<PAGE> 1
VANGUARD/
WINDSOR FUND
ANNUAL REPORT
OCTOBER 31, 1996
THE VANGUARD GROUP:
LINKING TRADITION
AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future.
The montage includes a bronze medallion with a likeness of our namesake, HMS
Vanguard (Lord Nelson's flagship at The Battle of the Nile); a clock built
circa 1816 in Scotland, featuring a portrait of Nelson (who is also shown,
accepting a surrender, in a detail from a nineteenth-century engraving); and
several views of our recently completed campus, which is steeped in nautical
imagery--from our buildings named after Nelson's warships (Victory, Majestic,
and Goliath are three shown), to our artwork and ornamental compass rose.
[PHOTO]
<PAGE> 2
[PHOTO]
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide a candid
assessment of the Fund's performance relative to an appropriate unmanaged
market benchmark and a peer group of mutual funds with similar investment
policies. It also reviews the principal factors contributing to--and detracting
from--the returns earned by the Fund. To help you evaluate your Fund's
current-year performance, the Message includes a discussion of the Fund's
long-term investment results, as well as a look ahead to the prospects for the
coming year. A recap of the financial markets, which had been included as part
of the Chairman's letter, now appears in The Markets In Perspective. This
overview covers the world's financial markets, putting the results of the
Fund's strategy in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS AN ADDITION TO OUR FUND REPORTS. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics.
The Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the
adviser to address--and we do our best to ensure that this Report is written in
the same simple and candid manner that characterizes all Vanguard
communications. Finally, each Adviser's Report will include an inset reminder
of the adviser's basic investment philosophy.
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
3
Report From
The Adviser
5
Portfolio
Profile
8
Performance
Summary
10
Financial
Statements
11
Report Of
Independent
Accountants
19
Directors And
Officers
INSIDE BACK COVER
<PAGE> 3
[PHOTO]
John C. Bogle
[PHOTO]
John J. Brennan
FELLOW SHAREHOLDER,
Windsor Fund, participating fully and vigorously in a spirited bull market
for stocks, provided a total return of +23.2% in the twelve months ended
October 31, 1996--our 38th fiscal year. We surpassed the return on the average
competing fund but fell just short of that provided by the unmanaged Standard &
Poor's 500 Composite Stock Price Index.
The following table compares Windsor's total return (capital change plus
reinvested dividends) for the year with those of the S&P 500 Index, which is
dominated by blue-chip stocks, and the average value (growth and income) mutual
fund, the peer group that best reflects the investment philosophy Windsor has
maintained over the years.
The Fund's return is based on an increase in net asset value from $15.55
per share on October 31, 1995, to $16.99 per share on October 31, 1996, with
the latter figure adjusted for dividends of $.46 per share paid from net
investment income and a distribution of $1.38 per share paid from net realized
capital gains.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
TOTAL RETURN
FISCAL YEAR ENDED
OCTOBER 31, 1996
- ----------------------------------------------------------
<S> <C>
Vanguard/Windsor Fund +23.2%
- ----------------------------------------------------------
Average Value Fund +21.4%
- ----------------------------------------------------------
S&P 500 Index +24.1%
- ----------------------------------------------------------
</TABLE>
FISCAL 1996 PERFORMANCE OVERVIEW
In the twelve months ended October 31, the stock market flourished in an ideal
environment of moderate economic growth and rising corporate profits
accompanied by low inflation. Interest rates fluctuated considerably, first
declining amid expectations of an economic slowdown, then rising sharply as it
became apparent that the economy was accelerating. But after another course
reversal in the final two months of the fiscal year, interest rates and bond
prices had nearly returned to their levels of a year earlier.
In contrast, the stock market's advance in this banner year was remarkably
steady, with the S&P 500 Index providing positive returns in eleven of the
twelve months ended October 31, 1996. Both growth stocks and value stocks
performed well. Returns on these two groups, while very similar over longer
periods, often diverge over shorter periods. In fiscal 1996, value stocks, as
measured by the S&P/BARRA Value Index, held the edge with a return of +24.6%
versus +23.7% for the S&P/BARRA Growth Index.
As usual, however, not all sectors of the market marched to the same
drumbeat. The highest-performing sector of the market during the fiscal year
(with a return of +39.0%) was financial stocks, and Windsor's overweighting in
this group gave the Fund's performance a nice boost versus both the S&P 500
Index and the average value fund. So, too, the Fund benefited from its
underweighting in utilities stocks, the weakest sector (+1.3%), and from
excellent stock selections in the financial and technology sectors. Holdings in
the basic-materials sector performed poorly versus the S&P 500 Index, however.
It should be noted that the unmanaged S&P 500 Index is a 100% stock
portfolio and includes no cash whatsoever, which in a bull market gives it an
advantage over most equity mutual funds. Equity funds typically hold a small
portion (5% to 10%) of their as-
1
<PAGE> 4
sets in interest-bearing cash equivalents to provide liquidity or to reflect
recent cash inflows awaiting investment in equities. Indeed, on its stock
holdings alone, Windsor Fund earned a return of +24.9% during the fiscal year,
slightly ahead of the S&P 500 Index return of +24.1%. However, the overall
total return of the Fund was reduced by 1.7% because of its cash holdings.
LONG-TERM PERFORMANCE OVERVIEW
Windsor Fund's fiscal 1996 results added to our significant long-term advantage
over the average value fund. However, over the past decade, neither the Fund
nor our average competitor has matched the S&P 500 Index. The returns for the
past ten years are summarized in the adjacent table.
We should emphasize that future returns from the stock market may be lower
than those of the past decade, which were unusually high by historical
standards. Indeed, with stock prices at lofty levels by several measures,
investors have ample reason to expect lower returns in the coming decade.
With respect to Windsor Fund's return versus that of the S&P 500 Index, we
note that the Index is a tough standard to match, since it is a theoretical
construct that bears none of the "real-world" costs that all mutual funds
incur. Also, as discussed earlier, the Fund's cash position is a detriment to
its performance versus the S&P 500 Index when stock prices are rising, as
during most of the past decade. Charles T. Freeman, Windsor's portfolio manager
since December 31, 1995, has gradually decreased the Fund's cash position and
increased its exposure to equities to 89% of assets at fiscal year end. Mr.
Freeman intends to maintain the Fund's equity exposure at 90% or higher, up
from a previous "floor" of about 80%. This change, which brings Windsor's
policy into line with that of our other actively managed equity funds, has been
endorsed by the Board of Directors.
That said, the Fund's equity position remains highly concentrated, with
38% of its assets in its ten largest positions. (For the average value fund,
this figure is about 25%.) As a result, our returns may often diverge from
those of the market and our peers.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
TOTAL RETURN
10 YEARS ENDED OCTOBER 31, 1996
----------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- ---------------------------------------------------------------------
<S> <C> <C>
Vanguard/Windsor Fund +13.4% $35,091
- ---------------------------------------------------------------------
Average Value Fund +12.6% $32,641
- ---------------------------------------------------------------------
S&P 500 Index +14.7% $39,283
- ---------------------------------------------------------------------
</TABLE>
IN SUMMARY
The U.S. stock market has been on the rise--with only a few, relatively brief
setbacks--for more than 14 years. So now seems an appropriate time to state the
obvious, namely that the ever-present risks of investing in stocks may be
higher now than for some time. Certainly, the sailing will not always be smooth
in the future. However, we believe that investors who "stay the course," with a
balanced investment portfolio of stock funds, bond funds, and money market
funds consistent with their own financial objectives, have little to fear from
rough seas in the financial markets.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
Chairman of the Board President
November 11, 1996
2
<PAGE> 5
THE MARKETS IN PERSPECTIVE: FISCAL YEAR ENDED OCTOBER 31, 1996
U.S. EQUITY MARKETS
The past twelve months were truly rewarding for common-stock investors in the
United States, particularly those who emphasized larger companies. As noted in
the table, the Standard & Poor's 500 Composite Stock Price Index gained 24.1%
for the fiscal year, while the Russell 2000 Small Stock Index posted a 16.6%
advance. The strong absolute returns can be attributed primarily to solid
earnings growth, continued low inflation, and the expectation on the part of
investors that this environment will prevail over the near term.
Among larger-capitalization issues, the best performing sector was
financial, with a 39.0% advance. Leading this group were banks and brokerage
firms. Banks benefited from the relative stability of economic growth--which
could be expected to result in both growing demand for loans and low default
rates; brokerage firms continued to reap the benefits of positive equity
markets. Energy issues also posted very strong results (33.1%), reflecting the
pronounced increase in oil prices from $17.98 per barrel to $23.35 during the
past twelve months.
Technology issues probably exhibited the greatest disparity of any sector.
The best performers were generally larger companies with dominant positions in
their industries; many of these firms rose 30% or more compared to 16.9%, in
aggregate, for the technology holdings in the S&P 500 Index. By contrast,
technology was the worst-performing sector within the Russell 2000 Index, with
a scant 2.9% return over the fiscal year.
In sum, investors displayed a strong preference for companies with
"predictable" earnings streams. One unusual note: the price/earnings ratio of
the S&P 500 Index rose 17% (from 15.8 to 18.5) during the last twelve months,
despite a rise in interest rates. In general, the P/E ratio moves inversely
with interest rates.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED OCTOBER 31, 1996
------------------------------------
1 YEAR 3 YEARS 5 YEARS
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 24.1% 17.7% 15.5%
Russell 2000 Index 16.6 11.2 14.8
MSCI-EAFE Index 10.8 6.9 8.0
- -----------------------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 5.9% 5.6% 7.7%
Lehman 10-Year Municipal
Bond Index 5.0 5.2 7.7
Salomon 90-Day U.S. Treasury Bills 5.3 5.0 4.4
- -----------------------------------------------------------------------------------
Other
Consumer Price Index 3.0% 2.8% 2.9%
- -----------------------------------------------------------------------------------
</TABLE>
U.S. FIXED-INCOME MARKETS
While U.S. stock investors relished their solid gains, bond investors were not
so fortunate. Interest rates, as reflected in the 30-year U.S. Treasury yield,
fell from 6.33% on October 31, 1995, to 5.95% two months later. At that time,
analysts anticipated an environment of slow economic growth and harbored almost
no concern about potential increases in inflation. Underscoring that view, the
Federal Reserve Board's Open Market Commit-
3
<PAGE> 6
tee cut both the discount rate and the Federal funds rate by 0.25% in late
January.
Economic data soon suggested a different scenario--one characterized by
accelerating economic activity. A range of indicators pointed toward more rapid
growth than anticipated, but none concerned the bond market as much as the
ongoing increases in employment. In many analysts' view, continued job growth
would probably lead to higher wage rates, which might not be offset by
improvements in productivity. The net result would be higher inflation, the
bane of bond investors. Such concerns caused the 30-year U.S. Treasury yield to
climb to 7.19% in early July. From that point forward, interest rates declined,
although in an erratic pattern, leaving the long-term Treasury yield at 6.64%
by the end of October.
Three categories of bonds did benefit their investors, at least on a
relative basis, over the past year: short-maturity portfolios, low-quality
issues, and municipals. Short-maturity investors saw a small increase in rates
(0.18% for the 3-year U.S. Treasury bond). Owners of junk bonds earned
positive returns as lower-quality, higher-yielding issues generally fare well
during periods of steady growth; a modest increase in inflation can be
beneficial to junk-bond issuers (the Lehman High Yield Bond Index gained
11.1%). Municipal bonds, freed from investor worries over the proposed "flat
tax," performed exceptionally well and, to some extent, seemed immune to the
inflation concerns of the taxable market. In fact, the yield on the benchmark
30-year municipal fell -0.05% during the twelve months, while the yield on the
comparable-maturity U.S. Treasury issue rose 0.31%.
INTERNATIONAL EQUITY MARKETS
Investments in non-U.S. equity markets fared quite well over the fiscal year,
with one major exception: Japan. For the past twelve months, the Morgan Stanley
Capital International-Europe, Australasia, Far East Index (which covers all
major markets outside North America) posted a total return of 10.8% in dollars,
after a 5.1% increase in the value of the U.S. dollar over foreign currencies.
Nearly all of this return was generated in the European markets, where the
dollar return was 17.9% compared to 3.5% for the Pacific Basin. Aside from
Japan (-0.7% in dollars) and Singapore (-3.1%), markets in the Pacific Basin
provided very strong returns, as evidenced by Hong Kong (28.0%) and Australia
(18.3%).
The variation in returns across and within regions can be attributed to
differing environments and expectations for growth and inflation. In Europe,
many governments focused on the deficit-spending guidelines mandated by the
Maastricht Treaty for the conversion to a common European currency unit (the
ECU). The Treaty stipulated that deficit spending not exceed defined
levels--with the idea that restraint would keep inflation to reasonable levels.
Over the past year, many governments reaffirmed their commitments to the ECU
and cut spending accordingly. Investors took this as an indication that
inflation would remain modest and economic growth tepid. The result was a
strong boost to high-quality growth stocks across Europe.
The Japanese market continues to suffer because the long-anticipated
economic recovery has yet to materialize in a meaningful way. Despite some
positive signs, such as improving corporate profits, the Japanese economy
continues to perform in a lack-luster fashion.
4
<PAGE> 7
REPORT FROM THE ADVISER
[PHOTO]
Our total return for the twelve months ended October 31--our fiscal
year--was 23.2%, slightly less than the Standard & Poor's 500 Composite Stock
Price Index's 24.1% and better than the 21.4% turned in by the average value
(growth and income) mutual fund. For the first ten months of calendar 1996,
our total return of 18.4% outdistanced both the S&P 500 Index (16.6%) and the
competitive group (14.7%). Our fiscal-year performance was boosted by our
holdings in the financial, energy, and technology sectors. At the same time,
we were not helped by the neutral performance of our auto holdings, the quite
poor performance of our basic-materials holdings, and--given the strong
market--our significant cash position. More detail can be found in our
traditional report card on page 7.
Our equity holdings on October 31 were 89% of net assets, up from 80% at
the beginning of 1996. We intend to increase the equity ratio to at least 90%
by the end of 1996 and at least 95% by mid-1997. We plan to keep it at
95%-100%--i.e., essentially fully invested--after that. Not that the market is
not on the high side--in fact, by our reckoning, it is about 15% above fair
value--but it's a big stock market, and the Fund can choose from among plenty
of stocks with low price/earnings ratios. Our goal is to deliver to you, the
shareholder, the full plate of equities that you expect, and if you want to
keep cash on the side--as a hedge against the stock market, say--that's up to
you.
We gave ourselves 18 months to become fully invested, thinking that this
would give us a chance to put the cash to work opportunistically, buying into
any temporarily sagging sectors or into an overall market drop that might well
occur in such a length of time. That we have been able to do this is well
illustrated by our portfolio's P/E ratio, which is only 9.4 times estimated
1997 earnings (except for energy stocks, which we value on an asset basis).
This is a sharp 42% discount to the market, which, as represented by the S&P
500 Index, has a P/E ratio of more than 16 times estimated 1997 earnings.
As part of our full-investment program, we wanted to diversify the Fund
beyondour very large concentrations in consumer cyclicals (especially autos),
energy, basic materials, and financial stocks. We have been able to do this,
most notably increasing our technology position from 3% of net assets at the
beginning of the year to about 11%. The largest holdings in this new position
are Compaq, Seagate, and Nokia--leaders in the PC, disk drive, and wireless
telecommunication fields, respectively. These are companies with 15% annual
growth rates that we bought in a big way earlier in 1996, at 7-to-9 times 1997
earnings--i.e., Windsor math--and that have contributed significantly to our
performance this year, advancing some 40% to 60% from our purchase price. Other
1996 additions to the portfolio include 3% positions in airlines and
agriculture (farm equipment and fertilizer companies) and 2% positions in AT&T
and Rhone-Poulenc.
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by emphasizing common stocks that are generally misunderstood, out of favor, or
undervalued by fundamental measures such as price/earnings ratio or dividend
yield. The adviser will concentrate a large portion of the Fund's assets in
those securities it believes offer the best return potential.
5
<PAGE> 8
Our energy holdings decreased during the fiscal year from 14% of net
assets to 12%. The group performed well, and we took some profits, particularly
as we do not think that a $23-a-barrel price for crude oil is sustainable. We
also fear that prices of well over $2 per thousand cubic feet for natural gas
may not last, particularly if the current pace of drilling in the United States
persists. Our financial-sector concentration--banks, savings and loans, and
insurance--fell from 25% to 19%, as we again have been selling into strength,
although we continue to be overweighted versus the market. Citicorp is the
largest single holding here; at 4.6%, it is still the second-largest holding in
the Fund. Its developing-country business, which distinguishes Citicorp from
other banks, produces 60% of the company's total earnings and is growing at an
annual clip of 12% to 15%. Also, Citicorp continues to use all of its excess
earnings to buy its own stock at the rate of 6% to 7% per year.
Autos still make up about 10% of the portfolio, with Chrysler, at 6%, the
largest holding in the Fund. On the core product development side, Chrysler
continues to crank out hit after hit. We are convinced that this is no fluke,
that Chrysler is the most nimble and entrepreneurial of the Big Three, that it
has institutionalized these strengths, and that it will continue to gain market
share over time. Finally, our basic-materials concentration--aluminum,
chemicals, paper, and steel--comprises 21% of the portfolio and, while
disappointing to date, is well placed directionally. We believe that, with low
inflation and easing interest rates around the world, 1997 should be a year of
synchronous economic growth, with global industrial production rising on the
order of 4.5%. This will chew up a lot of aluminum, chemicals, paper, and steel
at a rate outstripping the underlying capacity increases, and thus we should
enjoy a sustained rise in the commodity prices.
Our investing style is well established: low P/E, price-opportunistic on
the buy side, price-disciplined on the sell side, and a willingness to
concentrate where it makes sense. Importantly, the current Windsor team, which
I have the pleasure to lead, has more than 50 years of collective experience in
this investing style and is entirely focused on the task of providing unusual
returns for your investment in the Fund.
Charles T. Freeman, Portfolio Manager
Wellington Management Company, LLP
November 14, 1996
6
<PAGE> 9
<TABLE>
<CAPTION>
WINDSOR 1996 REPORT CARD
- ----------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR 1996*
10/31/96 --------------------------
PERCENT WEIGHTED RELATIVE TO MEANINGFUL
SIGNIFICANT OF NET AVERAGE S&P 500 WINDSOR POSITIONS
CONCENTRATIONS ASSETS APPRECIATION INDEX (IN ORDER OF SIZE) GRADE CRITIQUE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Autos 10% 21% 1% Chrysler, Ford C Chrysler good,
Ford not.
- ----------------------------------------------------------------------------------------------------------------------------
Banks 8% 39% 21% Citicorp, A+ Big outperform-
NationsBank, ance two years
First Union in a row makes a
coup of 1994's
buildup in this
area to 22%
of Fund.
- ----------------------------------------------------------------------------------------------------------------------------
Basic Materials 21% 0% -18% Georgia-Pacific, F Quite disap-
(aluminum, Reynolds Metals, pointing so far,
chemicals, Alcoa, Champion but improving
paper, and steel) International, supply/demand
Union Camp, should make these
Lyondell Petro- good 1997 stocks;
chemical, Stone aluminum our
Container, favorite.
Union Carbide,
Georgia Gulf
- ----------------------------------------------------------------------------------------------------------------------------
Energy 12% 26% 9% Burlington A Our long-stand-
Resources, USX- ing natural gas
Marathon Group, case finally
Atlantic Richfield, panned out;
ENSERCH plus a surprising
surge in crude
oil price.
- ----------------------------------------------------------------------------------------------------------------------------
Insurance 4% 25% 13% Allstate, CIGNA A Allstate terrific,
including some
purchases earlier
this year.
- ----------------------------------------------------------------------------------------------------------------------------
Savings & 6% 25% 5% Golden West B+ Finally some
Loans Financial, Great recognition here.
Western Financial,
H.F. Ahmanson
- ----------------------------------------------------------------------------------------------------------------------------
Technology 11% 26% 15% Seagate, Compaq, A+ Home run--
Nokia, Advanced quick payoff on
Micro Devices
early 1996
purchases.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Capital change only. For stocks purchased and sold during the year, absolute
appreciation is measured from the date of purchase or to the date of sale, and
then relative to the S&P 500 Index for the same period.
7
<PAGE> 10
PORTFOLIO PROFILE: WINDSOR FUND
OCTOBER 31, 1996
This Profile provides a snapshot of the Fund's characteristics, where
appropriate, compared to an unmanaged index. Key elements of this Profile are
defined on page 9.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------
WINDSOR S&P 500
- -----------------------------------------
<S> <C> <C>
Number of Stocks 104 500
Median Market Cap $6.4B $24.2B
Price/Earnings Ratio 14.7x 18.5x
Price/Book Ratio 1.9x 3.3x
Yield 2.4% 2.1%
Return on Equity 10.3% 19.6%
Earnings Growth Rate 10.3% 13.7%
Foreign Holdings 6.7% 3.8%
Turnover Rate 34% --
Expense Ratio 0.31% --
Cash Reserves 9.7% --
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------
WINDSOR S&P 500
- -----------------------------------------
<S> <C> <C>
R-Squared 0.65 1.00
Beta 0.94 1.00
</TABLE>
INVESTMENT FOCUS
- -----------------------------------------
[FIGURE]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------
<S> <C>
Chrysler Corp. 6.3%
Citicorp 4.6
Seagate Technology 4.4
Ford Motor Co. 4.2
Burlington Resources, Inc. 4.0
Georgia-Pacific Corp. 3.9
USX-Marathon Group 3.3
Compaq Computer Corp. 3.1
Golden West Financial Corp. 2.3
Reynolds Metals Co. 2.3
- --------------------------------------------
Top Ten 38.4%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- --------------------------------------------------------------------------------------
OCTOBER 31, 1995 OCTOBER 31, 1996
------------------------------------------
WINDSOR WINDSOR S&P 500
------------------------------------------
<S> <C> <C> <C>
Basic Materials . . . . . . . . . . . 26.8% 26.3% 6.3%
Capital Goods & Construction . . . . . 2.2 4.3 8.6
Consumer Cyclical . . . . . . . . . . 15.1 12.4 12.7
Consumer Staples . . . . . . . . . . . 0.0 0.0 12.3
Energy . . . . . . . . . . . . . . . . 17.5 13.4 9.6
Financial . . . . . . . . . . . . . . 31.3 21.5 14.8
Health Care . . . . . . . . . . . . . 0.0 2.2 10.4
Technology . . . . . . . . . . . . . . 3.9 12.7 12.1
Transport & Services . . . . . . . . . 1.1 3.7 1.4
Utilities . . . . . . . . . . . . . . 1.5 2.8 9.7
Miscellaneous . . . . . . . . . . . . 0.6 0.7 2.1
- --------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
[PHOTO]
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has a beta of 1.00, so a portfolio with a beta of
1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
EARNINGS GROWTH RATE. The annual average rate of growth in earnings over the
past five years for the stocks now in a portfolio.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors. The average expense ratio for a stock mutual fund was
1.34% in 1995.
FOREIGN HOLDINGS. The percentage of a portfolio's investments represented by
stocks or American Depository Receipts (ADRs) of companies based outside the
United States.
INVESTMENT FOCUS. This grid indicates a portfolio's characteristics in terms of
market capitalization and relative valuation (growth, value, or a blend). For
instance, if the upper right box of the grid is shaded, it indicates that a
portfolio emphasizes large capitalization growth stocks.
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of stocks in the portfolio. Half the stocks in the portfolio have
higher market capitalizations and half lower.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified, and the more likely it is to perform in line with
the overall stock market.
PRICE/BOOK RATIO. The share price of a stock, divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. P/E is an indicator of market expectations about
corporate prospects; the higher the P/E, the greater the expectations for a
company's future growth. For a portfolio, the weighted average P/E of the
stocks it holds.
RETURN ON EQUITY. The rate of return generated by a company during the past
year for each dollar of shareholder's equity (net income for the year /
shareholder's equity). For a portfolio, the weighted average return on equity
for the companies represented in the portfolio.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
SECTOR DIVERSIFICATION. The percentage of a portfolio's common stocks invested
in each of the major industry classifications that compose the stock market.
TEN LARGEST HOLDINGS. Indicates the percentage of a portfolio's total net
assets in its ten largest stocks (the average for stock mutual funds is about
25%). As this percentage rises, a portfolio's returns are likely to be more
volatile, since its return is more dependent on a few companies.
TURNOVER RATE. Indicates trading activity during the past year. Portfolios with
high turnover rates incur higher transaction costs and are more likely to
realize and distribute capital gains (which are taxable to investors). The
average turnover rate for stock mutual funds is about 80%.
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of a portfolio's net asset value, is based on
income earned by the portfolio over the past 30 days and is annualized, or
projected forward for the coming year.
9
<PAGE> 12
PERFORMANCE SUMMARY: WINDSOR FUND
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Fund. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Fund could lose money.
TOTAL INVESTMENT RETURNS: 10/31/76-10/31/96
<TABLE>
<CAPTION>
- -----------------------------------------
WINDSOR FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------
<S> <C> <C> <C> <C>
1977 3.8% 4.3% 8.1% -6.1%
1978 6.2 5.0 11.2 6.3
1979 13.5 6.0 19.5 15.3
1980 17.2 7.0 24.2 32.1
1981 11.1 6.9 18.0 0.6
1982 14.2 7.0 21.2 16.3
1983 25.3 7.3 32.6 27.8
1984 9.6 6.9 16.5 6.3
1985 16.6 6.7 23.3 19.4
1986 22.8 6.5 29.3 33.2
1987 2.7 1.9 4.6 6.4
1988 18.9 8.1 27.0 14.8
1989 11.9 5.2 17.1 26.4
1990 -31.8 3.9 -27.9 -7.5
1991 35.7 9.0 44.7 33.5
1992 4.3 5.0 9.3 10.0
1993 24.6 3.7 28.3 14.9
1994 3.7 2.6 6.3 3.9
1995 14.2 3.6 17.8 26.4
1996 19.6 3.6 23.2 24.1
</TABLE>
See Financial Highlights table on page 16 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: 10/31/86-10/31/96
- ----------------------------------------------------------------------
[FIGURE]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1996
------------------------------ FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
WINDSOR FUND 23.16% 16.69% 13.38% $35,091
AVERAGE VALUE FUND 21.39 13.80 12.56 32,641
S&P 500 INDEX 24.10 15.55 14.66 39,283
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 9/30/96*
- --------------------------------------------------------------------------------------
10 YEARS
INCEPTION -----------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Windsor Fund 10/23/58 13.28% 15.95% 8.18% 4.93% 13.11%
- --------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Fund's fiscal year end.
10
<PAGE> 13
[PHOTO]
FINANCIAL STATEMENTS
OCTOBER 31, 1996
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, preferred stocks, bonds,
etc.) and by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the Fund's Net
Assets. Finally, Net Assets are divided by the outstanding shares of the Fund
to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the Fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested
by shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the Fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date. Any Accumulated Net Realized Losses, and any cumulative
excess of distributions over net income or net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the market value of the Fund's investments and their cost, and reflects
the gains (losses) that would be realized if the Fund were to sell all of its
investments at their statement-date values.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
MARKET
VALUE*
WINDSOR FUND SHARES (000)
- -------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (88.9%)
- -------------------------------------------------------------------------
BASIC MATERIALS (23.4%)
(1) AK Steel Holding Corp. 2,294,400 $ 81,451
Akzo Nobel NV ADR 412,500 26,039
Alcan Aluminium Ltd. 3,891,900 127,946
#(1) Alumax, Inc. 2,352,600 75,577
Aluminum Co. of America 5,632,400 330,199
Arcadian Corp. 1,085,900 26,740
#(1) Bethlehem Steel Corp. 8,495,800 69,028
(1) Bowater Inc. 3,500,000 123,813
British Steel PLC ADR 5,344,400 146,971
(1) Century Aluminum Co. 2,000,000 27,000
(1) Champion International Corp. 6,300,000 274,050
Freeport-McMoRan, Inc. 842,200 26,845
(1) Freeport-McMoRan Resource
Partners, LP 6,549,100 113,791
# Geneva Steel Class A 1,309,500 4,911
(1) Geon Co. 2,480,000 48,670
(1) Georgia Gulf Corp. 3,705,300 100,043
(1) Georgia-Pacific Corp. 8,286,300 621,473
IMC Global, Inc. 1,617,000 60,637
Inland Steel Industries, Inc. 1,929,200 31,108
# Kemira Oy ADR 1,994,000 43,370
(1) LTV Corp. 7,302,600 74,852
(1) Lyondell Petrochemical Co. 7,410,600 157,475
(1) Mississippi Chemical Corp. 1,570,800 39,270
#(1) National Steel Corp. Class B 1,897,300 16,364
Norsk Hydro AS ADR 1,660,900 76,194
(1) Reynolds Metals Co. 6,225,800 350,201
Rouge Steel Co. Class A 1,395,300 28,429
# Ryerson Tull, Inc. Class A 1,450,500 18,494
(1) Stone Container Corp. 9,470,000 144,418
(1) Terra Industries, Inc. 4,170,000 61,508
(1) Union Camp Corp. 5,408,900 263,684
Union Carbide Corp. 2,542,600 108,378
# WHX Corp. 203,700 1,706
#(1) Weirton Steel 3,719,500 7,904
-----------
3,708,539
-----------
CAPITAL GOODS & CONSTRUCTION (3.8%)
Case Corp. 3,129,000 145,498
(1) Continental Homes
Holding Corp. 687,900 11,178
(1) LaFarge Corp. 5,471,500 101,907
Lone Star Industries, Inc. 202,600 7,446
MDC Holdings, Inc. 498,600 3,677
(1) Owens Corning 5,096,800 197,501
(1) Ryland Group, Inc. 925,200 11,912
Southdown, Inc. 366,600 10,036
(1) Standard Pacific Corp. 1,750,000 9,406
#(1) Toll Brothers, Inc. 1,787,300 30,608
# USG Corp. 1,669,100 49,238
#(1) U.S. Home Corp. 1,100,000 23,788
-----------
602,195
-----------
CONSUMER CYCLICAL (11.0%)
# Burlington Coat Factory
Warehouse Corp. 421,500 5,163
#(1) Burlington Industries, Inc. 6,700,000 76,213
Chrysler Corp. 29,570,400 994,305
Ford Motor Co. 21,215,800 662,994
-----------
1,738,675
-----------
ENERGY (11.9%)
Amerada Hess Corp. 518,400 28,706
Atlantic Richfield Co. 2,177,000 288,453
(1) Burlington Resources, Inc. 12,531,000 631,249
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
MARKET
VALUE*
WINDSOR FUND SHARES (000)
- -------------------------------------------------------------------------
<S> <C> <C>
(1) Cabot Oil & Gas Corp. Class A 2,255,200 34,956
(1) ENSERCH Corp. 4,753,500 $ 102,200
# Enserch Exploration, Inc. 3,011,000 29,734
Murphy Oil Corp. 1,966,700 97,106
# Seagull Energy Corp. 1,450,000 31,356
(1) USX-Marathon Group 24,027,200 525,595
Ultramar Corp. 1,875,700 53,692
(1) Valero Energy Corp. 2,688,100 63,842
-----------
1,886,889
-----------
FINANCIAL (19.1%)
(1) H.F. Ahmanson & Co. 7,676,845 240,861
Allstate Corp. 6,113,100 343,098
Bancorp Hawaii, Inc. 123,200 4,882
Bear Stearns Co., Inc. 4,264,365 100,746
Chase Manhattan Corp. 559,700 47,994
CIGNA Corp. 1,705,200 222,528
Citicorp 7,349,200 727,571
# Coast Savings Financial, Inc. 431,600 14,189
(1) Equity Residential Properties
Trust REIT 2,178,900 80,074
First Union Corp. 3,034,000 220,724
(1) Golden West Financial Corp. 5,652,100 366,680
(1) Great Western Financial Corp. 9,621,586 269,404
(1) IPC Holdings Ltd. 1,370,600 29,468
KeyCorp 1,072,923 50,025
Mid Ocean Ltd. 367,600 17,277
NationsBank Corp. 2,391,700 225,418
PartnerRe Ltd. 2,116,200 60,576
-----------
3,021,515
-----------
HEALTH CARE (1.9%)
Rhone-Poulenc SA ADR 10,351,872 307,968
-----------
TECHNOLOGY (11.3%)
#(1) Advanced Micro Devices, Inc. 12,879,500 228,611
# Arrow Electronics, Inc. 1,080,000 51,435
# Compaq Computer Corp. 6,994,000 486,957
# Komag, Inc. 446,300 12,274
Nokia Corp. Pfd. ADR 5,833,400 270,524
# Quantum Corp. 1,466,000 29,503
#(1) Seagate Technology 10,552,108 704,353
-----------
1,783,657
-----------
TRANSPORT & SERVICES (3.3%)
# America West Airlines, Inc. 1,454,200 16,723
# AMR Corp. 1,400,000 117,600
#(1) Continental Airlines-Class B 3,567,500 89,634
(1) Delta Air Lines, Inc. 4,072,000 288,603
(1) Maritrans Inc. 739,000 4,526
-----------
517,086
-----------
UTILITIES (2.5%)
AT&T Corp. 9,606,000 335,009
Unicom Corp. 2,321,499 60,359
-----------
395,368
-----------
MISCELLANEOUS (0.7%) 115,463
- --------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $11,292,728) 14,077,355
- --------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (0.2%)
- --------------------------------------------------------------------------
Atlantic Richfield Cvt. 9.00%
(Convertible into Lyondell
Petrochemical Co.) 610,000 13,191
Bethlehem Steel Corp. $5.00 123,900 6,381
Reynolds Metals Co. $3.31 180,000 8,798
- --------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $30,648) 28,370
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATION (1.3%)
- --------------------------------------------------------------------------
U.S. Treasury Note
7.25%, 11/15/96
(COST $204,654) $204,500 204,627
- --------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (9.7%)
- --------------------------------------------------------------------------
COMMERCIAL PAPER (4.7%)
Abbott Laboratories
5.23%, 11/5/96 20,000 19,988
5.30%, 11/14/96 20,000 19,962
5.312%, 11/6/96 25,000 24,982
5.343%, 12/30/96 19,080 18,912
AIG Funding Inc.
5.333%, 11/26/96 20,000 19,927
The Coca Cola Co.
5.33%, 11/7/96 22,900 22,880
Duke Power Co.
5.317%, 11/12/96 35,000 34,944
E.I. du Pont de Nemours & Co.
5.282%, 11/7/96 25,000 24,978
5.306%, 11/19/96 50,000 49,870
5.316%, 11/22/96 50,000 49,848
Emerson Electric
5.279%, 11/4/96 30,000 29,987
5.286%, 11/12/96 30,000 29,952
General Electric Co.
5.25%, 12/10/96 50,000 49,709
5.371%, 12/11/96 50,000 49,702
General Re Corp.
5.366%, 12/24/96 100,000 99,227
Harvard University
5.318%, 11/19/96 25,000 24,935
5.328%, 11/5/96 35,000 34,980
5.329%, 11/21/96 30,000 29,913
Hewlett-Packard Co.
5.287%, 11/6/96 50,000 49,964
Metlife Funding Inc.
5.317%, 11/13/96 41,260 41,188
Private Export Fund Corp.
5.549%, 12/18/96 25,000 24,825
-----------
750,673
-----------
FEDERAL HOME LOAN BANK (0.5%)
5.389%, 11/20/96 80,000 79,769
-----------
FEDERAL HOME LOAN MORTGAGE CORP. (1.8%)
5.20%, 12/9/96 23,700 23,570
5.284%, 11/20/96 50,000 49,863
5.288%, 11/15/96 50,000 49,899
5.289%, 11/19/96 90,000 89,767
5.294%, 11/14/96 68,000 67,872
-----------
280,971
-----------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- -------------------------------------------------------------------------
<S> <C> <C>
FEDERAL NATIONAL MORTGAGE ASSN. (0.9%)
5.279%, 11/26/96 $ 40,000 $ 39,856
5.284%, 11/29/96 100,000 99,597
-----------
139,453
-----------
STUDENT LOAN MARKETING ASSN. (0.2%)
5.337%, 12/13/96 40,000 39,754
-----------
REPURCHASE AGREEMENT (1.6%)
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.58%, 11/1/96 247,923 247,923
- -------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $1,538,572) 1,538,543
- -------------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(COST $13,066,602) 15,848,895
- -------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.1%)
- -------------------------------------------------------------------------
Other Assets--Notes C and F 582,092
Liabilities--Note F (589,937)
-----------
(7,845)
- -------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------
Applicable to 932,473,612 outstanding
$.01 par value shares
(authorized 1,300,000,000 shares) $15,841,050
=========================================================================
NET ASSET VALUE PER SHARE $16.99
=========================================================================
</TABLE>
*See Note A in Notes 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.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------
AT OCTOBER 31, 1996, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $11,707,454 $12.56
Undistributed Net
Investment Income 114,649 .12
Accumulated Net
Realized Gains 1,236,654 1.33
Unrealized Appreciation--
Note E 2,782,293 2.98
- -------------------------------------------------------------------------
NET ASSETS $15,841,050 $16.99
=========================================================================
</TABLE>
13
<PAGE> 16
WSTATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
WINDSOR FUND
YEAR ENDED OCTOBER 31, 1996
(000)
- -------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 319,222
Interest 118,745
----------
Total Income 437,967
----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 18,816
Performance Adjustment (4,417)
The Vanguard Group--Note C
Management and Administrative 26,107
Marketing and Distribution 2,505
Taxes (other than income taxes) 962
Custodian Fees 19
Auditing Fees 21
Shareholders' Reports 398
Annual Meeting and Proxy Costs 153
Directors' Fees and Expenses 43
----------
Total Expenses 44,607
Expenses Paid Indirectly--Note C (2,716)
----------
Net Expenses 41,891
- -------------------------------------------------------------------------------------
NET INVESTMENT INCOME 396,076
- -------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 1,243,836
- -------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 1,366,247
- -------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,006,159
=====================================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
that is detailed in the Statement of Operations. The amounts shown as
Distributions to shareholders from the Fund's net income and capital gains may
not match the amounts shown in the Operations section, because distributions
are determined on a tax basis and may be made in a period different from the
one in which the income was earned or the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount
shareholders invested in the Fund, either by purchasing shares or by
reinvesting distributions, as well as the amounts redeemed. The corresponding
numbers of Shares Issued and Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
WINDSOR FUND
YEAR ENDED OCTOBER 31,
-------------------------
1996 1995
(000) (000)
- -------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 396,076 $ 360,056
Realized Net Gain 1,243,836 1,167,670
Change in Unrealized Appreciation (Depreciation) 1,366,247 425,123
-------------------------
Net Increase in Net Assets Resulting from Operations 3,006,159 1,952,849
-------------------------
DISTRIBUTIONS
Net Investment Income (406,918) (352,640)
Realized Capital Gain (1,165,890) (673,435)
-------------------------
Total Distributions (1,572,808) (1,026,075)
-------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 1,866,840 1,283,038
Issued in Lieu of Cash Distributions 1,499,031 976,040
Redeemed (1,965,937) (1,584,392)
-------------------------
Net Increase from Capital Share Transactions 1,399,934 674,686
- -------------------------------------------------------------------------------------
Total Increase 2,833,285 1,601,460
- -------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 13,007,765 11,406,305
-------------------------
End of Year $15,841,050 $13,007,765
=====================================================================================
(1)Shares Issued (Redeemed)
Issued 121,079 89,000
Issued in Lieu of Cash Distributions 102,408 75,852
Redeemed (127,266) (112,335)
-------------------------
Net Increase in Shares Outstanding 96,221 52,517
=====================================================================================
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the
Fund; and the extent to which the Fund tends to distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Fund for one year. Finally, the table lists the Fund's Average Commission
Rate Paid, a disclosure required by the SEC beginning in 1996. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
WINDSOR FUND
YEAR ENDED OCTOBER 31,
---------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $15.55 $14.55 $14.95 $12.37 $12.79
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .43 .44 .44 .37 .49
Net Realized and Unrealized Gain (Loss) on Investments 2.85 1.86 .42 2.98 .50
---------------------------------------------------
Total from Investment Operations 3.28 2.30 .86 3.35 .99
---------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.46) (.44) (.37) (.39) (.57)
Distributions from Realized Capital Gains (1.38) (.86) (.89) (.38) (.84)
---------------------------------------------------
Total Distributions (1.84) (1.30) (1.26) (.77) (1.41)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $16.99 $15.55 $14.55 $14.95 $12.37
===================================================================================================================
TOTAL RETURN 23.16% 17.80% 6.35% 28.29% 9.30%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $15,841 $13,008 $11,406 $10,537 $8,250
Ratio of Total Expenses to Average Net Assets--Note C 0.31% 0.45% 0.45% 0.40% 0.26%
Ratio of Net Investment Income to Average Net Assets 2.75% 3.01% 3.11% 2.68% 3.89%
Portfolio Turnover Rate 34% 32% 34% 25% 32%
Average Commission Rate Paid $.0579 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
Vanguard/Windsor Fund is registered under the Investment Company Act of 1940 as
a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform with generally
accepted accounting principles for mutual funds. The Fund consistently follows
such policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the
latest quoted bid and asked prices. Securities not listed on an exchange are
valued at the latest quoted bid prices. Bonds, and temporary cash investments
acquired over 60 days to maturity, are valued using the latest bid prices or
using valuations based on a matrix system (which considers such factors as
security prices, yields, maturities, and 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 to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. Government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Under a contract that expires July 31, 1998, the Fund pays Wellington
Management Company, LLP an investment advisory fee calculated at an annual
percentage rate of average net assets. The basic fee is subject to quarterly
adjustments based on performance relative to the S&P 500 Index. For the year
ended October 31, 1996, the advisory fee represented an effective annual basic
rate of 0.13% of the Fund's average net assets before a decrease of $4,417,000
(0.03%) based on performance. The basic fee reflects a fee waiver of $2,616,000
(0.02%) during the period January 1, 1996, to July 31, 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 October 31,
1996, the Fund had contributed capital of $1,450,000 to Vanguard (included in
Other Assets), representing 7.2% of Vanguard's capitalization. The Fund's
directors and officers are also directors and officers of Vanguard.
Vanguard has asked 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 to the Fund part of the commissions generated. Such
rebates are used solely to reduce the Fund's administrative expenses. For the
year ended October 31, 1996, these arrangements reduced the Fund's expenses by
$2,716,000 (0.02% of average net assets).
D. During the year ended October 31, 1996, the Fund purchased $5,268,883,000
of investment securities and sold $4,290,314,000 of investment securities, not
counting U.S. Government securities and temporary cash investments.
17
<PAGE> 20
E. At October 31, 1996, net unrealized appreciation of investment securities
for financial reporting and Federal income tax purposes was $2,782,293,000,
consisting of unrealized gains of $3,327,206,000 on securities that had risen
in value since their purchase and $544,913,000 in unrealized losses on
securities that had fallen in value since their purchase.
F. The market value of securities on loan to broker/dealers at October 31,
1996, was $438,709,000, for which the Fund held cash collateral of
$456,161,000.
18
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Vanguard/Windsor Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard/Windsor Fund (the "Fund") at October 31, 1996, and the results of its
operations, the changes in its net assets and the financial highlights for each
of the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1996 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 2, 1996
19
<PAGE> 22
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
VANGUARD/WINDSOR FUND
This information for the fiscal year ended October 31, 1996, is included
pursuant to provisions of the Internal Revenue Code.
The Fund designates $1,038,544,000 as capital gain dividends (from net
long-term capital gains), which will be distributed in December 1996.
For corporate shareholders, 49.9% of investment income (dividend income plus
short-term gains, if any) qualifies for the dividends-received deduction.
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
20
<PAGE> 23
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group;
Director of Chris-Craft Industries, Inc.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer Inc.;
Director of Sun Company, Inc. and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and
Massa-chusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, 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., Procter & Gamble 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; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President,
Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President,
Institutional.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGUARD GROUP LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
[email protected] http://www.vanguard.com
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.
<PAGE> 24
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity--U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity--International
Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q220-10/96
[PHOTO]
<PAGE> 25
[PHOTO]
VANGUARD/
WINDSOR II
Annual Report
October 31, 1996
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our course
toward the twenty-first century. Our Report cover reflects that blending of
tradition and innovation, of past, present, and future. The montage includes a
bronze medallion with a likeness of our namesake, HMS Vanguard (Lord Nelson's
flagship at The Battle of the Nile); a clock built circa 1816 in Scotland,
featuring a portrait of Nelson (who is also shown, accepting a surrender, in a
detail from a nineteenth-century engraving); and several views of our recently
completed campus, which is steeped in nautical imagery--from our buildings named
after Nelson's warships (Victory, Majestic, and Goliath are three shown), to our
artwork and ornamental compass rose.
<PAGE> 26
[PHOTO]
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide a candid
assessment of the Fund's performance relative to an appropriate unmanaged market
benchmark and a peer group of mutual funds with similar investment policies. It
also reviews the principal factors contributing to--and detracting from--the
returns earned by the Fund. To help you evaluate your Fund's current-year
performance, the Message includes a discussion of the Fund's long-term
investment results, as well as a look ahead to the prospects for the coming
year. A recap of the financial markets, which had been included as part of the
Chairman's letter, now appears in The Markets In Perspective. This overview
covers the world's financial markets, putting the results of the Fund's strategy
in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS AN ADDITION TO OUR FUND REPORTS. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics. The
Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the adviser
to address--and we do our best to ensure that this Report is written in the same
simple and candid manner that characterizes all Vanguard communications.
Finally, each Adviser's Report will include an inset reminder of the adviser's
basic investment philosophy.
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
3
Report From
The Adviser
5
Performance
Summary
7
Portfolio
Profile
8
Financial
Statements
10
Report Of
Independent
Accountants
18
Directors And
Officers
INSIDE BACK COVER
<PAGE> 27
[PHOTO]
JOHN C. BOGLE
[PHOTO]
JOHN J. BRENNAN
FELLOW SHAREHOLDER,
Amid a spirited bull market for stocks Vanguard/Windsor II earned a total
return of +27.2% during the twelve months ended October 31, 1996, substantially
above the returns of the average competing fund and the unmanaged Standard &
Poor's 500 Composite Stock Price Index.
The following table compares Windsor II's total return (capital change plus
reinvested dividends) for the year with those of the S&P 500 Index, which is
dominated by blue-chip stocks, and the average value (growth and income) mutual
fund, the group that best reflects the investment philosophy of Windsor II.
The Fund's return is based on an increase in its net asset value from
$20.06 per share on October 31, 1995, to $24.04 per share on October 31, 1996,
with the latter figure adjusted for dividends of $.58 per share paid from net
investment income and a distribution of $.69 per share paid from net realized
capital gains.
<TABLE>
<CAPTION>
- ---------------------------------------------
TOTAL RETURN
FISCAL YEAR ENDED
OCTOBER 31, 1996
- ---------------------------------------------
<S> <C>
Vanguard/Windsor II +27.2%
- ---------------------------------------------
Average Value Fund +21.4%
- ---------------------------------------------
S&P 500 Index +24.1%
- ---------------------------------------------
</TABLE>
FISCAL 1996 PERFORMANCE OVERVIEW
During the year ended October 31, the stock market flourished in an ideal
environment of moderate economic growth and rising corporate profits accompanied
by low inflation. Interest rates fluctuated considerably, but ended the fiscal
year slightly above their levels of a year earlier.
By contrast, the stock market's advance in this banner year was remarkably
steady, with the S&P 500 Index providing positive returns in eleven of the
twelve months. During the fiscal year, both growth stocks and value stocks
performed well. While returns on these two groups tend to be very similar over
longer periods, they often diverge over shorter periods. In fiscal 1996, value
stocks achieved a slight edge over growth stocks: the S&P/BARRA Value Index
earned a return of +24.6%; the S&P/BARRA Growth Index earned a return of +23.7%.
Windsor II outperformed the S&P 500 Index, the Value Index, and the average
value fund for several reasons. First, our advisers generally picked the right
market sectors to emphasize. For example, Windsor II had twice the weighting of
the S&P 500 Index (26% versus 13%) in financial stocks, the market's
highest-performing sector during the fiscal year. What's more, our advisers'
stock selections were exemplary, especially in the financial, energy, and
health-care sectors. On balance, our stocks earned a return of +30.4% for the
year, but the 8% cash reserve we hold for liquidity purposes (somewhat larger
than our competitors' reserves) moderated the impact of that excellent outcome.
Finally, we benefited relative to our competitors from the market's bias toward
larger-capitalization stocks. The median market capitalization of Windsor II's
stocks is about $19 billion, one-third larger than that of the average value
fund.
We are gratified that all four of the advisers who constitute our
multi-manager structure outpaced the return of our value-fund peer group, and
that three of the four surpassed the return of the S&P 500 Index. The share of
assets supervised by each of our
1
<PAGE> 28
<TABLE>
<CAPTION>
- ------------------------------------------------------------
TOTAL ASSETS MANAGED
--------------------
$ MILLION PERCENT
- ------------------------------------------------------------
<S> <C> <C>
Barrow, Hanley, Mewhinney
& Strauss, Inc. $10,166 69%
Equinox Capital Management, Inc. 1,424 10
Tukman Capital Management, Inc. 1,305 9
Vanguard Core Management Group 1,081 7
Cash Reserves 782 5
- ------------------------------------------------------------
Total $14,758 100%
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------
TOTAL RETURN*
OCT. 31, 1986, TO OCT. 31, 1996
-------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- -----------------------------------------------------
<S> <C> <C>
Vanguard/Windsor II +13.9% $36,775
- -----------------------------------------------------
Average Value Fund +12.6% $32,641
- -----------------------------------------------------
S&P 500 Index +14.7% $39,283
- -----------------------------------------------------
</TABLE>
*Assumes reinvestment of all dividends and distributions, and excludes sales
charges, if any, on the other mutual funds.
portfolio managers is presented in the adjacent table.
LONG-TERM PERFORMANCE OVERVIEW
Windsor II has achieved a significant long-term advantage over the average value
mutual fund. However, over the past decade, neither the Fund nor our average
competitor has matched the S&P 500 Index. The following table summarizes returns
for the past decade.
We should emphasize that future returns from stocks may be lower than those
shown for the past decade, which were unusually high. Indeed, with stock prices
at lofty levels by several measures, investors have reason to expect lower
returns in the coming decade.
With respect to Windsor II's return versus that of the S&P 500 Index, we
note that the Index is a tough bogey, since it is a theoretical construct that
bears none of the "real world" operating costs that mutual funds incur. Nor does
the Index hold cash, which retards performance when stock prices are rising, as
they were for most of the past decade. By contrast, equity funds typically hold
a small part (5% to 10%) of their assets in interest-bearing cash equivalents to
provide liquidity or because recent cash inflows are awaiting investment in
equities.
IN SUMMARY
The U.S. stock market has been on the rise--with only a few brief setbacks--for
more than 14 years. So, it seems appropriate to note that the ever-present risks
of investing in stocks may be higher now than for some time. Certainly, the
sailing will not always be smooth in the future. However, we believe that
investors who "stay the course" with a balanced portfolio of stock funds, bond
funds, and money market funds consistent with their own financial objectives
have little to fear from rough seas in the financial markets.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
Chairman of the Board President
November 12, 1996
2
<PAGE> 29
THE MARKETS IN PERSPECTIVE: FISCAL YEAR ENDED OCTOBER 31, 1996
[PHOTO]
U.S. EQUITY MARKETS
The past twelve months were truly rewarding for common-stock investors in the
United States, particularly those who emphasized larger companies. As noted in
the table, the Standard & Poor's 500 Composite Stock Price Index gained 24.1%
for the fiscal year, while the Russell 2000 Small Stock Index posted a 16.6%
advance. The strong absolute returns can be attributed primarily to solid
earnings growth, continued low inflation, and the expectation on the part of
investors that this environment will prevail over the near term.
Among larger-capitalization issues, the best performing sector was
financial, with a 39.0% advance. Leading this group were banks and
brokerage firms. Banks benefited from the relative stability of economic
growth--which could be expected to result in both growing demand for loans and
low default rates; brokerage firms continued to reap the benefits of positive
equity markets. Energy issues also posted very strong results (33.1%),
reflecting the pronounced increase in oil prices from $17.98 per barrel to
$23.35 during the past twelve months.
Technology issues probably exhibited the greatest disparity of any sector.
The best performers were generally larger companies with dominant positions in
their industries; many of these firms rose 30% or more compared to 16.9%, in
aggregate, for the technology holdings in the S&P 500 Index. By contrast,
technology was the worst-performing sector within the Russell 2000 Index, with a
scant 2.9% return over the fiscal year.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED OCTOBER 31, 1996
---------------------------------
1 YEAR 3 YEARS 5 YEARS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 24.1% 17.7% 15.5%
Russell 2000 Index 16.6 11.2 14.8
MSCI-EAFE Index 10.8 6.9 8.0
- -----------------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 5.9% 5.6% 7.7%
Lehman 10-Year Municipal
Bond Index 5.0 5.2 7.7
Salomon 90-Day U.S. Treasury Bills 5.3 5.0 4.4
- -----------------------------------------------------------------------------
Other
Consumer Price Index 3.0% 2.8% 2.9%
- -----------------------------------------------------------------------------
</TABLE>
In sum, investors displayed a strong preference for companies with
"predictable" earnings streams. One unusual note: the price/earnings ratio of
the S&P 500 Index rose 17% (from 15.8 to 18.5) during the last twelve months,
despite a rise in interest rates. In general, the P/E ratio moves inversely with
interest rates.
U.S. FIXED-INCOME MARKETS
While U.S. stock investors relished their solid gains, bond investors were not
so fortunate. Interest rates, as reflected in the 30-year U.S. Treasury yield,
fell from 6.33% on October 31, 1995, to 5.95% two months later. At that time,
analysts anticipated an environment of slow economic growth and harbored almost
no concern about potential increases in inflation. Underscoring that view, the
Federal Reserve Board's Open Market Committee cut both the discount rate and the
Federal funds rate by 0.25% in late January.
3
<PAGE> 30
Economic data soon suggested a different scenario--one characterized by
accelerating economic activity. A range of indicators pointed toward more rapid
growth than anticipated, but none concerned the bond market as much as the
ongoing increases in employment. In many analysts' view, continued job growth
would probably lead to higher wage rates, which might not be offset by
improvements in productivity. The net result would be higher inflation, the bane
of bond investors. Such concerns caused the 30-year U.S. Treasury yield to climb
to 7.19% in early July. From that point forward, interest rates declined,
although in an erratic pattern, leaving the long-term Treasury yield at 6.64% by
the end of October.
Three categories of bonds did benefit their investors, at least on a
relative basis, over the past year: short-maturity portfolios, low-quality
issues, and municipals. Short-maturity investors saw a small increase in rates
(0.18% for the 3-year U.S. Treasury bond). Owners of junk bonds earned positive
returns as lower-quality, higher-yielding issues generally fare well during
periods of steady growth; a modest increase in inflation can be beneficial to
junk-bond issuers (the Lehman High Yield Bond Index gained 11.1%). Municipal
bonds, freed from investor worries over the proposed "flat tax," performed
exceptionally well and, to some extent, seemed immune to the inflation concerns
of the taxable market. In fact, the yield on the benchmark 30-year municipal
fell -0.05% during the twelve months, while the yield on the comparable-maturity
U.S. Treasury issue rose 0.31%.
INTERNATIONAL EQUITY MARKETS
Investments in non-U.S. equity markets fared quite well over the fiscal year,
with one major exception: Japan. For the past twelve months, the Morgan Stanley
Capital International-Europe, Australasia, Far East Index (which covers all
major markets outside North America) posted a total return of 10.8% in dollars,
after a 5.1% increase in the value of the U.S. dollar over foreign currencies.
Nearly all of this return was generated in the European markets, where the
dollar return was 17.9% compared to 3.5% for the Pacific Basin. Aside from Japan
(-0.7% in dollars) and Singapore (-3.1%), markets in the Pacific Basin provided
very strong returns, as evidenced by Hong Kong (28.0%) and Australia (18.3%).
The variation in returns across and within regions can be attributed to
differing environments and expectations for growth and inflation. In Europe,
many governments focused on the deficit-spending guidelines mandated by the
Maastricht Treaty for the conversion to a common European currency unit (the
ECU). The Treaty stipulated that deficit spending not exceed defined
levels--with the idea that restraint would keep inflation to reasonable levels.
Over the past year, many governments reaffirmed their commitments to the ECU and
cut spending accordingly. Investors took this as an indication that inflation
would remain modest and economic growth tepid. The result was a strong boost to
high-quality growth stocks across Europe.
The Japanese market continues to suffer because the long-anticipated
economic recovery has yet to materialize in a meaningful way. Despite some
positive signs, such as improving corporate profits, the Japanese economy
continues to perform in a lack-luster fashion.
4
<PAGE> 31
REPORT FROM THE ADVISER
[PHOTO]
Results for the fiscal year were heartening, with your Fund earning a
return that exceeded those of our key benchmarks. Our returns for the six- and
twelve-month periods ended October 31, 1996, were 8.7% and 27.2%, respectively,
which were quite competitive with those of the unmanaged Standard & Poor's 500
Composite Stock Price Index (9.1% for the six months and 24.1% for the fiscal
year). Our returns surpassed those of the average value (growth and income)
mutual fund (6.8% and 21.4%) and those of the S&P/BARRA Value Index (7.2% and
24.6%), which includes the sort of value stocks held by most growth and income
portfolios. For more details on the performance of Windsor II, please see the
Message To Shareholders on pages 1 and 2.
The question that is probably on the minds of most investors is "Where will
the stock market go? It is so high!" We feel that equities are unlikely to mount
a major advance in the near term but that, with continued growth in corporate
profits and low inflation, they can achieve reasonable returns relative to other
types of investments. We do not attempt to time the stock market's movements,
since there is little evidence that this is a useful pursuit.
Every corporate management team in the country, it seems, insists it is
enhancing shareholder value. Generally, this is being done by holding down
costs, cutting staff, and buying back stock. We applaud these actions but think
that, while they often raise share prices in the short run, such moves also
create an illusion of improving profitability by decreasing shareholder equity.
Over the longer term, return on equity is determined by the earnings on
reinvested capital. We also wish that corporate managements would give a higher
priority to dividend increases.
The economy seems to be in good shape; the current slowing in growth is a
positive sign for the longer term. We do worry that high levels of consumer debt
could choke the expansion, but in all candor, we felt the same last year. Still,
one wonders just how much credit-card debt consumers can service with the
present level of income.
The dominant portfolio characteristics of Windsor II are its low
price-to-earnings and price-to-book ratios (each is only about 80% of the
overall market's level) and its relatively high current yield (one-third higher
than the market's yield). While most value funds share the low P/E trait, the
other characteristics do not accrue automatically. We find that a portfolio
without all these characteristics can be quite volatile in difficult
markets--which, in time, we will face.
Our significant holding in stocks of money-center banks has served us well
for the past year and, indeed, for several years past. It should be noted that
the percentage of assets we hold in this group, and particularly in Chase
Manhattan Bank, is generally unchanged. But--even though these stocks have been
wonderful--we have reduced the number of shares we own as their prices have
advanced. The same is true for other financial stocks. Although they are
undervalued relative to the broad market, this is less so than in the past.
INVESTMENT PHILOSOPHY
The fund reflects a belief that superior long-term investment results can be
achieved by holding a diversified portfolio of out-of-favor stocks with
below-average price/earnings ratios, above-average dividend yields, and the
prospect of above-average total return.
5
<PAGE> 32
While we have benefited from our position in the energy sector, its overall
impact was less than we expected in light of the steady and significant rise in
oil and gas prices. If this winter proves to be normal or colder-than-normal,
energy prices should hold up. Large energy companies have generally been
penalized by results from their refining and marketing divisions, as end-product
pricing has not kept up with rising crude-oil costs. We would expect to maintain
an above-average exposure to oil, gas, and petroleum service stocks until
current energy prices are reflected in the prices of these stocks.
Drugs have been an area of particular concentration for your Fund in
comparison to the value indexes. This strategy has paid off, but as the rapidly
rising prices of these stocks continue to lift them out of the valuation ranges
we consider desirable, we are taking significant profits.
Utilities in general have been a drag on performance. This is largely
because of their low sensitivity to the economy's ups and downs and to
investors' uneasiness over the impact of wholesale (and even retail)
competition. In the case of electric utilities, we feel that the process of
opening their markets to increasing competition will be protracted and that
regulators may permit utilities to recover some of the costs of expensive
generating plants. We continue to expect improving results from this portion of
the portfolio.
The overall exposure of the portfolio to the economy's movements is below
average, with the previously discussed groups being significant. We think this
will help our returns, relative to the market, should either the economy or the
market run out of steam. We are confident that your Fund is positioned to
participate in any market advance but, at the same time, we believe that it
should provide downside protection in the event of a correction.
Barrow, Hanley, Mewhinney & Strauss, Inc.
November 14, 1996
6
<PAGE> 33
PERFORMANCE SUMMARY: WINDSOR II
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Fund. Note, too, that both
share price and return can fluctuate widely so that an investment in the Fund
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 6/24/85-10/31/96
- --------------------------------------------------------------------------------------------
WINDSOR II S&P 500 WINDSOR II S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1985 -0.9% 1.1% 0.2% 1.8% 1991 29.4% 7.2% 36.6% 33.5%
1986 31.2 4.4 35.6 33.2 1992 7.9 4.6 12.5 10.0
1987 -0.6 1.5 0.9 6.4 1993 15.8 3.7 19.5 14.9
1988 14.5 6.0 20.5 14.8 1994 -0.8 3.0 2.2 3.9
1989 19.5 5.2 24.7 26.4 1995 19.2 3.9 23.1 26.4
1990 -21.5 4.0 -17.5 -7.5 1996 23.8 3.4 27.2 24.1
- --------------------------------------------------------------------------------------------
</TABLE>
See Financial Highlights table on page 15 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: 10/31/86-10/31/96
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MULTI-MANAGER
APPROACH ADOPTED
- -----------------------------------------------------------------
AVERAGE VALUE STANDARD & POOR'S
WINDSOR II FUND 500 INDEX
- -----------------------------------------------------------------
<S> <C> <C> <C>
1986 10000 10000 10000
11226 11002 11326
11366 11495 12006
12187 12463 13367
1987 10090 10171 10641
10619 10618 10949
10636 11038 11228
11482 11493 11800
1988 12162 11804 12216
12912 12528 13149
13735 13110 13802
15587 14401 15568
1989 15165 14220 15441
14578 13793 15051
14227 13926 15259
14805 14880 16580
1990 12514 12862 14286
14760 14699 16314
16346 16022 17947
16936 16597 18696
1991 17095 17067 19072
17872 17998 20016
18524 18211 20465
19330 18564 21087
1992 19232 18564 20970
20512 19756 22134
21018 19993 22355
21911 20521 22928
1993 22984 21569 24104
23606 22395 24984
22387 21213 23545
22898 21525 24111
1994 23494 22106 25036
23348 21858 25117
25644 23850 27657
27606 26049 30406
1995 28917 26671 31656
32463 29048 34828
33842 30366 36013
33241 29552 35444
1996 36775 32641 39283
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1996
------------------------------ FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Windsor II 27.17% 16.56% 13.91% $36,775
Average Value Fund 21.39 13.80 12.56 32,641
S&P 500 Index 24.10 15.55 14.66 39,283
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 9/30/96*
- -------------------------------------------------------------------------------------
10 YEARS
INCEPTION ---------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Windsor II 6/24/85 20.62% 16.04% 9.80% 4.39% 14.19%
- -------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Fund's fiscal year end.
7
<PAGE> 34
PORTFOLIO PROFILE: WINDSOR II
OCTOBER 31, 1996
This Profile provides a snapshot of the Fund's characteristics, where
appropriate, compared to an unmanaged index. Key elements of this Profile are
defined on page 9.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ------------------------------------------------
WINDSOR II S&P 500
- ------------------------------------------------
<S> <C> <C>
Number of Stocks 172 500
Median Market Cap $19.3B $24.2B
Price/Earnings Ratio 15.6x 18.5x
Price/Book Ratio 2.5x 3.3x
Yield 2.8% 2.1%
Return on Equity 15.9% 19.6%
Earnings Growth Rate 13.4% 13.7%
Foreign Holdings 3.3% 3.8%
Turnover Rate 32% --
Expense Ratio 0.39% --
Cash Reserves 7.5% --
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ------------------------------------------------
WINDSOR II S&P 500
- ------------------------------------------------
<S> <C> <C>
R-Squared 0.90 1.00
Beta 0.99 1.00
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ---------------------------------------------------------------------------------------
OCTOBER 31, 1995 OCTOBER 31, 1996
------------------------------------------
WINDSOR II WINDSOR II S&P 500
------------------------------------------
<S> <C> <C> <C>
Basic Materials ........................... 4.0% 3.7% 6.3%
Capital Goods & Construction .............. 6.1 7.2 8.6
Consumer Cyclical ......................... 12.7 9.7 12.7
Consumer Staples .......................... 10.4 8.1 12.3
Energy .................................... 15.6 17.3 9.6
Financial ................................. 27.0 27.6 14.8
Health Care ............................... 9.9 5.9 10.4
Technology ................................ 3.2 4.8 12.1
Transport & Services ...................... 0.6 0.6 1.4
Utilities ................................. 9.8 11.5 9.7
Miscellaneous ............................. 0.7 3.6 2.1
- ---------------------------------------------------------------------------------------
</TABLE>
INVESTMENT FOCUS
- --------------------------------------------
[FIGURE]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------
<S> <C>
Chase Manhattan Corp. 5.0%
Philip Morris Cos., Inc. 3.0
Allstate Corp. 2.5
International Business Machines Corp. 2.4
Exxon Corp. 2.4
Travelers Group Inc. 2.3
Texaco Inc. 2.3
PNC Bank Corp. 2.2
BankAmerica Corp. 2.2
First Chicago NBD Corp. 2.2
- --------------------------------------------
Top Ten 26.5%
</TABLE>
8
<PAGE> 35
[PHOTO]
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has a beta of 1.00, so a portfolio with a beta of
1.20 would have seen its share price rise or fall by 12% when the overall market
rose or fell by 10%.
EARNINGS GROWTH RATE. The annual average rate of growth in earnings over the
past five years for the stocks now in a portfolio.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors. The average expense ratio for a stock mutual fund was
1.34% in 1995.
FOREIGN HOLDINGS. The percentage of a portfolio's investments represented by
stocks or American Depository Receipts (ADRs) of companies based outside the
United States.
INVESTMENT FOCUS. This grid indicates a portfolio's characteristics in terms of
market capitalization and relative valuation (growth, value, or a blend). For
instance, if the upper right box of the grid is shaded, it indicates that a
portfolio emphasizes large capitalization growth stocks.
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of stocks in the portfolio. Half the stocks in the portfolio have
higher market capitalizations and half lower.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified, and the more likely it is to perform in line with
the overall stock market.
PRICE/BOOK RATIO. The share price of a stock, divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. P/E is an indicator of market expectations about
corporate prospects; the higher the P/E, the greater the expectations for a
company's future growth. For a portfolio, the weighted average P/E of the stocks
it holds.
RETURN ON EQUITY. The rate of return generated by a company during the past year
for each dollar of shareholder's equity (net income for the year / shareholder's
equity). For a portfolio, the weighted average return on equity for the
companies represented in the portfolio.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
SECTOR DIVERSIFICATION. The percentage of a portfolio's common stocks invested
in each of the major industry classifications that compose the stock market.
TEN LARGEST HOLDINGS. Indicates the percentage of a portfolio's total net assets
in its ten largest stocks (the average for stock mutual funds is about 25%). As
this percentage rises, a portfolio's returns are likely to be more volatile,
since its return is more dependent on a few companies.
TURNOVER RATE. Indicates trading activity during the past year. Portfolios with
high turnover rates incur higher transaction costs and are more likely to
realize and distribute capital gains (which are taxable to investors). The
average turnover rate for stock mutual funds is about 80%.
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of a portfolio's net asset value, is based on
income earned by the portfolio over the past 30 days and is annualized, or
projected forward for the coming year.
9
<PAGE> 36
[PHOTO]
FINANCIAL STATEMENTS
OCTOBER 31, 1996
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, preferred stocks, bonds,
etc.) and by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the Fund's Net
Assets. Finally, Net Assets are divided by the outstanding shares of the Fund to
arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the Fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested by
shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the Fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date. Any Accumulated Net Realized Losses, and any cumulative
excess of distributions over net income or net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the market value of the Fund's investments and their cost, and reflects
the gains (losses) that would be realized if the Fund were to sell all of its
investments at their statement-date values.
<TABLE>
<CAPTION>
- -------------------------------------------------------
MARKET
VALUE*
WINDSOR II SHARES (000)
- -------------------------------------------------------
COMMON STOCKS (92.5%)
- -------------------------------------------------------
<S> <C>
BASIC MATERIALS (3.4%)
Dow Chemical Co. 802,500 $ 62,394
E.I. du Pont de Nemours & Co. 272,800 25,302
Eastman Chemical 2,847,400 150,200
The BF Goodrich Co. 1,067,000 45,214
James River Corp. 30,000 945
Kimberly-Clark Corp. 157,800 14,715
The Mead Corp. 183,300 10,402
- - Millenium Chemicals, Inc. 3,752,432 75,987
Morton International, Inc. 121,300 4,776
Phelps Dodge Corp. 152,900 9,614
USX-U.S. Steel Group 100,500 2,739
Union Carbide Corp. 130,300 5,554
Westvaco Corp. 18,200 519
(1) Witco Chemical Corp. 3,170,400 98,282
----------
506,643
----------
CAPITAL GOODS & CONSTRUCTION (6.6%)
The Boeing Co. 644,700 61,488
Cooper Industries, Inc. 19,000 765
General Electric Co. 1,236,500 119,631
Harnischfeger Industries Inc. 191,600 7,664
Honeywell, Inc. 3,706,000 230,235
Raytheon Co. 6,360,500 313,255
Schuller Corp. 231,100 2,224
TRW, Inc. 124,300 11,249
Tecumseh Products Co. Class A 115,700 6,508
Thomas & Betts Corp. 206,200 8,738
The Timkin Co. 75,700 3,378
Trinity Industries, Inc. 193,900 6,714
United Technologies Corp. 90,800 11,691
WMX Technologies Inc. 291,100 10,007
Westinghouse Electric Corp. 10,838,400 185,608
----------
979,155
----------
CONSUMER CYCLICAL (8.9%)
Brunswick Corp. 91,800 2,157
Chrysler Corp. 228,700 7,690
Dana Corp. 332,300 9,844
Dayton-Hudson Corp. 159,900 5,537
Dillard Department Stores
Class A 148,100 4,702
The Walt Disney Co. 1,072,444 70,647
R.R. Donnelley & Sons Co. 109,400 3,323
Eastman Kodak Co. 3,384,300 269,898
Fleetwood Enterprises, Inc. 71,400 2,410
Ford Motor Co. 10,331,000 322,844
Gannett Co., Inc. 1,302,800 98,850
General Motors Corp. 439,200 23,662
The Goodyear Tire & Rubber Co. 97,900 4,491
ITT Industries, Inc. 5,070,200 117,882
Kmart Corp. 20,014,600 195,142
Maytag Corp. 254,400 5,056
Russell Corp. 160,400 4,551
Sears, Roebuck & Co. 1,270,200 61,446
Wal-Mart Stores, Inc. 2,256,200 60,071
Washington Post Co. Class B 10,200 3,356
Whirlpool Corp. 881,200 41,637
- - Woolworth Corp. 123,500 2,594
----------
1,317,790
----------
CONSUMER STAPLES (7.5%)
American Stores Co. 192,600 7,969
Anheuser-Busch Cos., Inc. 7,170,000 276,045
Archer-Daniels-Midland Co. 675,130 14,684
- - Boston Chicken, Inc. 102,700 3,723
Brown-Forman Corp. Class B 55,600 2,405
The Clorox Co. 23,300 2,543
Great Atlantic & Pacific
Tea Co., Inc. 127,700 3,831
</TABLE>
10
<PAGE> 37
<TABLE>
<CAPTION>
- -------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -------------------------------------------------------
<S> <C>
H.J. Heinz Co. 2,669,100 $ 94,753
IBP, Inc. 159,600 3,990
- - Imperial Tobacco Group ADR 4,377,600 50,342
- - Owens-Illinois, Inc. 96,700 1,499
PepsiCo, Inc. 3,380,700 100,153
Philip Morris Cos., Inc. 4,760,300 440,923
RJR Nabisco Holdings Corp. 752,400 21,726
Sara Lee Corp. 2,250,200 79,882
- - Vons Cos., Inc. 95,400 5,283
----------
1,109,751
----------
ENERGY (16.0%)
Amoco Corp. 3,909,900 296,175
Atlantic Richfield Co. 585,200 77,539
Burlington Resources, Inc. 129,200 6,508
Chevron Corp. 110,900 7,292
(1) Dresser Industries, Inc. 9,656,100 317,444
Exxon Corp. 3,918,900 347,313
Mobil Corp. 370,000 43,197
NGC Corp. 108,500 1,953
PanEnergy Corp. 4,145,918 159,618
Phillips Petroleum Co. 7,077,500 290,177
Royal Dutch Petroleum Co. ADR 275,400 45,544
Schlumberger Ltd. 3,166,900 313,919
Texaco Inc. 3,274,800 332,802
USX-Marathon Group 5,020,700 109,828
Unocal Corp. 2,900 106
- - Western Atlas Inc. 155,400 10,781
----------
2,360,196
----------
FINANCIAL (25.5%)
BANKS (13.6%)
AmSouth Bancorp 237,000 10,991
Banc One Corp. 1,715,600 72,699
Bank of Boston Corp. 219,300 14,035
BankAmerica Corp. 3,593,823 328,835
Chase Manhattan Corp. 8,599,528 737,410
Citicorp 251,300 24,879
Fifth Third Bancorp 37,500 2,348
First Chicago NBD Corp. 6,413,871 327,107
First Union Corp. 245,800 17,882
Firstar Corp. 214,500 10,510
Mellon Bank Corp. 202,900 13,214
Northern Trust Corp. 35,600 2,465
PNC Bank Corp. 9,123,400 330,723
Regions Financial Corp. 55,800 2,776
Star Banc Corp. 18,900 1,701
UnionBanCal Corp. 87,726 4,562
Wells Fargo & Co. 391,100 104,473
FINANCIAL SERVICES (5.8%)
American Express Co. 4,299,508 202,077
Dean Witter Discover & Co. 958,000 56,402
A.G. Edwards & Sons, Inc. 230,500 6,886
Federal National
Mortgage Assn. 4,055,600 158,675
Merrill Lynch & Co., Inc. 814,600 57,226
Morgan Stanley Group, Inc. 122,100 6,136
PaineWebber Group, Inc. 327,950 7,707
Salomon, Inc. 236,300 10,663
Travelers Group Inc. 6,368,305 345,481
INSURANCE (6.0%)
Allstate Corp. 6,554,022 367,844
American International
Group, Inc. 1,374,325 149,286
Aon Corp. 2,216,450 128,000
CIGNA Corp. 108,000 14,094
- - CNA Financial Corp. 94,400 9,263
The Chubb Corp. 1,167,000 58,350
Exel Ltd. 4,226,000 160,588
Old Republic International Corp. 27,200 673
Providian Corp. 161,200 7,576
SAVINGS & LOAN (0.1%)
H.F. Ahmanson & Co. 412,000 12,926
----------
3,766,463
----------
HEALTH CARE (5.5%)
American Home Products Corp. 3,881,300 237,730
Beckman Instruments Inc. 33,900 1,246
Becton, Dickinson & Co. 140,600 6,116
Bristol-Myers Squibb Co. 2,142,600 226,580
Johnson & Johnson 722,400 35,578
Rhone-Poulenc Rorer, Inc. 111,800 7,505
- - Tenet Healthcare Corp. 242,300 5,058
Warner-Lambert Co. 4,543,200 289,061
----------
808,874
----------
TECHNOLOGY (4.5%)
- - Compaq Computer Corp. 36,400 2,534
Harris Corp. 63,200 3,958
Intel Corp. 748,000 82,093
International Business
Machines Corp. 2,772,300 357,627
Pitney Bowes, Inc. 137,600 7,688
Tektronix, Inc. 27,500 1,076
- - United States Cellular 171,300 5,032
Xerox Corp. 4,226,421 196,000
----------
656,008
----------
TRANSPORT & SERVICES (0.6%)
- - AMR Corp. 48,600 4,082
CSX Corp. 1,305,000 56,278
Norfolk Southern Corp. 133,000 11,854
- - Northwest Airlines Corp. Class A 84,700 2,785
Ryder System, Inc. 71,400 2,124
- - UAL Corp. 46,600 2,208
----------
79,331
----------
UTILITIES (10.6%)
AT&T Corp. 423,300 14,763
Ameritech Corp. 347,800 19,042
Bell Atlantic Corp. 729,000 43,922
Boston Edison Co. 288,800 6,931
CMS Energy Corp. 248,900 7,871
(1) Centerior Energy Corp. 8,662,900 84,463
Central & South West Corp. 2,938,200 77,862
Century Telephone
Enterprises, Inc. 296,800 9,535
Consolidated Edison Co. of
New York, Inc. 425,800 12,455
DTE Energy Co. 344,800 10,387
Edison International 492,700 9,731
</TABLE>
11
<PAGE> 38
<TABLE>
<CAPTION>
- -------------------------------------------------------
MARKET
VALUE*
WINDSOR II SHARES (000)
- -------------------------------------------------------
<S> <C> <C>
Entergy Corp. 11,017,200 $ 308,482
GPU Inc. 236,300 7,768
GTE Corp. 432,500 18,219
MCI Communications Corp. 1,715,000 42,875
MidAmerican Energy Co. 148,200 2,297
New York State Electric &
Gas Corp. 454,000 9,477
Niagara Mohawk Power Corp. 361,500 3,073
NYNEX Corp. 341,300 15,188
Ohio Edison Co. 468,500 9,780
Pacific Gas & Electric Co. 284,000 6,674
Pacific Telesis Group 6,255,800 212,697
Public Service Enterprise
Group Inc. 8,088,400 217,376
Southern Co. 340,000 7,522
Southern New England
Telecommunications Corp. 188,900 7,037
Texas Utilities Co. 263,200 10,660
Unicom Corp. 5,854,600 152,220
U S WEST Communications
Group 7,875,100 239,206
----------
1,567,513
----------
MISCELLANEOUS (3.4%)
Hanson PLC ADR 20,629,500 131,513
Minnesota Mining &
Manufacturing Co. 580,700 44,496
Tenneco, Inc. 6,495,200 321,512
----------
497,521
----------
- -------------------------------------------------------
TOTAL COMMON STOCKS
(COST $9,739,522) 13,649,245
- -------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- -------------------------------------------------------
TEMPORARY CASH INVESTMENTS (7.1%)
- -------------------------------------------------------
<S> <C>
U.S. TREASURY BILL--Note E
5.17%, 1/9/97 $ 1,600 1,585
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.58%, 11/1/96 1,054,053 1,054,053
- -------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $1,055,638) 1,055,638
- -------------------------------------------------------
TOTAL INVESTMENTS (99.6%)
(COST $10,795,160) 14,704,883
- -------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.4%)
- -------------------------------------------------------
Other Assets--Notes C and F 173,073
Liabilities--Note F (120,070)
----------
53,003
- -------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------
Applicable to 613,764,999 outstanding
$.01 par value shares
(authorized 900,000,000 shares) $14,757,886
=======================================================
NET ASSET VALUE PER SHARE $24.04
=======================================================
</TABLE>
* See Note A in Notes 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.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- -------------------------------------------------------
AT OCTOBER 31, 1996, NET ASSETS CONSISTED OF:
- -------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------
<S> <C> <C>
Paid in Capital $ 9,941,349 $ 16.20
Undistributed Net
Investment Income 192,348 .31
Accumulated Net Realized
Gains 714,076 1.16
Unrealized Appreciation--
Note E
Investment Securities 3,909,723 6.37
Futures Contracts 390 --
- -------------------------------------------------------
NET ASSETS $14,757,886 $24.04
=========================================================
</TABLE>
12
<PAGE> 39
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If the
Fund invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
WINDSOR II
YEAR ENDED OCTOBER 31, 1996
(000)
- ----------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 360,574
Interest 49,056
-----------
Total Income 409,630
-----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 16,232
Performance Adjustment 935
The Vanguard Group--Note C
Management and Administrative 27,243
Marketing and Distribution 2,254
Taxes (other than income taxes) 842
Custodian Fees 54
Auditing Fees 20
Shareholders' Reports 371
Annual Meeting and Proxy Costs 163
Directors' Fees and Expenses 38
-----------
Total Expenses 48,152
Expenses Paid Indirectly--Note C (1,390)
-----------
Net Expenses 46,762
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME 362,868
- ----------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 711,657
Futures Contracts 2,980
- ----------------------------------------------------------------------------------------
REALIZED NET GAIN 714,637
- ----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 1,827,641
Futures Contracts 410
- ----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 1,828,051
- ----------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,905,556
========================================================================================
</TABLE>
13
<PAGE> 40
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information that is
detailed in the Statement of Operations. The amounts shown as Distributions to
shareholders from the Fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
Fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
WINDSOR II
YEAR ENDED OCTOBER 31,
---------------------------
1996 1995
(000) (000)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 362,868 $ 294,616
Realized Net Gain 714,637 354,200
Change in Unrealized Appreciation (Depreciation) 1,828,051 1,244,032
---------------------------
Net Increase in Net Assets Resulting from Operations 2,905,556 1,892,848
---------------------------
DISTRIBUTIONS
Net Investment Income (309,925) (267,796)
Realized Capital Gain (352,517) (225,725)
---------------------------
Total Distributions (662,442) (493,521)
---------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 3,658,017 1,480,585
Issued in Lieu of Cash Distributions 550,557 476,777
Redeemed (1,965,967) (1,330,673)
---------------------------
Net Increase from Capital Share Transactions 2,242,607 626,689
- -----------------------------------------------------------------------------------------
Total Increase 4,485,721 2,026,016
- -----------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 10,272,165 8,246,149
---------------------------
End of Year $14,757,886 $10,272,165
=========================================================================================
(1)Shares Issued (Redeemed)
Issued 166,158 81,880
Issued in Lieu of Cash Distributions 26,223 29,313
Redeemed (90,590) (74,940)
---------------------------
Net Increase in Shares Outstanding 101,791 36,253
=========================================================================================
</TABLE>
14
<PAGE> 41
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the Fund;
and the extent to which the Fund tends to distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in the
Fund for one year. Finally, the table lists the Fund's Average Commission Rate
Paid, a disclosure required by the SEC beginning in 1996. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
WINDSOR II
YEAR ENDED OCTOBER 31,
-----------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 20.06 $ 17.33 $ 17.98 $ 15.75 $ 15.07
- ----------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .62 .58 .55 .50 .56
Net Realized and Unrealized Gain (Loss) on
Investments 4.63 3.17 (.19) 2.47 1.17
-----------------------------------------------
Total from Investment Operations 5.25 3.75 .36 2.97 1.73
-----------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.58) (.55) (.51) (.52) (.61)
Distributions from Realized Capital Gains (.69) (.47) (.50) (.22) (.44)
-----------------------------------------------
Total Distributions (1.27) (1.02) (1.01) (.74) (1.05)
- ----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 24.04 $ 20.06 $ 17.33 $ 17.98 $ 15.75
====================================================================================================
TOTAL RETURN 27.17% 23.08% 2.22% 19.51% 12.50%
====================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $14,758 $10,272 $ 8,246 $ 7,486 $ 4,878
Ratio of Total Expenses to Average Net Assets--
Note C 0.39% 0.40% 0.39% 0.39% 0.41%
Ratio of Net Investment Income to Average Net
Assets 2.92% 3.27% 3.26% 3.11% 3.72%
Portfolio Turnover Rate 32% 30% 24% 26% 23%
Average Commission Rate Paid $ .0483 N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 42
NOTES TO FINANCIAL STATEMENTS
Vanguard/Windsor II is registered under the Investment Company Act of 1940 as a
diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform with generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities not listed on an exchange are valued at
the latest quoted bid prices. Temporary cash investments acquired over 60 days
to maturity are valued using the latest bid prices or using valuations based on
a matrix system (which considers such factors as security prices, yields,
maturities, and 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 to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. Government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. FUTURES: The Fund uses S&P 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 invest incoming cash in the market, or sell
futures in response to cash outflows, thereby simulating a fully invested
position in the underlying index while maintaining a cash balance for liquidity.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of stocks held by the Fund and the
prices of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Under the terms of advisory contracts, the Fund pays Barrow, Hanley,
Mewhinney & Strauss, Inc.; Equinox Capital Management, Inc.; and Tukman Capital
Management, Inc. advisory fees calculated at an annual percentage rate of
average net assets. The basic fees thus computed for Barrow, Hanley, Mewhinney &
Strauss, Inc. are subject to quarterly adjustments based on performance relative
to the S&P/BARRA Value Index; such fees for Equinox Capital Management, Inc. are
subject to quarterly adjustments based on performance relative to the S&P 500
Index and the Russell 1000 Value Index; such fees for Tukman Capital Management,
Inc. are subject to quarterly adjustments based on performance relative to the
S&P 500 Index. For the year ended October 31,
16
<PAGE> 43
1996, the aggregate investment advisory fee represented an effective annual rate
of 0.13% of average net assets before an increase of $935,000 (0.01%) based on
performance. The base fee reflects a fee waiver of $75,000 during the period
February 1, 1996, to July 31, 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 October 31,
1996, the Fund had contributed capital of $1,344,000 to Vanguard (included in
Other Assets), representing 6.7% of Vanguard's capitalization. The Fund's
directors and officers are also directors and officers of Vanguard.
Vanguard has asked 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 to the Fund part of the commissions generated. Such
rebates are used solely to reduce the Fund's administrative expenses. For the
year ended October 31, 1996, these arrangements reduced the Fund's expenses by
$1,390,000 (0.01% of average net assets).
D. During the year ended October 31, 1996, the Fund purchased $5,241,799,000 of
investment securities and sold $3,647,362,000 of investment securities, not
counting U.S. Government securities and temporary cash investments.
E. At October 31, 1996, net unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes was $3,909,723,000,
consisting of unrealized gains of $4,080,185,000 on securities that had risen in
value since their purchase and $170,462,000 in unrealized losses on securities
that had fallen in value since their purchase.
At October 31, 1996, the aggregate settlement value of open S&P 500 Index
futures contracts expiring in December 1996, the unrealized appreciation on
those contracts, and the market value of U.S. Treasury bills deposited as
initial margin for those contracts were $39,031,000, $390,000, and $1,585,000,
respectively. Unrealized appreciation on open futures contracts is required to
be treated as realized gain for Federal income tax purposes.
F. The market value of securities on loan to broker/dealers at October 31, 1996,
was $36,217,000, for which the Fund held cash collateral of $37,900,000.
17
<PAGE> 44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Vanguard/Windsor II
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard/Windsor II (the "Fund") at October 31, 1996, and the results of its
operations, the changes in its net assets and the financial highlights for each
of the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1996 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 2, 1996
18
<PAGE> 45
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
VANGUARD/WINDSOR II
This information for the fiscal year ended October 31, 1996, is included
pursuant to provisions of the Internal Revenue Code.
The Fund designates $665,865,000 as capital gain dividends (from net
long-term capital gains), which will be distributed in December 1996.
For corporate shareholders, 85.1% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received
deduction.
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
19
<PAGE> 46
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group;
Director of Chris-Craft Industries, Inc.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer
Inc.; Director of Sun Company, Inc. and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Co., Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and
Massa-chusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director
of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, 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., Procter & Gamble 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; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller
of each of the investment companies in The Vanguard Group. Directors
And Officers
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President, Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President, Institutional.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGUARD GROUP LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
[email protected] http://www.vanguard.com
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.
<PAGE> 47
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity-International
Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q380-10/96
[PHOTO]
