763,400 12,405
*USG Corp. 1,509,000 39,423
------------
SECTOR TOTAL 313,413
------------
- --------------------------------------------------------------------------------------------------
CONSUMER CYCLICAL (12.5%)
- --------------------------------------------------------------------------------------------------
APPAREL & TEXTILES (.5%)
*(1)Burlington Industries Inc. 6,700,000 77,888
AUTO & TRUCK (11.9%)
(2)Chrysler Corp. 14,785,200 927,771
(2)Ford Motor Co. 23,617,200 847,267
RETAIL (.1%)
*Burlington Coat Factory
Warehouse Corp. 939,600 10,218
------------
SECTOR TOTAL 1,863,144
------------
- --------------------------------------------------------------------------------------------------
ENERGY (13.7%)
Amerada Hess Corp. 555,000 31,427
Apache Corp. 90,900 2,636
(2)Atlantic Richfield Co. 4,041,000 475,828
(1)(2)Burlington Resources, Inc. 12,531,000 466,780
(1)Cabot Oil & Gas Corp. Class A 2,255,200 37,211
(1)ENSERCH Corp. 4,753,500 102,200
*(1)Oryx Energy Co. 5,811,100 92,978
(1)Pennzoil Co. 3,169,000 140,228
Phillips Petroleum Co. 208,000 8,632
*Santa Fe Energy Resources, Inc. 590,000 7,080
*Seagull Energy Corp. 694,000 16,916
(1)(2)USX-Marathon Group 24,027,200 528,598
Ultramar Corp. 1,553,200 48,732
(1)Valero Energy Corp. 2,866,500 82,770
------------
SECTOR TOTAL 2,042,016
------------
- --------------------------------------------------------------------------------------------------
FINANCIAL (19.2%)
- --------------------------------------------------------------------------------------------------
BANKS (10.9%)
Bancorp Hawaii, Inc. 123,200 4,466
BankAmerica Corp. 2,076,253 157,276
Chase Manhattan Corp. 984,700 67,821
(2)Citicorp 9,551,200 752,157
First Union Corp. 3,338,800 205,336
KeyCorp 3,572,923 138,004
NationsBank Corp. 3,791,700 302,388
INSURANCE (3.0%)
Allstate Corp. 4,838,100 188,081
CIGNA Corp. 1,893,100 214,630
*(1)IPC Holdings Ltd. 1,370,600 26,898
Mid Ocean Ltd. 278,300 9,880
REAL ESTATE INVESTMENT TRUST (.3%)
Equity Residential
Properties Trust 1,178,900 38,019
SAVINGS & LOANS (5.0%)
(1)H.F. Ahmanson & Co. 8,476,845 201,325
*Coast Savings Financial, Inc. 431,600 13,433
(1)Golden West Financial Corp. 5,652,100 297,442
(1)Great Western Financial Corp. 10,246,186 235,662
------------
SECTOR TOTAL 2,852,818
------------
- --------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY (8.9%)
- --------------------------------------------------------------------------------------------------
COMMUNICATION EQUIPMENT (1.3%)
Nokia Corp. Pfd. ADR 5,282,900 $ 192,165
COMPUTER RELATED (5.4%)
*(2)COMPAQ Computer Corp. 11,725,000 546,678
*Seagate Technology 4,479,108 259,788
ELECTRONICS (.6%)
*(1)Western Digital Corp. 3,660,700 86,026
SEMICONDUCTORS (1.6%)
*(1)Advanced Micro Devices 12,310,400 230,820
------------
SECTOR TOTAL 1,315,477
------------
- --------------------------------------------------------------------------------------------------
TRANSPORT & SERVICES (1.2%)
- --------------------------------------------------------------------------------------------------
AIRLINES (1.2%)
*America West Airlines, Inc. 1,056,200 22,180
Delta Air Lines, Inc. 1,972,000 158,499
TRUCKING & SHIPPING
(1)Maritrans Inc. 954,000 5,008
------------
SECTOR TOTAL 185,687
------------
- --------------------------------------------------------------------------------------------------
UTILITIES (.4%)
- --------------------------------------------------------------------------------------------------
Unicom Corp. 2,321,499 63,841
------------
- --------------------------------------------------------------------------------------------------
MISCELLANEOUS (2.4%) 353,883
- --------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $10,301,890) 12,757,105
- --------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (.2%)
- --------------------------------------------------------------------------------------------------
Atlantic Richfield Cvt. 9.00%
(Convertible into Lyondell
Petrochemical Co.) 610,000 17,233
Bethlehem Steel Corp. $5.00 123,900 6,536
Reynolds Metals Co. $3.31 180,000 8,573
- --------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $30,648) 32,342
- --------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATION (1.4%)
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
--------
<S> <C> <C>
U.S. TREASURY NOTE
7.25%, 11/15/96
(Cost $206,654) $204,500 206,416
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
(000)+
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (12.0%)
- --------------------------------------------------------------------------------------------------
COMMERCIAL PAPER
Abbott Laboratories
5.25%, 5/24/96 $ 19,000 $ 18,936
Chevron Oil Finance
5.25%, 5/20/96 25,000 24,931
5.25%, 5/21/96 50,000 49,854
5.27%, 5/2/96 50,000 49,993
Duke Power
5.30%, 5/13/96 60,000 59,894
E.I. duPont de Nemours & Co.
5.27%, 7/11/96 50,000 49,468
General Electric Capital Corp.
5.28%, 5/23/96 50,000 49,839
5.28%, 5/30/96 50,000 49,787
5.30%, 5/30/96 50,000 49,786
Shell Oil Co.
5.25%, 6/5/96 45,000 44,770
5.25%, 6/21/96 50,000 49,628
Statoil
5.30%, 5/24/96 25,000 24,915
FEDERAL HOME LOAN BANK
5.22%, 5/23/96 25,760 25,678
FEDERAL HOME LOAN MORTGAGE CORP.
5.20%, 5/28/96 100,000 99,610
5.22%, 5/20/96 150,000 149,587
5.24%, 5/15/96 54,173 54,063
FEDERAL NATIONAL MORTGAGE ASSN.
5.24%, 5/16/96 275,000 274,400
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.32%, 5/1/96 665,523 665,523
- --------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $1,790,675) 1,790,662
- --------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.3%)
(Cost $12,329,867) 14,786,525
- --------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.7%)
- --------------------------------------------------------------------------------------------------
Other Assets--Notes C and E 260,322
Liabilities--Note E (161,409)
----------
98,913
- --------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Market
Value
(000)+
- -----------------------------------------------------------------------------------
<S> <C>
NET ASSETS (100%)
- -----------------------------------------------------------------------------------
Applicable to 936,036,516 outstanding
$.01 par value shares
(authorized 1,300,000,000 shares) $14,885,438
- -----------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $15.90
===================================================================================
</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 39.8% of net assets.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- -------------------------------------------------------
AT APRIL 30, 1996, NET ASSETS CONSISTED OF:
- -------------------------------------------------------
AMOUNT PER
(000) SHARE
----------- ------
<S> <C> <C>
PAID IN CAPITAL $11,763,516 $12.57
UNDISTRIBUTED NET
INVESTMENT INCOME 110,206 .12
ACCUMULATED NET
REALIZED GAINS 555,058 .59
UNREALIZED APPRECIATION
OF INVESTMENTS--NOTE D 2,456,658 2.62
- ------------------------------------------------------
NET ASSETS $14,885,438 $15.90
- ------------------------------------------------------
</TABLE>
9
<PAGE> 10
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
April 30, 1996
(000)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . $ 156,028
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 68,947
- ---------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . 224,975
- ---------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B
Basic Fee . . . . . . . . . . . . . . . . . . . . . . . . $ 9,451
Performance Adjustment . . . . . . . . . . . . . . . . . . (2,827) 6,624
---------
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . 13,742
Marketing and Distribution . . . . . . . . . . . . . . . . 1,223 14,965
---------
Taxes (other than income taxes) . . . . . . . . . . . . . . . 502
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . 14
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . 11
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . 205
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . 89
Directors' Fees and Expenses . . . . . . . . . . . . . . . . 22
- ---------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . 22,432
Expenses Paid Indirectly--Note C . . . . . . . . . . . . (1,831)
- ---------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . . . . . . . 20,601
- ---------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . 204,374
- ---------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . . . . . 561,689
- ---------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . 1,040,612
- ---------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . $1,806,675
===================================================================================================
</TABLE>
10
<PAGE> 11
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
APRIL 30, 1996 October 31, 1995
(000) (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . $ 204,374 $ 360,056
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . 561,689 1,167,670
Change in Unrealized Appreciation (Depreciation) . . . . . . . 1,040,612 425,123
- -----------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . 1,806,675 1,952,849
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . (219,659) (352,640)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . (1,165,883) (673,435)
- -----------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . (1,385,542) (1,026,075)
- -----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,192,798 1,283,038
Issued In Lieu of Cash Distributions . . . . . . . . . . . . . 1,322,510 976,040
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,058,768) (1,584,392)
- -----------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . 1,456,540 674,686
- -----------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . 1,877,673 1,601,460
- -----------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . 13,007,765 11,406,305
- -----------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . . . . $14,885,438 $13,007,765
=====================================================================================================
(1) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . 78,729 89,000
Issued in Lieu of Cash Distributions . . . . . . . . . . 91,019 75,852
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . (69,965) (112,335)
- -----------------------------------------------------------------------------------------------------
99,783 52,517
- -----------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended October 31,
SIX MONTHS ENDED -----------------------------------------------------
For a Share Outstanding Throughout Each Period APRIL 30, 1996 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . $15.55 $14.55 $14.95 $12.37 $12.79 $ 9.72
-------- -------- -------- -------- ------- --------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . .23 .44 .44 .37 .49 .58
Net Realized and Unrealized Gain
on Investments . . . . . . . . . . . . . . . . . . 1.76 1.86 .42 2.98 .50 3.55
-------- -------- -------- -------- ------- --------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . 1.99 2.30 .86 3.35 .99 4.13
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.26) (.44) (.37) (.39) (.57) (.74)
Distributions from Realized Capital Gains . . . . . (1.38) (.86) (.89) (.38) (.84) (.32)
-------- -------- -------- -------- ------- --------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (1.64) (1.30) (1.26) (.77) (1.41) (1.06)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . $15.90 $15.55 $14.55 $14.95 $12.37 $12.79
================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . +13.79% +17.80% +6.35% +28.29% +9.30% +44.69%
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . $14,885 $13,008 $11,406 $10,537 $8,250 $7,859
Ratio of Total Expenses to Average Net Assets . . . . . .32%* .45% .45% .40% .26% .30%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . 2.93%* 3.01% 3.11% 2.68% 3.89% 4.84%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . 38%* 32% 34% 25% 32% 36%
Average Commission Rate Paid . . . . . . . . . . . . . $.0581+ N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions were charged.
This disclosure is required by the SEC beginning in 1996.
12
<PAGE> 13
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 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, 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. 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 July 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, 1996, the investment
advisory fee represented an effective annual rate of .14 of 1% of Fund average
net assets before a decrease of $2,827,000 (an annual rate of .04 of 1%) based
on performance. The basic fee reflects a fee waiver of $1,482,000 (an annual
rate of .03 of 1%) for the period January 1, 1996 to April 30, 1996.
C. The Vanguard Group 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,
1996, the Fund had contributed capital of $1,544,000 to Vanguard (included in
Other Assets), representing 7.7% 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 six months ended
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS (continued)
April 30, 1996, directed brokerage arrangements reduced the Fund's expenses by
$1,831,000 (an annual rate of .03 of 1% of average net assets).
D. During the six months ended April 30, 1996, the Fund made purchases of
$2,917,035,000 and sales of $2,249,282,000 of investment securities other than
U.S. Government securities and temporary cash investments.
At April 30, 1996, unrealized appreciation for financial reporting and Federal
income tax purposes aggregated $2,456,658,000, of which $2,731,486,000 related
to appreciated securities and $274,828,000 related to depreciated securities.
E. The market value of securities on loan to broker/dealers at April 30, 1996,
was $123,930,000, for which the Fund had received cash collateral of
$127,593,000.
14
<PAGE> 15
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President and Chief Executive Officer
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.; Director of Westinghouse Electric Corporation.
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 F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Information Technology Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
15
<PAGE> 16
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 Selected Value Portfolio
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 Portfolio
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 Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
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]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1 (800) 662-7447 1 (800) 662-2739
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.
Q222-4/96
VANGUARD
WINDSOR
FUND
SEMI-ANNUAL REPORT
APRIL 30, 1996
<PAGE> 17
A MESSAGE TO SHAREHOLDERS
FELLOW SHAREHOLDER:
During the first half of Windsor II's 1996 fiscal year, which ended on April
30, the stock market extended its heady run, posting positive returns in each
of the six months. In this period, your Fund provided a return of +17.0%,
comfortably outpacing that of the market and most mutual funds with comparable
objectives.
The table below compares Windsor II's total return (capital change
plus reinvested dividends) with the returns of the average value (growth and
income) mutual fund and the Standard & Poor's 500 Composite Stock Price Index,
the unmanaged 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, 1996
- ------------------------------------------------------
<S> <C>
VANGUARD/WINDSOR II +17.0%
- ------------------------------------------------------
AVERAGE VALUE FUND +13.7%
STANDARD & POOR'S 500 STOCK INDEX +13.8
- ------------------------------------------------------
</TABLE>
The Fund's return is based on net asset values of $20.06 on October 31, 1995,
and $22.32 on April 30, 1996, with the latter figure adjusted to take into
account the reinvestment of a semi-annual dividend totaling $.38 per share from
net investment income and a distribution of $.69 per share from net realized
capital gains. Both payments were the result of our 1995 operations and were
made on December 18, 1995.
THE PERIOD IN REVIEW
The stock market, as measured by the Standard & Poor's 500 Index, provided
positive returns in each month of the semi-annual period--a very strong showing
indeed, as reflected in the table above. Stock prices initially seemed to get
a lift from falling interest rates from November through mid-January. And yet,
surprisingly, the stock market shrugged off the subsequent sharp reversal in
long-term interest rates. (The yield on the 30-year U.S. Treasury bond rose
from below 6.0% in mid-January to 6.8% by the end of April). In short, it was a
period during which both "good" and "bad" economic news were interpreted as
good news for stocks, suggesting that a speculative spirit is abroad in the
land. In any case, the result was a robust gain of +13.8% for the Standard &
Poor's 500 Index for the six months.
Although the Federal Reserve lowered short-term interest rates in
December and January, the bond market fretted over the apparent strength of the
U.S. economy and the possibility of an increase in inflation. Since the end of
January, the performance of the stock and bond markets has "decoupled," as
long-term Treasury bonds lost a total of more than 8%, while stocks continued
to climb higher. It remains to be seen whether the stock market has enough
earnings growth momentum to withstand the competition for investors' dollars
that higher-yielding bonds might provide.
Windsor II's sterling +17.0% gain, comfortably ahead of the Index, was
largely a product of superior sector weighting and stock selection within our
value-investing philosophy. Holding double the market weight in the financial
group (26% of the Fund's net assets versus 13% for the Index) and substantially
overweighting energy issues (16% versus 9% for the Index) provided the
foundation for our strong performance, as both groups of stocks led the market
upward. On balance, we earned a healthy advantage of +3.3 percentage points
over the +13.7% return from the average value mutual fund. In fairness, we
would note that the semi-annual period proved to be quite favorable for value
stocks (those with above-average dividend yields and below-average market
price-to-book value) compared with growth stocks (those with lower yields and
higher rates of earnings growth), as evidenced by the +16.2% return of the
Standard & Poor's Value Index and the +11.4% return of the Standard & Poor's
Growth Index.
It bears repeating that performance over any six-month period is
hardly a reasonable standard by which to judge any mutual fund. However,
Windsor II--now in its eleventh year--should
1
<PAGE> 18
continue to provide solid returns for investors who "stay the course.'' Keep in
mind that the Fund's returns will, on occasion, be tempered by both market risk
and the risk that a fundamental value approach does not always take the market
lead. We look forward to reporting to you in further detail in our 1996 Annual
Report six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
/s/ JOHN J. BRENNAN
- -------------------
John J. Brennan
President
May 15, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
2
<PAGE> 19
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND (PERIODS ENDED MARCH 31, 1996)
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 +35.00% +15.28% +13.28% +8.85% +4.43%
</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.
3
<PAGE> 20
REPORT FROM BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.
The first half of fiscal 1996 has been one of impressive returns. While
Windsor II bested the market averages nicely, it did so in part because it held
the type of stocks which had underperformed last year. The dearth of technology
issues and large holdings in the financial and energy sectors were a great
help. Given time, the tortoise can beat the hare. Economic indicators in the
past few months have sent out very mixed signals. About half of the time
investors were worried about slow final demand, and a recession was feared.
This was the case in November, December, and January (remember the slow
Christmas and the severe weather?). Now the crowd worries about too much
growth, inflation, and interest rates. In the final analysis, things are moving
right along.
MARKET PERSPECTIVE
Commodity prices in areas such as agricultural products and oil have increased;
this seems either related to weather or political developments. While these
price moves grab headlines, they are neither permanent nor predictable. You
will remember that three years ago, there was an attempt to put a
50-cent-a-gallon excise tax on gasoline; now there is a rush to repeal a
4.3-cent tax. (It's an election year.)
Of much greater concern, real unit labor costs have begun to move up.
Although this is predictable after a long dormant period, the cost level is not
a major concern of the markets, though rising labor costs can lead to cost-plus
inflation. We see little chance of Federal Reserve pressure on interest rates
to slow things down. Remember, "It's the economy, stupid."
What about the stock market? We hear lots of talk about how elevated
prices are, and we know that a 5,000 Dow is higher than a 4,000, which is
higher than a 3,000. However, earnings on that index are expected to come in at
350 or so versus about one-half that level three years ago. P/E ratios, while
not low, are well below dangerous levels. The relationship of equity prices to
book value is quite high, but the accountants have forced companies to write
off everything but the kitchen sink. Equity yields versus bonds are quite low,
but the "realization of shareholder values" school has taught managements to
buy back shares with a passion rather than to increase dividends. As an
interesting aside, despite what seems like an endless stream of initial public
offerings, the value of buyback programs actually exceeds the value of new
offerings.
We do not subscribe to a scarcity theory of investing, nor do we
expect that talk of the privatization of part of the Social Security system
will make its way into a stock market at even more elevated levels. But we
think current prices are OK, so long as inflation doesn't get out of hand and
interest rates are stable to down.
PORTFOLIO COMMENTS
Financial stocks continue to make up a significant portion of our equity
holdings. We have generally maintained our weighting in this sector, even
though prices have advanced. We feel this part of the market offers good
potential through lower-than-average prices, higher-than-average yields, and
earnings gains of around 20% this year. We see no likelihood of a replay of the
credit problems of the 1980s. Even though financial stocks should do well, we
would expect that, with time, our level of commitment to them may decline. Our
energy holdings are also quite significant. Oil and gas prices should decline
from currently elevated levels but, nonetheless, should, on average, be above
prices of the past few years. Current inventory levels and political
developments make it seem unlikely that earnings will be disappointing.
As usual, we have your Fund positioned in stocks with a low
price-to-earnings ratio, a low price-to-book value, and a high current dividend
yield. We feel these characteristics will offer full equity exposure and, yet,
provide some protection from declines.
Respectfully,
Barrow, Hanley, Mewhinney & Strauss, Inc.
May 8, 1996
4
<PAGE> 21
SPECIAL NOTICE TO SHAREHOLDERS
NEW AGREEMENT TO REDUCE INVESTMENT ADVISORY FEES
We are pleased to announce that the Board of Directors of Vanguard/Windsor II
has reached agreement with Equinox Capital Management, Inc., one of the Fund's
investment advisers, on a revised investment advisory agreement. The revised
agreement involves a reduction in the annual rate of advisory fees to be paid
to Equinox. Given the assets of $1.2 billion currently assigned to Equinox, the
dollar amount of the annual fee would decline from $2,100,000 to $1,950,000, a
reduction of $150,000. The new effective annual fee rate paid to Equinox would
equal 0.162% of its current assets, and would decline further if its assets
under management were to continue to grow.
Under the terms of the new agreement, the Fund will pay Equinox a
basic advisory fee at the end of each fiscal quarter, based on the average
month-end net assets managed by Equinox during the quarter. The quarterly rate
is applied according to the following annual fee schedule:
<TABLE>
<CAPTION>
- -----------------------------------------------------
ANNUAL BASIC
NET ASSETS FEE RATE
- -----------------------------------------------------
<S> <C>
FIRST $400 MILLION 0.200%
NEXT $600 MILLION 0.150
NEXT $1 BILLION 0.125
OVER $2 BILLION 0.100
- -----------------------------------------------------
</TABLE>
Both the current and revised agreements provide that the basic fee may be
increased or decreased by applying an incentive/penalty fee adjustment based on
the investment performance of the Equinox-managed assets relative to the
investment record of the Standard & Poor's 500 Composite Stock Price Index for
the same period.
This revised investment advisory agreement replaces the Fund's
current agreement with the adviser dated November 1, 1991, and will go into
effect on August 1, 1996. Until the effective date, the adviser has agreed to
waive its advisory fees to the extent necessary to abide by the new fee
schedule. For the fiscal year ended October 31, 1995, the Fund paid
approximately $1,681,000 to Equinox for investment advisory services.
The adviser, located at 590 Madison Avenue, 41st floor, New York,
New York, is a professional investment counseling firm founded in 1989. Under
the terms of its investment advisory agreement with the Fund, the adviser
agrees to manage the investment and reinvestment of the assets assigned to it
and to continuously review, supervise, and administer the Fund's investment
program with respect to those assets. The adviser discharges its
responsibilities subject to the control of the officers and directors of the
Fund.
5
<PAGE> 22
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD/WINDSOR II since inception through April 30, 1996. 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 S&P 500
Value with Income ----------------------------- -------
October 31 Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
Fiscal Year 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 9.91 -- $.11 10.02 - 0.9% +1.1% + 0.2% + 1.8%
- ---------------------------------------------------------------------------------------------------------------------
1986 12.48 $.52 .43 13.59 +31.2 +4.4 +35.6 +33.2
- ---------------------------------------------------------------------------------------------------------------------
1987 12.41 -- .20 13.71 - 0.6 +1.5 + 0.9 + 6.4
- ---------------------------------------------------------------------------------------------------------------------
1988 13.23 .80 .61 16.53 +14.5 +6.0 +20.5 +14.8
- ---------------------------------------------------------------------------------------------------------------------
1989 15.81 -- .57 20.61 +19.5 +5.2 +24.7 +26.4
- ---------------------------------------------------------------------------------------------------------------------
1990 11.91 .61 .74 17.00 -21.5 +4.0 -17.5 - 7.5
- ---------------------------------------------------------------------------------------------------------------------
1991 15.07 .28 .73 23.23 +29.4 +7.2 +36.6 +33.5
- ---------------------------------------------------------------------------------------------------------------------
1992 15.75 .44 .61 26.13 + 7.9 +4.6 +12.5 +10.0
- ---------------------------------------------------------------------------------------------------------------------
1993 17.98 .22 .52 31.23 +15.8 +3.7 +19.5 +14.9
- ---------------------------------------------------------------------------------------------------------------------
1994 17.33 .50 .51 31.93 - 0.8 +3.0 + 2.2 + 3.9
- ---------------------------------------------------------------------------------------------------------------------
1995 20.06 .47 .55 39.29 +19.2 +3.9 +23.1 +26.4
- ---------------------------------------------------------------------------------------------------------------------
1996 (4/30) 22.32 .69 .38 45.99 +15.0 +2.0 +17.0 +13.8
- ---------------------------------------------------------------------------------------------------------------------
LIFETIME +359.9% +388.5%
- ---------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +15.1% +15.7%
- ---------------------------------------------------------------------------------------------------------------------
</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.
6
<PAGE> 23
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
April 30, 1996
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (92.2%)
- ------------------------------------------------------------------------------------------
BASIC MATERIALS (3.3%)
Bowater Inc. 152,000 $ 6,080
Champion International Corp. 112,000 5,404
Dow Chemical Co. 679,500 60,391
E.I. du Pont de Nemours & Co. 215,900 17,353
Eastman Chemical 2,739,000 184,198
*FMC Corp. 78,700 5,460
The BF Goodrich Co. 1,213,000 48,217
IMC Global Inc. 59,400 2,190
International Paper Co. 105,600 4,211
Kimberly-Clark Corp. 134,400 9,761
Phelps Dodge Corp. 120,100 8,827
Union Carbide Corp. 64,900 2,953
Witco Chemical Corp. 1,793,900 61,217
-----------
SECTOR TOTAL 416,262
-----------
- ------------------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (5.8%)
The Boeing Co. 183,700 15,086
Caterpillar, Inc. 143,000 9,152
Cooper Industries, Inc. 12,800 544
Cummins Engine Co., Inc. 32,100 1,501
GATX Corp. 38,900 1,751
General Electric Co. 1,097,400 85,049
Honeywell, Inc. 2,590,000 136,299
Johnson Controls, Inc. 62,100 4,440
McDonnell Douglas Corp. 29,200 2,818
Parker Hannifin Corp. 103,600 4,377
Raytheon Co. 4,824,200 244,225
Rockwell International Corp. 145,200 8,494
TRW, Inc. 73,900 6,937
Tecumseh Products Co. Class A 55,300 3,083
The Timkin Co. 48,700 1,930
United Technologies Corp. 39,400 4,354
WMX Technologies Inc. 189,200 6,575
Westinghouse Electric Corp. 10,338,400 195,137
-----------
SECTOR TOTAL 731,752
-----------
- ------------------------------------------------------------------------------------------
CONSUMER CYCLICAL (10.6%)
Dana Corp. 226,500 7,531
Dillard Department Stores Class A 148,100 5,943
The Walt Disney Co. 1,035,844 64,222
R.R. Donnelley & Sons Co. 109,400 3,938
(1)Eastman Kodak Co. 3,409,300 260,811
Eaton Corp. 32,300 1,954
(1)Ford Motor Co. 7,477,400 268,252
Gannett Co., Inc. 1,783,100 121,919
General Motors Corp. 2,382,800 129,267
ITT Industries, Inc. 4,869,200 133,903
Jostens Inc. 37,700 848
Kmart Corp. 15,177,700 153,674
May Department Stores Co. 116,900 5,962
Maytag Corp. 180,400 3,879
*Navistar International Corp. 175,000 2,100
J.C. Penney Co., Inc. 199,800 9,890
*Price/Costco Inc. 88,000 1,661
Russell Corp. 72,600 1,888
Sears, Roebuck & Co. 1,063,000 53,017
Tandy Corp. 27,700 1,437
Wal-Mart Stores, Inc. 2,256,200 53,867
Washington Post Co. Class B 10,200 2,999
Wendy's International, Inc. 105,900 2,025
Whirlpool Corp. 794,000 47,739
-----------
SECTOR TOTAL 1,338,726
-----------
- ------------------------------------------------------------------------------------------
CONSUMER STAPLES (7.9%)
American Stores Co. 150,800 5,033
(1)Anheuser-Busch Co., Inc. 4,708,400 315,463
Archer-Daniels-Midland Co. 418,505 7,899
Brown-Forman Corp. Class B 55,600 2,196
CPC International, Inc. 16,800 1,161
Earthgrains Co. 5,204 167
Great Atlantic & Pacific
Tea Co., Inc. 54,100 1,887
H.J. Heinz Co. 2,669,100 90,416
IBP, Inc. 60,400 1,616
PepsiCo, Inc. 703,100 44,647
Philip Morris Cos., Inc. 2,868,100 258,488
RJR Nabisco Holdings Corp. 6,806,600 203,347
Sara Lee Corp. 2,156,100 66,839
*Vons Cos., Inc. 95,400 3,053
-----------
SECTOR TOTAL 1,002,212
-----------
- ------------------------------------------------------------------------------------------
ENERGY (16.4%)
(1)Amoco Corp. 3,730,500 272,327
Atlantic Richfield Co. 62,300 7,336
Chevron Corp. 864,300 50,129
Dresser Industries, Inc. 7,398,800 235,837
(1)Exxon Corp. 3,538,600 300,781
Halliburton Co. 70,900 4,068
Mobil Corp. 370,000 42,550
NGC Corp. 317,600 4,764
Occidental Petroleum Corp. 289,700 7,460
PanEnergy Corp. 5,816,718 189,770
(1)Phillips Petroleum Co. 7,077,500 293,716
Royal Dutch Petroleum Co. ADR 275,400 39,451
(1)Schlumberger Ltd. 3,166,900 279,479
Texaco Inc. 2,678,000 228,969
USX-Marathon Group 4,982,900 109,624
*Western Atlas Inc. 113,600 6,816
-----------
SECTOR TOTAL 2,073,077
-----------
- ------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 24
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL (24.5%)
Allstate Corp. 6,500,722 $ 252,716
American Express Co. 5,344,608 259,213
American General Corp. 172,600 6,063
American International
Group, Inc. 1,101,025 100,606
Aon Corp. 2,160,650 115,865
Banc One Corp. 1,545,080 53,692
Bank of Boston Corp. 121,756 5,890
(1)BankAmerica Corp. 3,813,383 288,864
Bear Stearns Co., Inc. 137,700 3,460
CIGNA Corp. 84,200 9,546
*CNA Financial Corp. 29,700 2,888
(1)Chase Manhattan Corp. 10,680,028 735,587
The Chubb Corp. 363,400 34,387
Citicorp 159,700 12,576
CoreStates Financial Corp. 201,885 7,874
Dean Witter Discover & Co. 1,095,300 59,694
A.G. Edwards & Sons, Inc. 230,500 5,417
Exel Ltd. 2,113,000 152,136
Federal Home Loan
Mortgage Corp. 50,000 4,169
Federal National Mortgage Assn. 4,216,000 129,115
Fifth Third Bancorp 62,000 3,418
First Chicago NBD Corp. 5,662,404 233,574
First Tennessee National Corp. 183,000 5,993
First Union Corp. 173,300 10,658
KeyCorp 72,000 2,781
NationsBank Corp. 177,100 14,124
Old Republic International Corp. 103,900 3,429
PNC Bank Corp. 8,493,600 256,931
PaineWebber Group, Inc. 327,950 6,846
Providian Corp. 68,500 3,160
Republic New York Corp. 115,700 6,870
Star Banc Corp. 12,200 804
*Transport Holdings, Inc. Class A 346 15
Travelers Group Inc. 3,756,737 231,039
UnionBanCal Corp. 73,726 3,723
Wells Fargo & Co. 326,000 79,096
-----------
SECTOR TOTAL 3,102,219
-----------
- ------------------------------------------------------------------------------------------
HEALTH CARE (6.3%)
American Home Products Corp. 2,321,200 244,887
Bausch & Lomb, Inc. 47,000 1,874
Baxter International, Inc. 165,800 7,337
Beckman Instruments 33,900 1,254
Becton, Dickinson & Co. 70,300 5,668
Bergen Brunswig Corp. Class A 62,300 1,698
Bristol-Myers Squibb Co. 2,805,500 230,752
Johnson & Johnson 512,100 47,369
Warner-Lambert Co. 2,235,400 249,806
-----------
SECTOR TOTAL 790,645
-----------
- ------------------------------------------------------------------------------------------
TECHNOLOGY (4.1%)
Harris Corp. 63,200 3,903
Intel Corp. 748,000 50,677
International Business
Machines Corp. 2,205,100 237,048
*Read-Right Corp. 194,200 4,030
*Seagate Technology 112,400 6,519
Tektronix, Inc. 27,500 1,090
*360 Communications Co. 70,300 1,652
Xerox Corp. 1,408,807 206,390
-----------
SECTOR TOTAL 511,309
-----------
- ------------------------------------------------------------------------------------------
TRANSPORT & SERVICES (.6%)
*AMR Corp. 48,600 4,338
CSX Corp. 1,266,500 64,908
Norfolk Southern Corp. 97,600 8,198
*Northwest Airlines Corp. Class A 69,800 3,150
-----------
SECTOR TOTAL 80,594
-----------
- ------------------------------------------------------------------------------------------
UTILITIES (10.5%)
AT&T Corp. 112,800 6,909
Ameritech Corp. 246,100 14,366
Bell Atlantic Corp. 938,300 60,989
Boston Edison Co. 256,500 6,252
CMS Energy Corp. 138,600 4,037
Centerior Energy Corp. 409,500 2,815
Central & South West Corp. 2,938,200 80,066
Century Telephone
Enterprises, Inc. 131,800 4,316
Consolidated Edison Co. of
New York, Inc. 264,800 7,778
DTE Energy Co. 203,000 6,293
Edison International 492,700 7,883
(1)Entergy Corp. 10,017,200 265,456
Frontier Corp. 80,700 2,552
GTE Corp. 354,700 15,385
General Public Utilities Corp. 201,300 6,391
Long Island Lighting Co. 282,100 4,584
MCI Communications Corp. 1,830,800 53,551
New York State Electric &
Gas Corp. 165,700 3,790
Niagara Mohawk Power Corp. 361,500 2,711
Northeast Utilities 49,500 786
NYNEX Corp. 69,300 3,404
Ohio Edison Co. 254,200 5,306
PECO Energy Corp. 255,300 6,350
Pacific Gas & Electric Co. 342,600 7,794
Pacific Telesis Group 5,413,400 185,409
Portland General Electric Co. 104,100 3,058
Public Service Enterprise
Group Inc. 8,121,800 212,182
Southern Co. 305,900 6,730
Southern New England
Telecommunications Corp. 140,900 6,270
</TABLE>
8
<PAGE> 25
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Sprint Corp. 218,000 $ 9,183
Unicom Corp. 4,927,000 135,492
U S WEST Communications Group 5,875,100 192,409
------------
SECTOR TOTAL 1,330,497
------------
- ------------------------------------------------------------------------------------------
MISCELLANEOUS (2.2%)
Loews Corp. 97,600 7,442
McKesson Corp. 16,200 771
Minnesota Mining &
Manufacturing Co. 726,700 47,780
Ogden Corp. 52,300 1,059
Tenneco, Inc. 3,940,800 216,251
Textron, Inc. 51,600 4,425
------------
SECTOR TOTAL 277,728
------------
- ------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $8,401,842) 11,655,021
- ------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (.1%)
- ------------------------------------------------------------------------------------------
RJR Nabisco Class C $.6012
(Cost $7,695) 1,227,900 7,214
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TEMPORARY CASH INVESTMENTS (7.7%)
- ------------------------------------------------------------------------------------------
Face
Amount
(000)
------
<S> <C> <C>
U.S. TREASURY BILL--NOTE E
5.02%, 7/11/96 $ 700 693
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.32%, 5/1/96 980,816 980,816
- ------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $981,509) 981,509
- ------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100%)
(Cost $9,391,046) 12,643,744
- ------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------------------
Other Assets--Note C 101,161
Liabilities (105,265)
------------
(4,104)
- ------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------
Applicable to 566,382,474 outstanding
$.01 par value shares
(authorized 900,000,000 shares) $12,639,640
- ------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $22.32
==========================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
(1) Ten largest common stock investments representing 26.0% of net assets.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ------------------------------------------------------
AT APRIL 30, 1996,
NET ASSETS CONSISTED OF:
- ------------------------------------------------------
AMOUNT PER
(000) SHARE
------------ ------
<S> <C> <C>
PAID IN CAPITAL $ 8,864,251 $15.65
UNDISTRIBUTED NET
INVESTMENT INCOME 106,756 .19
ACCUMULATED NET
REALIZED GAINS 415,876 .74
UNREALIZED APPRECIATION--
NOTE E
INVESTMENT SECURITIES 3,252,698 5.74
FUTURES CONTRACTS 59 --
- ------------------------------------------------------
NET ASSETS $12,639,640 $22.32
- ------------------------------------------------------
</TABLE>
9
<PAGE> 26
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
April 30, 1996
(000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 158,934
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,509
- ---------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,443
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,612
Performance Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . 478 8,090
-------
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . . . . . . . 12,006
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . . . 1,043 13,049
-------
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . . . . . . 418
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . . . . 80
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 18
- ---------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,863
Expenses Paid Indirectly--Note C . . . . . . . . . . . . . . . . . . (769)
- ---------------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 21,094
- ---------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . 161,349
- ---------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . . . . 415,033
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,402
- ---------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . 416,435
- ---------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,170,616
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
- ---------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) . . . . . . . . 1,170,695
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . . $1,748,479
=====================================================================================================================
</TABLE>
10
<PAGE> 27
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
APRIL 30, 1996 October 31, 1995
(000) (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . $ 161,349 $ 294,616
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . 416,435 354,200
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . 1,170,695 1,244,032
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . 1,748,479 1,892,848
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . (193,998) (267,796)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . (352,515) (225,725)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . (546,513) (493,521)
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,928,771 1,480,585
Issued In Lieu of Cash Distributions . . . . . . . . . . . . . . . . 439,924 476,777
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,203,186) (1,330,673)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . . . 1,165,509 626,689
- ---------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . . 2,367,475 2,026,016
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . 10,272,165 8,246,149
- ---------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,639,640 $10,272,165
=====================================================================================================================
(1) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,896 81,880
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . 21,302 29,313
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . (56,789) (74,940)
- ---------------------------------------------------------------------------------------------------------------------
54,409 36,253
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 28
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended October 31,
SIX MONTHS ENDED ------------------------------------------------
For a Share Outstanding Throughout Each Period APRIL 30, 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . . $20.06 $17.33 $17.98 $15.75 $15.07 $11.91
-------- -------- ------- -------- -------- --------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . .30 .58 .55 .50 .56 .62
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . . . . 3.03 3.17 (.19) 2.47 1.17 3.55
-------- -------- ------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . . 3.33 3.75 5.36 2.97 1.73 4.17
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . . (.38) (.55) (.51) (.52) (.61) (.73)
Distributions from Realized Capital Gains . . . . . . . . . (.69) (.47) (.50) (.22) (.44) (.28)
-------- -------- ------- -------- -------- --------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . (1.07) (1.02) (1.01) (.74) (1.05) (1.01)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . $22.32 $20.06 $17.33 $17.98 $15.75 $15.07
==============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . +17.03% +23.08% +2.22% +19.51% +12.50% +36.61%
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . . $12,640 $10,272 $8,246 $7,486 $4,878 $3,298
Ratio of Total Expenses to Average Net Assets . . . . . . . . . .38%* .40% .39% .39% .41% .48%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . . . . 2.82%* 3.27% 3.26% 3.11% 3.72% 4.51%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . 36%* 30% 24% 26% 23% 41%
Average Commission Rate Paid . . . . . . . . . . . . . . . . . $.0504+ N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions are charged.
This disclosure is required by the SEC beginning in 1996.
12
<PAGE> 29
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 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 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 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 redeeming 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 values 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
13
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS (continued)
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 six
months ended April 30, 1996, the aggregate investment advisory fee represented
an effective annual rate of .13 of 1% of average net assets before an increase
of $478,000 (an annual rate of .01 of 1%) based on performance. The base fee
reflects a fee waiver of $35,000 for the period from February 1, 1996, to April
30, 1996.
The Vanguard Group provides investment advisory services to a portion of the
Fund on an at-cost basis.
C. The Vanguard Group 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,
1996, the Fund had contributed capital of $1,301,000 to Vanguard (included in
Other Assets), representing 6.5% 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, 1996, directed
brokerage arrangements reduced the Fund's expenses by $769,000 (an annual rate
of .01 of 1% of average net assets).
D. During the six months ended April 30, 1996, the Fund made purchases of
$2,483,414,000 and sales of $1,922,339,000 of investment securities other than
U.S. Government securities and temporary cash investments.
E. At April 30, 1996, unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes aggregated $3,252,698,000
of which $3,372,246,000 related to appreciated securities and $119,548,000
related to depreciated securities.
At April 30, 1996, the aggregate settlement value of open Standard & Poor's 500
Index futures contracts expiring in June 1996, the related unrealized
appreciation, and the market value of U.S. Treasury bills deposited as initial
margin for those contracts were $2,619,000, $59,000, and $693,000,
respectively.
14
<PAGE> 31
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President and Chief Executive Officer
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.; Director of Westinghouse Electric Corporation.
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 F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Information Technology Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
15
<PAGE> 32
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 Selected Value Portfolio
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 Portfolio
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 Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
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]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1 (800) 662-7447 1 (800) 662-2739
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.
Q732-4/96
VANGUARD
WINDSOR II
SEMI-ANNUAL REPORT
APRIL 30, 1996
