<PAGE> 1
[PHOTO]
VANGUARD/
WINDSOR FUND
Annual Report -- October 31, 1997
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
http://www.vanguard.com
[email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
Post Office Box 2600
Valley Forge, Pennsylvania 19482
[THE VANGUARDGROUP LOGO]
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[PHOTO]
OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--some 6,000 highly motivated men
and women--who form the cornerstone of our operations.
As with any cornerstone, we could not survive long--let alone prosper--without
it. That's why we chose this fiscal year's annual report to celebrate the
spirit, enthusiasm, and achievements of our crew. (We call those who work at
Vanguard crew members, not employees, because they operate as a team to
accomplish our mission of serving you, our clients.)
But while we prize the collective contributions of our crew, we also take
time to recognize the importance of the individual. Each calendar quarter, we
present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit."
Our report cover shows only a few of the more than 300 crew members who have
received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving you
in the years ahead.
[PHOTO]
John J. Brennan
President
John C. Bogle
Chairman
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS..........................................1
THE MARKETS IN PERSPECTIVE.............................................4
REPORT FROM THE ADVISER................................................6
PERFORMANCE SUMMARY....................................................9
PORTFOLIO PROFILE.....................................................10
FINANCIAL STATEMENTS..................................................12
REPORT OF INDEPENDENT ACCOUNTANTS.....................................20
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
The U.S. stock market continued to roar ahead during the 1997 fiscal year of
Vanguard/Windsor Fund, but not without some noteworthy fits and starts. Windsor
provided a solid performance of +27.0% during its 39th fiscal year ended
October 31, but fell moderately short of the return of its average peer and
significantly short of the marvelous +32.1% gain of the Standard & Poor's 500
Composite Stock Price Index. Wonderful as the year was on an absolute basis,
then, it was somewhat disappointing on a relative basis.
The table at right compares Windsor's total return (capital change plus
reinvested dividends) for the year with those of the S&P 500 Index, and the
average value (growth and income) mutual fund. The S&P 500 Index is dominated
by blue chip stocks; the average value fund group best reflects the investment
philosophy Windsor has maintained over the years.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
OCTOBER 31, 1997
- --------------------------------------------------------------
<S> <C>
Vanguard/Windsor Fund +27.0%
- --------------------------------------------------------------
Average Value Fund +28.5%
- --------------------------------------------------------------
S&P 500 Index +32.1%
- --------------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $16.99 per share
on October 31, 1996, and $19.55 per share on October 31, 1997, adjusted for the
reinvestment of dividends totaling $0.41 per share from net investment income
and a distribution of $1.33 per share from net realized capital gains. (We
expect to make a distribution of about $2.88 per share from net realized
capital gains to shareholders of record on December 11, 1997, with the
distribution payable on December 17.)
FISCAL 1997 PERFORMANCE OVERVIEW
Despite taking a tumble in late October, the U.S. stock market gained +32.1%
during the twelve months ended October 31. It was the third consecutive banner
year for investors in large-capitalization stocks, bringing the cumulative
return on the S&P 500 Index since October 31, 1994, to an incredible +107%.
Economic conditions during the year were almost picture-perfect for equity
investors. Business activity and corporate profits continued to increase apace,
yet inflation decelerated and long-term interest rates declined. On balance
during the year, the yield on the benchmark 30-year U.S. Treasury bond declined
by 0.49 percentage point to 6.15%; short-term interest rates edged up just a
bit. This positive interest-rate environment, along with the splendid economic
fundamentals, elevated the already-high spirits of investors. But after
reaching an all-time high in early October, the stock market retreated late in
the month, most notably with a -7% plunge on Monday, October 27. The market
rallied strongly the next day, then steadied through the rest of the week, and
the S&P 500 Index finished the fiscal year more than 30% higher than it
started.
While the late October slide (nearly 11% from high to low) was the
sharpest interim dip during the past twelve months, the stock market also
experienced monthly declines in December, March, and August. However, each drop
was followed promptly by a smart rebound. As a result, overall stock prices at
fiscal year-end were near historical highs in relation to such fundamentals as
dividends, earnings, and book values.
Windsor's twelve-month return of +27.0% was excellent on an absolute basis
but lagged that of the S&P 500 Index by a disappointing 5 percentage points.
(We were
1
<PAGE> 4
2.7 percentage points short of the +29.7% return on the value component of the
Index.) Among large stocks, the market favored growth stocks over the value
stocks that Windsor emphasizes. Also, Windsor's holdings are, on average, far
smaller than those of the S&P 500 Index ($8.7 billion median market
capitalization for Windsor versus $35.7 billion for the Index!)--a significant
disadvantage during a period when bigger was better among U.S. stocks.
Specifically, one of our main handicaps was our heavy weighting during the
year in the materials & processing sector (26% for our Fund versus 7% for the
Index). The sector's return of some +15% was less than half that of the overall
market. In addition, our performance was hampered by our relatively low
weighting and notably inferior stock selection in the market-leading technology
sector and by subpar stock picking among energy-related issues.
On the positive side, we benefited from excellent stock selection in
financial services stocks--among the market's leaders with a 41% gain--and in
the producer-durables and utilities sectors, as well as from our avoidance of
the consumer discretionary sector, a relatively poor performer during the
twelve months.
LONG-TERM PERFORMANCE OVERVIEW
The table below presents our results over the past ten years. Over this period,
an initial $10,000 investment in our Fund would have grown to $42,608, earning
our shareholders $1,007 more than the $41,601 earned by the average value
mutual fund. The difference in returns is equal to about 10% of the initial
investment.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
TOTAL RETURNS
10 YEARS ENDED OCTOBER 31, 1997
-----------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Vanguard/Windsor Fund +15.6% $42,608
- ----------------------------------------------------------------------------------------
Average Value Fund +15.3% $41,601
- ----------------------------------------------------------------------------------------
S&P 500 Index +17.2% $48,772
- ----------------------------------------------------------------------------------------
</TABLE>
Our low expenses have accounted for more than our advantage over our
competitors during the past ten years. Our expense ratio (annual expenses as a
percentage of average net assets) is 0.27%--just over one-fifth of the 1.23%
expense ratio of our average peer. This advantage of about 1% annually is
significant indeed and is an edge that we fully expect will persist.
On the other hand, when comparing our Fund's performance with that of the
S&P 500 Index, it must be remembered that the Index bears none of the expenses
(administrative fees, transaction costs, etc.) that all real-world mutual funds
must assume, carries no cash reserve position, and therefore is a notoriously
tough foe for all equity mutual funds.
The returns provided by the financial markets over the past decade have
been nothing short of spectacular. We caution, however, that returns will
almost certainly be less generous in years to come. To help keep the decade's
extraordinary returns in perspective, we note that the ten-year period covered
in this report is the first since 1987 to exclude the stock market crash of
October 1987--a month during which the S&P 500 Index shed 21.5% of its value.
The exclusion of that month's losses, coupled with the strong returns in fiscal
1997, are why the Fund's ten-year returns and those of its comparative
benchmarks are roughly 2.5 percentage points per year higher here than in last
year's report.
2
<PAGE> 5
IN SUMMARY
After a twelve-month period during which the stock market gained the equivalent
of nearly three years' worth of returns at its long-term average of nearly 11%
annually, investors have every reason to be thankful for the market's bounty.
But the recent market volatility--punctuated by October's sudden slide--should
make everyone especially mindful of the risks of investing in stocks. The
danger of the breathtaking bull market, now in its 16th year, is that it may
have dulled investors' awareness of an immutable law of investing: Stock prices
can drop sharply and suddenly. And these declines are not always quickly
erased.
That said, the greatest risk associated with investing is not investing in
the first place. We believe that a sound method for dealing with risk is to
construct a balanced investment program of stock funds, bond funds, and
reserves, one that is suited to your objectives, financial situation, tolerance
for risk, and time horizon. If you have such a program in place, you should be
prepared to "stay the course" toward your investment goals, no matter what lies
ahead.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
November 15, 1997
3
<PAGE> 6
THE MARKETS IN PERSPECTIVE
Year Ended October 31, 1997
U.S. EQUITY MARKETS
The 12-month period ended October 31, 1997, was exceptionally strong for stock
investors, although it wound up on a rather unpleasant note. Over the period,
large-capitalization stocks continued their advance, propelling the S&P 500
Index to a 32.1% gain. Small-cap stocks also fared well, as illustrated by the
29.3% increase of the Russell 2000 Index. These gains stood despite October's
volatile final week, when sharp declines in Asian stock markets led many
investors to question their expectations regarding the U.S. market. While the
domestic market dropped substantially--the Dow Jones Industrial Average fell
554 points, or 7.2%, on October 27--it then rebounded smartly over the next few
days. This quick recovery probably can be attributed to investors' recognition
that three major factors underlying the bull market of recent years were
unaffected by the turmoil in Asia. These factors are solid economic growth;
restrained inflation, at levels not experienced since the 1960s; and impressive
growth in corporate profits.
Among large-cap stocks, the best-performing sectors in fiscal 1997 were
technology and financial services, with increases of 51.1% and 41.4%,
respectively. The surge in technology reflects robust corporate spending on
this industry's products, particularly desktop computers, networking equipment,
and software. Consumer discretionary and cyclical stocks could be considered
laggards by contrast, despite their respective gains of 20.4% and 14.5%.
(Clearly the market has shown amazing growth when a 15%-20% advance over a
one-year period can be viewed as inadequate.)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED OCTOBER 31, 1997
------------------------------
1 YEAR 3 YEARS 5 YEARS
- -----------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 32.1% 27.5% 19.9%
Russell 2000 Index 29.3 21.3 18.7
MSCI EAFE Index 4.9 5.1 12.1
- -----------------------------------------------------------------------
FIXED INCOME
Lehman Aggregate Bond Index 8.9% 10.1% 7.5%
Lehman 10-Year Municipal Bond Index 8.7 9.4 7.8
Salomon Brothers Three-Month
U.S. Treasury Bill Index 5.2 5.4 4.6
- -----------------------------------------------------------------------
OTHER
Consumer Price Index 2.1% 2.6% 2.6%
</TABLE>
While small-company stocks failed to match the outsized advance of the S&P
500 Index, their performance grew notably stronger in the second half of the
fiscal year. This was evident in both absolute and relative terms: During the
past six months, the Russell 2000 Index rose 27.3%, compared to 15.2% for the
S&P 500. The improved performance of smaller companies cannot be attributed to
any single factor, but is, rather, due to a combination of attractive
valuations and good earnings.
U.S. FIXED-INCOME MARKETS
Interest rates fell across the yield curve, rewarding fixed-income investors
with higher total returns. For example, the rates on 1-, 5-, 10-, and 30-year
Treasury issues decreased 0.06%, 0.35%, 0.51%, and 0.49%, respectively, during
the fiscal year. These declines reflected the continuing good news regarding
inflation and the relative dormancy of
4
<PAGE> 7
the Federal Reserve. The benefit to investors was illustrated by the 8.9%
return of the Lehman Brothers Aggregate Bond Index, the broadest measure of
investment-grade issues. Investors in lower-quality securities fared even
better, as shown by the 13.7% gain of the Lehman High Yield Bond Index. The
strength of the economy combined with the lack of inflationary pressure
produced an ideal environment for junk bonds.
INTERNATIONAL EQUITY MARKETS
The last quarter of the fiscal year proved to be horrible for investments in
Pacific markets, with declines both widespread and pronounced. The Morgan
Stanley Capital International (MSCI) Pacific Index declined by 21.4% in U.S.
dollar terms during the three months and was down 19.7% for the full fiscal
year. Among individual markets (also in U.S. dollar terms), Japan fell 18.4%
for the quarter and 18.1% for the 12 months, while the declines over the same
periods reached 34.3% and 17.5% in Hong Kong and 49.0% and 57.2% in Malaysia.
These markets suffered for a variety of reasons, but concern about future
economic growth was particularly significant.
By contrast, the European markets continued to provide U.S. investors with
solid returns, although they, too, stumbled in late October. The MSCI Europe
Index posted a gain of 26.0% for the 12 months despite a 4.9% decline in
October. The robust character of the European markets reflects strong earnings
and optimism that the growth will remain solid.
5
<PAGE> 8
REPORT FROM THE ADVISER
For our fiscal year ended October 31, 1997, Vanguard/Windsor Fund finished 5.1
percentage points behind the S&P 500 Index, with a total return of 27.0% versus
32.1%, and 1.1 percentage points behind the average growth and income fund. Of
the five-point shortfall versus the market, three points occurred in the last
seven days of October, when the Fund declined 7.8% versus a 5.5% decline for
the S&P 500 Index. This disappointing result is particularly surprising in that
we had consistently outperformed during market declines over the last 22
months. In those previous dips--summer 1996, spring 1997, and August 1997--the
market's concern was that an overheating economy would lead to higher inflation
and rising interest rates, and the cyclical tilt in our portfolio tended to
serve us well. This time around, though, because of the decline in several
Asian currencies and stock markets, U.S. investors were concerned about too
little economic growth, not too much, and our cyclicals--especially our basic
materials position--actually went down more than the market, whereas in the
previous dips they tended to go down less or not at all. About half of our
shortfall versus the Index in late October was due to our 15% position in basic
materials--aluminum, paper, and chemicals--one-quarter was due to our Citicorp
holding, and the remaining quarter was due to our stake in Caterpillar, what's
left of our tech position, and other, largely cyclical, odds and ends.
We think that these setbacks represent an overreaction by the market to
events in Asia, and later in Brazil, and that we will earn them back in due
course. The smaller countries of Asia that have suffered declines in their
currencies and Brazil, which has introduced a tough austerity program to avoid a
currency devaluation, account for only about 7% of the world economy. While
these countries will suffer significant economic impacts for the next year or
two, and while there will be some reverberative effects on other countries,
especially Japan and China, we think the overall impact on world economic growth
next year will be about 1 point, is all--from 31/2%-4% otherwise to 21/2%-3%.
This is not enough to upset the basic supply-demand balance in basic materials,
though it may slow the recovery in their selling prices somewhat. The supply
side may actually benefit beginning in 1999, and especially 2000, as some of the
reckless capacity-building in Asia planned for that period goes off the board
for lack of financing. All in all, the impact is hardly in keeping with the
15%-20% late-October sell-off in these stocks.
Citicorp--our largest holding at nearly 5% of the Fund's assets--derives
about 27% of its earnings from Asia and Brazil. While there will be some
increase in loan losses in these countries, we think the risks have been well
contained, and there will be some offset as Citi usually gains deposit share
and spreads increase in such uncertain periods, given the flight-to-quality
tendency. Most important, Citi just announced a restructuring of its back
offices that will save $1 per share beginning in the second half of 1998. This
step should ensure that it meets its targeted net income growth of 10%-12% in
1998 and 1999, plus a per-share gain of about 4% from
6
<PAGE> 9
ongoing stock repurchases. Citi's stock, off 20% from its late-October high,
now sells at a remarkable 20% discount to the bank group, even though the
company clearly has the best long-term opportunity set of any bank.
Detailed sector data on performance for the fiscal year can be found in
our traditional report card on page 8. As to performance since the beginning of
1996, when we took the reins of the Fund, our total return through the end of
fiscal 1997 was 50.5%, versus the S&P at 54.1%, about three points better than
the average growth and income fund, and second-best among the 30 largest
actively managed equity funds.
We are about 97% invested, consistent with our earlier commitment to get,
and stay, fully invested. We maintain a cyclical tilt to the portfolio,
continuing to think that the new paradigm--sustained growth by virtue of
continuous productivity that will keep inflation tame indefinitely--so richly
manifest in the current market multiple of 20 times earnings has got to be good
for our cyclicals, too. The price/earnings (P/E) ratio of our portfolio (except
energy stocks, which we value on an asset basis) is a much less demanding 12
times next year's earnings.
Financials are still our largest concentration, 17% of assets versus 19% a
year ago. Basic materials total about 15%, down from 21% a year ago and from a
peak of 25% at the beginning of 1996, as we sold virtually all our steels and
half our paper companies along the way, pre-Asian crisis. Technology is about
6% of the Fund versus 11% a year ago, reflecting sales and some caution toward
this sector. Energy is 9%, down from 12%, reflecting our view that oil prices
are headed lower. Autos are 5% of assets versus 10% last year, reflecting the
sale of most of our Chrysler as referenced in the mid-year report. Low-P/E
health-care stocks, which were 2% of assets last year, now total 11%--about
equally divided among Rhone-Poulenc, Columbia/HCA, and HMOs. Other sectors that
we have increased or built in the last year include airlines and
agriculture-related stocks, now about 6% each; cable and telephone (AT&T), 7%;
and aerospace and defense (mostly Boeing, purchased very late in the year), 4%.
We continue to apply the time-honored Windsor principles--low P/E stocks,
being price opportunistic on the buy side, price disciplined on the sell side,
and willing to concentrate where it makes more sense--in an entrepreneurial,
dedicated team setting in our endeavor to provide you with unusual returns.
Charles T. Freeman, Portfolio Manager
Wellington Management Company, LLP
November 14, 1997
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.
7
<PAGE> 10
WINDSOR 1997 REPORT CARD
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR 1997*
10/31/97 -----------------------------
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>
Agriculture- 6% 2% -19% Case, IMC Global, D Farm equipment OK,
Related New Holland fertilizer not--farm
fundamentals excellent--should be
good stocks in 1998.
- ------------------------------------------------------------------------------------------------------------------------------------
Airlines 5% 31% 15% Delta Air Lines, A Well-timed, big addi-
Northwest Airlines, tion to this group in
AMR Corp the summer deliv-
ered quick rewards.
- ------------------------------------------------------------------------------------------------------------------------------------
Autos 5% 8% -10% Ford Motor, C- Ford good, Chrysler
Chrysler Corp not--Ford should be
good again next year.
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Materials 15% 10% -14% Alcoa, Georgia-Pacific, D+ Late fade once
(aluminum, Reynolds Metals, again made this
chemicals, Champion Intl., Lyondell, group a disappoint-
paper, and Union Carbide, Stone ing one this year.
steel) Container, Alcan
- ------------------------------------------------------------------------------------------------------------------------------------
Communication 7% 42% 23% AT&T, Comcast, A AT&T, Sprint, and
Services Sprint cable stocks--all
bought 1996 or 1997--all big wins.
- ------------------------------------------------------------------------------------------------------------------------------------
Energy 9% 16% -4% Burlington Resources, C+ USX-Marathon big
USX-Marathon Group, winner--best major
Ultramar Diamond oil stock of last two
Shamrock, Petrobras, years--Burlington
Norsk Hydro, Murphy Resources not good
Oil, Enserch Exploration despite very strong
natural gas prices.
- ------------------------------------------------------------------------------------------------------------------------------------
Financials 17% 28% 10% Citicorp, Golden West A Despite late Citicorp
Financial, Washington weakness, group
Mutual, Allstate Corp, outstanding for third
CIGNA Corp, Canadian year in a row--
Imperial Bank, PMI Allstate and S&Ls
notable, incl. GWF.
- ------------------------------------------------------------------------------------------------------------------------------------
Health Care 11% 5% -5% Rhone-Poulenc, C Weak showing by
Columbia/HCA HMOs and Columbia/
Healthcare, Aetna, HCA offset by strength
Foundation Health, in Rhone-Poulenc
PacifiCare and RPR (sold).
- ------------------------------------------------------------------------------------------------------------------------------------
Technology 6% 13% -1% Seagate Technology, B- Big profits on
Advanced Micro Compaq sales
Devices, NextLevel offset Seagate
Systems weakness.
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
8
<PAGE> 11
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.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: OCTOBER 31, 1977-OCTOBER 31, 1997
- -----------------------------------------
WINDSOR FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------
<S> <C> <C> <C> <C>
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
1997 24.3 2.7 27.0 32.1
- -----------------------------------------
</TABLE>
See Financial Highlights table on page 17 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: OCTOBER 31, 1987-OCTOBER 31, 1997
- -------------------------------
<S> <C> <C> <C> <C>
1987 10 10000 10000 10000
1988 01 10886 10440 10290
1988 04 10849 10805 10552
1988 07 12116 11273 11089
1988 10 12701 11677 11480
1989 01 13617 12306 12357
1989 04 13838 12907 12971
1989 07 15092 14211 14631
1989 10 14867 14109 14511
1990 01 13437 13566 14145
1990 04 13382 13704 14340
1990 07 13768 14664 15582
1990 10 10715 12732 13426
1991 01 13101 14392 15332
1991 04 14534 15709 16866
1991 07 14934 16333 17570
1991 10 15503 16968 17923
1992 01 16031 17680 18811
1992 04 16972 17902 19232
1992 07 17561 18303 19817
1992 10 16945 18485 19707
1993 01 19288 19464 20801
1993 04 19789 19667 21009
1993 07 20778 20265 21547
1993 10 21738 21535 22652
1994 01 23123 22087 23480
1994 04 21573 20861 22127
1994 07 22815 21264 22659
1994 10 23117 22097 23528
1995 01 22191 21593 23604
1995 04 24490 23467 25991
1995 07 27303 25725 28575
1995 10 27233 26680 29749
1996 01 29137 28703 32730
1996 04 30989 29835 33844
1996 07 30185 29155 33309
1996 10 33541 32387 36917
1997 01 38005 35279 41352
1997 04 38092 35319 42350
1997 07 44570 42143 50676
1997 10 42608 41601 48772
- -------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1997
------------------------------ FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Windsor Fund 27.04% 20.25% 15.60% $42,608
Average Value Fund 28.45 17.61 15.32 41,601
S&P 500 Index 32.11 19.87 17.17 48,772
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997*
- --------------------------------------------------------------------------------------
10 YEARS
INCEPTION --------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Windsor Fund 10/23/1958 40.58% 21.89% 9.55% 4.65% 14.20%
- --------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
9
<PAGE> 12
PORTFOLIO PROFILE
Windsor Fund
This Profile provides a snapshot of the Fund's characteristics as of October
31, 1997, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on page 11.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------
WINDSOR S&P 500
- -----------------------------------------
<S> <C> <C>
Number of Stocks 119 500
Median Market Cap $8.7B $35.7B
Price/Earnings Ratio 15.8x 20.9x
Price/Book Ratio 2.4x 3.9x
Yield 1.6% 1.7%
Return on Equity 12.7% 20.3%
Earnings Growth Rate 5.9% 18.2%
Foreign Holdings 7.1% 2.0%
Turnover Rate 61% --
Expense Ratio 0.27% --
Cash Reserves 2.6% --
</TABLE>
INVESTMENT FOCUS
- -----------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------
WINDSOR S&P 500
- -----------------------------------------
<S> <C> <C>
R-Squared 0.69 1.00
Beta 0.83 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST STOCKS (% OF TOTAL NET ASSETS)
- -----------------------------------------
<S> <C>
Citicorp 4.8%
AT&T Corp. 4.6
Rhone-Poulenc SA 3.6
Ford Motor Co. 3.4
Columbia/HCA Healthcare Corp. 3.4
Delta Air Lines, Inc. 3.1
Aluminum Co. of America 2.9
The Boeing Co. 2.7
Georgia-Pacific Corp. 2.5
Burlington Resources, Inc. 2.4
- -----------------------------------------
Top Ten Total 33.4%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- -------------------------------------------------------------------------------------
OCTOBER 31, 1996 OCTOBER 31, 1997
---------------------------------------------
WINDSOR WINDSOR S&P 500
---------------------------------------------
<S> <C> <C> <C>
Auto & Transportation.................. 15.5% 12.2% 3.6%
Consumer Discretionary................. 0.0 0.9 9.7
Consumer Staples....................... 0.0 0.0 10.9
Financial Services..................... 21.5 19.2 17.0
Health Care............................ 1.9 11.6 11.3
Integrated Oils........................ 8.7 4.5 7.7
Other Energy........................... 5.9 4.6 1.6
Materials & Processing................. 28.3 20.6 6.5
Producer Durables...................... 1.9 11.9 4.2
Technology............................. 12.7 5.2 12.4
Utilities.............................. 3.6 7.8 9.7
Other.................................. 0.0 1.5 5.4
- -------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned 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%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing investments.
EARNINGS GROWTH RATE. The average annual 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.
FOREIGN HOLDINGS. The percentage of a portfolio's net assets represented by
stocks or American Depository Receipts of companies based outside the United
States.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of the stocks in a 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 it is and the more likely 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. For a portfolio, the weighted average P/E of the
stocks it holds. 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.
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.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a portfolio, the weighted average return
on equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a portfolio's common stocks that
come from each of the major industry groups that compose the stock market.
TEN LARGEST STOCKS. The percentage of net assets that a portfolio has invested
in its ten largest holdings. (The average for stock mutual funds is about 30%.)
As this percentage rises, a portfolio's returns are likely to be more volatile,
since its return is more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year.
Portfolios with high turnover rates incur higher transaction costs and are more
likely to distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based
on income earned over the past 30 days and is annualized, or projected forward
for the coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
11
<PAGE> 14
FINANCIAL STATEMENTS
October 31, 1997
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)
- ---------------------------------------------------------------------------
COMMON STOCKS (95.8%)
- ---------------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (11.7%)
- AMR Corp. 1,205,200 $ 140,330
-(1) America West Holdings Corp.
Class B 2,692,300 39,880
Chrysler Corp. 10,011,922 352,920
- Continental Airlines, Inc.
Class B 1,295,100 56,013
(1) Delta Air Lines, Inc. 6,332,961 638,046
Ford Motor Co. 16,194,153 707,482
The Goodyear Tire
& Rubber Co. 3,600,000 225,450
- Northwest Airlines Corp.
Class A 3,175,400 142,893
- UAL Corp. 1,114,000 97,614
USFreightways Corp. 400,500 12,866
------------
2,413,494
------------
CONSUMER DISCRETIONARY (0.8%)
-(1) BJ's Wholesale Club, Inc. 2,703,800 77,903
-(1) Homebase Inc. 2,487,900 22,858
(1) Unisource Worldwide, Inc. 4,220,200 68,842
------------
169,603
------------
FINANCIAL SERVICES (18.4%)
Allstate Corp. 3,791,100 314,424
Barnett Banks, Inc. 2,610,000 180,090
CIGNA Corp. 1,998,100 310,205
(1) Camden Property Trust REIT 3,148,200 94,446
Canadian Imperial Bank
of Commerce 7,110,000 207,905
Chase Manhattan Corp. 90,000 10,384
Citicorp 7,881,300 985,655
Equity Residential Properties
Trust REIT 2,570,700 129,820
First Union Corp. 2,545,600 124,893
(1) Golden West Financial Corp. 5,488,300 476,110
Horace Mann Educators Corp. 423,500 23,822
(1) IPC Holdings Ltd. 1,689,700 51,958
Mid Ocean Ltd. 273,600 17,750
(1) The PMI Group Inc. 3,234,700 195,497
Pacific Century Financial Corp. 940,000 47,352
PartnerRe Ltd. 2,116,200 86,764
- Security Capital Group Inc.
Warrants Exp. 9/18/98 46,966 226
Security Capital
Pacific, Inc. REIT 1,218,314 27,260
Signet Banking Corp. 679,000 36,539
U.S. Bancorp 1,128,574 114,762
Washington Federal Inc. 607,000 17,906
Washington Mutual, Inc. 5,039,543 344,579
------------
3,798,347
------------
HEALTH CARE (11.1%)
Aetna Inc. 5,539,500 393,651
Columbia/HCA
Healthcare Corp. 24,726,000 698,509
-(1) Foundation Health Systems
Class A 9,344,160 268,645
-(1) PacifiCare Health Systems Inc.
Class A 1,126,300 71,661
-(1) PacifiCare Health Systems Inc.
Class B 1,957,500 126,748
Rhone-Poulenc SA A 102,071 4,460
Rhone-Poulenc SA ADR 17,480,152 738,536
------------
2,302,210
------------
INTEGRATED OILS (4.3%)
(1) Cabot Oil & Gas Corp. Class A 2,255,200 54,125
(1) Lyondell Petrochemical Co. 9,188,803 235,463
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------------
<S> <C> <C>
(1) Murphy Oil Corp. 2,462,200 $ 142,654
USX-Marathon Group 12,684,100 453,457
------------
885,699
------------
OTHER ENERGY (4.4%)
(1) Burlington Resources, Inc. 10,246,000 501,414
-(1) Enserch Exploration, Inc. 12,191,096 109,720
(1) Freeport-McMoRan Resource
Partners, LP 8,973,200 88,050
(1) Ultramar Diamond
Shamrock Corp. 5,555,100 171,514
Valero Energy Corp. 1,217,300 36,671
------------
907,369
------------
MATERIALS & PROCESSING (19.7%)
(1) AK Steel Corp. 3,099,676 130,574
(1) Albany International Corp. 2,400,000 58,500
Alcan Aluminium Ltd. 3,891,900 111,162
- Alumax, Inc. 2,384,600 77,499
Aluminum Co. of America 8,082,400 590,015
(1) Bowater Inc. 2,187,880 91,481
-(1) Burlington Industries, Inc. 5,460,700 81,569
Centex Construction Products 953,500 29,558
(1) Century Aluminum Co. 2,000,000 30,500
(1) Champion International Corp. 5,494,000 303,200
Deltic Timber Corp. 538,171 15,170
Fluor Corp. 3,395,000 139,619
(1) Freeport-McMoRan, Inc. 1,932,200 65,936
(1) Geon Co. 2,480,000 53,785
(1) Georgia Gulf Corp. 3,705,300 111,159
(1) Georgia-Pacific Corp. 6,092,200 516,695
(1) IMC Global Inc. 9,303,300 313,405
Jefferson Smurfit Group
PLC ADR 1,191,300 34,026
-(1) Kaiser Aluminum
& Chemical Corp. 5,212,234 65,479
(1) Lafarge Corp. 3,386,500 102,865
(1) Mississippi Chemical Corp. 1,934,800 35,552
Norsk Hydro AS ADR 2,807,400 156,513
(1) Owens Corning 5,096,800 174,565
Pechiney SA ADR A 2,831,628 59,818
(1) Reynolds Metals Co. 6,702,548 408,437
- Ryerson Tull, Inc. Class A 1,450,500 21,486
(1) Stone Container Corp. 9,470,000 114,232
Terra Industries, Inc. 3,219,900 39,243
Union Camp Corp. 155,400 8,421
Union Carbide Corp. 3,003,300 137,213
------------
4,077,677
------------
PRODUCER DURABLES (11.4%)
- Beazer Homes USA, Inc. 171,900 3,288
The Boeing Co. 11,700,000 560,137
(1) Case Corp. 7,242,500 433,192
Caterpillar, Inc. 7,579,900 388,470
- CommScope, Inc. 2,330,700 25,638
(1) Continental Homes
Holdings Corp. 687,900 20,723
Deere & Co. 1,479,200 77,843
-(1) General Semiconductor, Inc. 2,912,500 33,130
- Gulfstream Aerospace Corp. 2,623,600 76,084
(1) Kaufman & Broad Home Corp. 2,649,300 56,463
Lincoln Electric Co. 139,200 5,255
Lincoln Electric Co. Class A 342,100 12,914
(1) MDC Holdings, Inc. 1,298,600 14,447
New Holland NV 5,193,400 147,687
Northrop Grumman Corp. 2,500,000 273,125
(1) Standard Pacific Corp. 1,750,000 19,031
(1) Tecumseh Products Co. Class B 495,000 25,740
Tektronix, Inc. 1,151,400 68,077
-(1) Toll Brothers, Inc. 3,045,400 67,379
(1) U.S. Home Corp. 1,149,295 40,800
------------
2,349,423
------------
TECHNOLOGY (5.0%)
-(1) Advanced Micro Devices, Inc. 13,923,300 320,236
-(1) NextLevel Systems, Inc. 14,570,000 196,695
- S3, Inc. 1,205,400 10,623
Scientific-Atlanta, Inc. 2,591,400 48,103
-(1) Seagate Technology 16,702,016 453,042
------------
1,028,699
------------
UTILITIES (7.5%)
AT&T Corp. 19,235,000 941,313
(1) Comcast Corp. Class A 2,884,900 78,614
(1) Comcast Corp. Class A Special 5,921,200 162,093
- Cox Communications Class A 2,798,100 86,042
Sprint Corp. 2,404,000 125,008
Texas Utilities Co. 4,490,425 161,094
------------
1,554,164
------------
OTHER (1.5%)
Kemira Oy ADR 4,957,300 99,146
Miscellaneous (1.1%) 226,190
------------
325,336
------------
- ---------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $16,037,685) 19,812,021
- ---------------------------------------------------------------------------
PREFERRED STOCKS (1.3%)
- ---------------------------------------------------------------------------
- Petroleo Brasileiro SA ADR 8,885,000 164,372
Miscellaneous (0.6%) 117,917
- ---------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(COST $335,477) 282,289
- ---------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (0.2%)
- ---------------------------------------------------------------------------
Beazer Homes 8.00% Cvt. Pfd. 370,000 10,730
Continential Airlines, Inc.
Fin. Trust 8.50% Cvt. Pfd. 175,000 16,341
Owens Corning Capital
LLC 6.50% Cvt. Pfd. 200,000 10,150
- ---------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $30,877) 37,221
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BOND
- ---------------------------------------------------------------------------
Toll Corp. Cvt.
4.75%, 1/15/04
(COST $46) $ 58 64
- ---------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
WINDSOR FUND (000) (000)
- ---------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.8%)
- ---------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.66%, 11/3/97 225,290 225,290
5.67%, 11/3/97--Note F 139,323 139,323
- ---------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $364,613) 364,613
- ---------------------------------------------------------------------------
TOTAL INVESTMENTS (99.1%)
(COST $16,768,698) 20,496,208
- ---------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.9%)
- ---------------------------------------------------------------------------
Other Assets--Note C 437,804
Liabilities--Note F (255,943)
------------
181,861
- ---------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------
Applicable to 1,057,854,870 outstanding
$.01 par value shares
(authorized 1,550,000,000 shares) $20,678,069
===========================================================================
NET ASSET VALUE PER SHARE $19.55
===========================================================================
</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. The total market value of
investments in affiliated companies was $8,015,053,000.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------
AT OCTOBER 31, 1997, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $13,834,439 $13.08
Undistributed Net
Investment Income 69,958 .07
Accumulated Net
Realized Gains 3,046,162 2.88
Unrealized Appreciation--
Note E 3,727,510 3.52
- ---------------------------------------------------------------------------
NET ASSETS $20,678,069 $19.55
===========================================================================
</TABLE>
14
<PAGE> 17
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
WINDSOR FUND
YEAR ENDED OCTOBER 31, 1997
(000)
- --------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 338,238
Interest 65,383
------------
Total Income 403,621
------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 23,502
Performance Adjustment (11,821)
The Vanguard Group--Note C
Management and Administrative 34,169
Marketing and Distribution 3,358
Taxes (other than income taxes) 1,401
Custodian Fees 69
Legal Fees 6
Auditing Fees 25
Shareholders' Reports 387
Annual Meeting and Proxy Costs 58
Directors' Fees and Expenses 43
------------
Total Expenses 51,197
Expenses Paid Indirectly--Note C (5,229)
------------
Net Expenses 45,968
- --------------------------------------------------------------------------------------
NET INVESTMENT INCOME 357,653
- --------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD* 3,052,726
- --------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 887,426
- --------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,297,805
======================================================================================
</TABLE>
*Dividend income and realized net gain from affiliated companies were
$107,465,000 and $625,902,000, respectively.
15
<PAGE> 18
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,
----------------------------------
1997 1996
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 357,653 $ 396,076
Realized Net Gain 3,052,726 1,243,836
Change in Unrealized Appreciation (Depreciation) 887,426 1,366,247
-----------------------------------
Net Increase in Net Assets Resulting from Operations 4,297,805 3,006,159
-----------------------------------
DISTRIBUTIONS
Net Investment Income (402,197) (406,918)
Realized Capital Gain (1,237,831) (1,165,890)
-----------------------------------
Total Distributions (1,640,028) (1,572,808)
-----------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 2,267,286 1,866,840
Issued in Lieu of Cash Distributions 1,562,364 1,499,031
Issued in Exchange for Net Assets of Gemini II--Note G 263,239 --
Redeemed (1,913,647) (1,965,937)
-----------------------------------
Net Increase from Capital Share Transactions 2,179,242 1,399,934
- -------------------------------------------------------------------------------------------------
Total Increase 4,837,019 2,833,285
- -------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 15,841,050 13,007,765
-----------------------------------
End of Year $20,678,069 $15,841,050
=================================================================================================
(1) Shares Issued (Redeemed)
Issued 123,045 121,079
Issued in Lieu of Cash Distributions 92,396 102,408
Issued in Exchange for Net Assets of Gemini II--Note G 13,730 --
Redeemed (103,790) (127,266)
-----------------------------------
Net Increase in Shares Outstanding 125,381 96,221
=================================================================================================
</TABLE>
16
<PAGE> 19
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 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $16.99 $15.55 $14.55 $14.95 $12.37
- ----------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .36 .43 .44 .44 .37
Net Realized and Unrealized Gain on Investments 3.94 2.85 1.86 .42 2.98
-------------------------------------------------------------
Total from Investment Operations 4.30 3.28 2.30 .86 3.35
-------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.41) (.46) (.44) (.37) (.39)
Distributions from Realized Capital Gains (1.33) (1.38) (.86) (.89) (.38)
-------------------------------------------------------------
Total Distributions (1.74) (1.84) (1.30) (1.26) (.77)
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $19.55 $16.99 $15.55 $14.55 $14.95
======================================================================================================================
TOTAL RETURN 27.04% 23.16% 17.80% 6.35% 28.29%
======================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $20,678 $15,841 $13,008 $11,406 $10,537
Ratio of Total Expenses to Average Net Assets 0.27% 0.31% 0.45% 0.45% 0.40%
Ratio of Net Investment Income to Average Net Assets 1.89% 2.75% 3.01% 3.11% 2.68%
Portfolio Turnover Rate 61% 34% 32% 34% 25%
Average Commission Rate Paid $.0576 $.0579 N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
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 to 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. Wellington Management Company, LLP provides investment advisory services to
the Fund for a 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, 1997, the
advisory fee represented an effective annual basic rate of 0.12% of the Fund's
average net assets before a decrease of $11,821,000 (an annual rate of 0.06%)
based on performance.
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,
1997, the Fund had contributed capital of $1,480,000 to Vanguard (included in
Other Assets), representing 7.4% 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, 1997, these arrangements reduced the Fund's expenses by
$5,160,000 (an annual rate of 0.03% of average net assets).
The Fund's custodian bank has agreed to reduce its fees when the Fund
maintains cash on deposit in the noninterest-bearing custody account. For the
year ended October 31, 1997, custodian fee offset arrangements reduced expenses
by $69,000.
18
<PAGE> 21
D. During the year ended October 31, 1997, the Fund purchased $12,730,368,000
of investment securities and sold $10,700,157,000 of investment securities,
other than U.S. government securities and temporary cash investments. Sales of
U.S. government securities were $204,500,000.
E. At October 31, 1997, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $3,727,510,000,
consisting of unrealized gains of $4,565,987,000 on securities that had risen
in value since their purchase and $838,477,000 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,
1997, was $136,023,000, for which the Fund held cash collateral of
$139,323,000. Cash collateral received is invested in repurchase agreements.
G. On June 19, 1997, the Fund acquired Gemini II Fund's net assets pursuant to
an agreement approved by Gemini II Fund's shareholders on June 18, 1997. The
acquisition was accomplished by a tax-free exchange of 13,730,319 of the Fund's
capital shares for the 9,232,207 outstanding Gemini II Fund shares on June 19,
1997. Gemini II Fund's net assets of $263,239,000, including $57,791,000 of
unrealized appreciation, were combined with Windsor Fund's net assets of
$19,820,772,000, resulting in combined net assets of $20,084,011,000 on the
merger date.
19
<PAGE> 22
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, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the five years in the period then ended, 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, 1997 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where securities purchased had not been settled, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 3, 1997
SPECIAL 1997 TAX INFORMATION (UNAUDITED) FOR VANGUARD/WINDSOR FUND
This information for the fiscal year ended October 31, 1997, is included
pursuant to provisions of the Internal Revenue Code.
The Fund designates $2,139,245,000 as capital gain dividends (from net
long-term capital gains), which will be distributed in December 1997. Of the
$2,139,245,000 capital gain dividends, the Fund designates $939,287,000 as a
20% rate gain distribution.
For corporate shareholders, 23.6% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received
deduction.
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.
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.; Managing Director
of Global Health Care Partners/DLJ Merchant Banking Partners; Director of Sun
Company, Inc., and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions,
Inc., Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance
Co., and Ladies Professional Golf Association; Trustee Emerita of Wellesley
College.
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 Telecommunications 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., and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director 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
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R)," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company is
the owner of trademarks and copyrights relating to the Russell Indexes.
"Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire Associates.
<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 Growth and Income Portfolio
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 International Value 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 Treasury Money Market Portfolio
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, NY, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds (CA, FL, NJ, NY, OH, PA)
Q220-10/97 -- (C) 1997 Vanguard Marketing Corporation, Distributor
<PAGE> 25
VANGUARD/
WINDSOR II
Annual Report -- October 31, 1997
[PHOTO]
[THE VANGUARDGROUP LOGO]
<PAGE> 26
[PHOTO]
OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--some 6,000 highly motivated men
and women--who form the cornerstone of our operations. As with any cornerstone,
we could not survive long--let alone prosper--without it. That's why we chose
this fiscal year's annual report to celebrate the spirit, enthusiasm, and
achievements of our crew. (We call those who work at Vanguard crew members, not
employees, because they operate as a team to accomplish our mission of serving
you, our clients.)
But while we prize the collective contributions of our crew, we also take
time to recognize the importance of the individual. Each calendar quarter, we
present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more
than 300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving you
in the years ahead.
[PHOTO]
John J. Brennan
President
John C. Bogle
Chairman
CONTENTS
<TABLE>
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS . . . . . . . . . . . . . . . . . . . 1
THE MARKETS IN PERSPECTIVE . . . . . . . . . . . . . . . . . . . . 4
REPORT FROM THE ADVISER . . . . . . . . . . . . . . . . . . . . . . 6
PERFORMANCE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . 8
PORTFOLIO PROFILE . . . . . . . . . . . . . . . . . . . . . . . . . 10
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . 11
REPORT OF INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . 19
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
<PAGE> 27
FELLOW SHAREHOLDER,
The long-running bull market for stocks carried Vanguard/Windsor II to a
powerful total return of +31.3% during the twelve months ended October 31,
1997, well ahead of the average competing fund and just slightly behind the
marvelous +32.1% rise of the unmanaged Standard & Poor's 500 Composite Stock
Price Index.
<TABLE>
<CAPTION>
- -------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
OCTOBER 31, 1997
- -------------------------------------------------------
<S> <C>
Vanguard/Windsor II +31.3%
- -------------------------------------------------------
Average Value Fund +28.5%
- -------------------------------------------------------
S&P 500 Index +32.1%
- -------------------------------------------------------
</TABLE>
The table at right compares Windsor II's total return (capital change
plus reinvested dividends) for the year with those of the S&P 500 Index and the
average value (growth and income) mutual fund. The S&P 500 is dominated by
blue-chip stocks; the value fund group best reflects the investment philosophy
of Windsor II.
The Fund's return is based on an increase in its net asset value from
$24.04 per share on October 31, 1996, to $29.36 per share on October 31, 1997,
with the latter figure adjusted for dividends of $0.63 per share paid from net
investment income and a distribution of $1.16 per share paid in December 1996
from net realized capital gains. (We expect to make a distribution of about
$2.20 per share from net realized capital gains to shareholders of record on
December 11, 1997, with the distribution payable on December 17.)
FISCAL 1997 PERFORMANCE OVERVIEW
Despite taking a tumble in late October, the U.S. stock market--as represented
by the S&P 500 Index--gained +32.1% during the twelve months ended October 31.
It was the third consecutive banner year for investors in large-capitalization
stocks, bringing the cumulative return on the S&P 500 since October 31, 1994,
to an incredible +107%.
Economic conditions during the year were almost picture-perfect for
equity investors. Business activity and corporate profits continued to increase
apace, yet inflation decelerated and long-term interest rates declined. On
balance during the year, the yield on the benchmark 30-year U.S. Treasury bond
declined by 0.49 percentage point to 6.15%; short-term interest rates edged up
just a bit. This positive interest-rate environment, along with the splendid
economic fundamentals, elevated the already-high spirits of investors. But
after reaching record territory in early October, the stock market retreated
late in the month, most notably with a -7% plunge on Monday, October 27. The
market rallied strongly the next day, steadied through the rest of the week,
and finished the fiscal year more than +30% higher than it started.
While the October slide (nearly 11% from high to low) was the sharpest
interim dip during the past twelve months, the stock market also experienced
monthly declines in December, March, and August. However, each drop was
promptly followed by a smart rebound. As a result, overall stock prices at
fiscal year-end were near historical highs in relation to such fundamentals as
dividends, earnings, and book values.
Large-capitalization growth stocks fared particularly well during the
fiscal year, with the S&P/BARRA Growth Index returning +34.3%, well ahead of
the S&P/BARRA Value Index's return of +29.7%. We note that, while the returns
of growth and value stocks often diverge over short periods, they have tended
to be very similar over longer
1
<PAGE> 28
periods. Windsor II outperformed the Value Index and the average value fund
largely because of excellent stock selection by our advisers.
Financial-services stocks, at +41% one of the market's strongest sectors during
fiscal 1997, were the Fund's biggest industry concentration during the year
(roughly 25% of assets versus 16% for the S&P 500) and generated total returns
of +50%, sharply in excess of the group norm. We also gained a nice advantage
in our health-care selections (+59%) despite a modest 4% commitment of Fund
assets to that group. In the market's hottest sector, technology stocks, we had
relatively light holdings (4% of assets versus 12% for the S&P 500).
The equity holdings of Windsor II actually outperformed the S&P 500
overall during fiscal 1997, but the Fund's tiny lag in net total return
relative to the Index occurred largely because of our modest cash reserve of
about 7%. As a theoretical construct, the Index owns no cash, which is a drag
on performance in a rising market. Our edge over competing funds was partly due
to the market's continuing fondness for larger-capitalization stocks. (The S&P
500, which is dominated by large companies, outperformed the rest of the U.S.
stock market by about 3 percentage points during fiscal 1997.) The median
market capitalization of Windsor II's stocks as of October 31 was about $23
billion, or roughly one-third greater than the $18 billion norm for the average
value fund.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
TOTAL ASSETS MANAGED
--------------------------------
$ MILLION PERCENT
- --------------------------------------------------------------------------
<S> <C> <C>
Barrow, Hanley, Mewhinney
& Strauss, Inc. $15,394 68%
Equinox Capital Management, Inc. 2,213 10
Tukman Capital Management, Inc. 2,149 10
Vanguard Core Management Group 1,408 6
Cash Reserves* 1,404 6
- --------------------------------------------------------------------------
Total $22,568 100%
- --------------------------------------------------------------------------
</TABLE>
*Each adviser also may maintain a modest cash reserve.
Three of the Fund's four advisers surpassed the average return of our
value-fund peer group, and holdings managed by two advisers also outpaced the
return of the S&P 500. The table above presents the share of assets supervised
by each of our managers at year-end.
LONG-TERM PERFORMANCE OVERVIEW
Windsor II has built an admirable long-term record. Our average annual return
of +16.9% during the decade ended October 31 beat that of our peers by 1.6
percentage points. A $10,000 investment in Windsor II at the start of the
decade would have grown to $47,847, more than $6,000 above the result of a
similar investment in our average competitor. The difference is equal to an
amazing 62% of the initial investment. We fell a bit short of our other
performance bogey, the S&P 500, over the decade. Of course, the Index, a
notoriously tough foe for all equity funds, invests in both value and growth
stocks and bears none of the "real world" operating costs of a mutual fund. The
table above summarizes returns for the past ten years.
<TABLE>
<CAPTION>
- --------------------------------------------------------
TOTAL RETURNS
10 YEARS ENDED OCTOBER 31, 1997
-----------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- --------------------------------------------------------
<S> <C> <C>
Vanguard/Windsor II +16.9% $47,847
- --------------------------------------------------------
Average Value Fund +15.3% $41,601
- --------------------------------------------------------
S&P 500 Index +17.2% $48,772
- --------------------------------------------------------
</TABLE>
2
<PAGE> 29
About one-half of our 1.6 percentage point annual edge over our peers
is accounted for by our cost advantage and half by the fine results turned in
by our managers. It clearly has been a winning combination.
The returns provided by the financial markets during this decade have
been nothing short of spectacular. We caution, however, that returns almost
certainly will be less generous in years to come. To help keep the
extraordinary returns of the recent past in perspective, we note that the
ten-year period covered in this report is the first since 1987 to exclude the
stock market crash of October 1987--a month during which the S&P 500 Index shed
21.5% of its value. The exclusion of that month's losses, coupled with the
strong returns in fiscal 1997, explains why the ten-year average annual returns
for the Fund and its comparative benchmarks are roughly 3 percentage points
higher here than in last year's report.
IN SUMMARY
After a year during which the stock market provided a return equivalent to
three years' worth of those produced at its long-term average of nearly 11%
annually, investors have every reason to be thankful for the market's bounty.
But the recent market volatility--punctuated by October's sudden slide--should
make investors mindful of the risks of investing in stocks. The danger of the
breathtaking bull market in U.S. stocks, now in its 16th year, is that it may
have dulled investors' awareness of an immutable law of stock investing: Prices
can drop sharply and suddenly. And these declines are not always quickly
erased.
Nonetheless, the greatest risk associated with investing is not
investing in the first place. We believe that a sound method for dealing with
risk is to construct a balanced investment program suited to your objectives,
financial situation, tolerance for risk, and time horizon. If you have such a
program in place, you are prepared to "stay the course" toward your investment
goals.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
November 14, 1997
3
<PAGE> 30
THE MARKETS IN PERSPECTIVE
YEAR ENDED OCTOBER 31, 1997
U.S. EQUITY MARKETS
The 12-month period ended October 31, 1997, was exceptionally strong for stock
investors, although it wound up on a rather unpleasant note. Over the period,
large-capitalization stocks continued their advance, propelling the S&P 500
Index to a 32.1% gain. Small-cap stocks also fared well, as illustrated by the
29.3% increase of the Russell 2000 Index. These gains stood despite October's
volatile final week, when sharp declines in Asian stock markets led many
investors to question their expectations regarding the U.S. market. While the
domestic market dropped substantially--the Dow Jones Industrial Average fell
554 points, or 7.2%, on October 27--it then rebounded smartly over the next few
days. This quick recovery probably can be attributed to investors' recognition
that three major factors underlying the bull market of recent years were
unaffected by the turmoil in Asia. These factors are solid economic growth;
restrained inflation, at levels not experienced since the 1960s; and impressive
growth in corporate profits.
Among large-cap stocks, the best-performing sectors in fiscal 1997
were technology and financial services, with increases of 51.1% and 41.4%,
respectively. The surge in technology reflects robust corporate spending on
this industry's products, particularly desktop computers, networking equipment,
and software. Consumer discretionary and cyclical stocks could be considered
laggards by contrast, despite their respective gains of 20.4% and 14.5%.
(Clearly the market has shown amazing growth when a 15%-20% advance over a
one-year period can be viewed as inadequate.)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED OCTOBER 31, 1997
-----------------------------------
1 YEAR 3 YEARS 5 YEARS
- -------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 32.1% 27.5% 19.9%
Russell 2000 Index 29.3 21.3 18.7
MSCI EAFE Index 4.9 5.1 12.1
- -------------------------------------------------------------------------
FIXED INCOME
Lehman Aggregate Bond Index 8.9% 10.1% 7.5%
Lehman 10-Year Municipal Bond Index 8.7 9.4 7.8
Salomon Brothers Three-Month
U.S. Treasury Bill Index 5.2 5.4 4.6
- -------------------------------------------------------------------------
OTHER
Consumer Price Index 2.1% 2.6% 2.6%
- -------------------------------------------------------------------------
</TABLE>
While small-company stocks failed to match the outsized advance of the
S&P 500 Index, their performance grew notably stronger in the second half of
the fiscal year. This was evident in both absolute and relative terms: During
the past six months, the Russell 2000 Index rose 27.3%, compared to 15.2% for
the S&P 500. The improved performance of smaller companies cannot be attributed
to any single factor, but is, rather, due to a combination of attractive
valuations and good earnings.
U.S. FIXED-INCOME MARKETS
Interest rates fell across the yield curve, rewarding fixed-income investors
with higher total returns. For example, the rates on 1-, 5-, 10-, and 30-year
Treasury issues decreased 0.06%, 0.35%, 0.51%, and 0.49%, respectively, during
the fiscal year. These declines reflected the continuing good news regarding
inflation and the relative dormancy of
4
<PAGE> 31
the Federal Reserve. The benefit to investors was illustrated by the 8.9%
return of the Lehman Brothers Aggregate Bond Index, the broadest measure of
investment-grade issues. Investors in lower-quality securities fared even
better, as shown by the 13.7% gain of the Lehman High Yield Bond Index. The
strength of the economy combined with the lack of inflationary pressure
produced an ideal environment for junk bonds.
INTERNATIONAL EQUITY MARKETS
The last quarter of the fiscal year proved to be horrible for investments in
Pacific markets, with declines both widespread and pronounced. The Morgan
Stanley Capital International (MSCI) Pacific Index declined by 21.4% in U.S.
dollar terms during the three months and was down 19.7% for the full fiscal
year. Among individual markets (also in U.S. dollar terms), Japan fell 18.4%
for the quarter and 18.1% for the 12 months, while the declines over the same
periods reached 34.3% and 17.5% in Hong Kong and 49.0% and 57.2% in Malaysia.
These markets suffered for a variety of reasons, but concern about future
economic growth was particularly significant.
By contrast, the European markets continued to provide U.S. investors
with solid returns, although they, too, stumbled in late October. The MSCI
Europe Index posted a gain of 26.0% for the 12 months despite a 4.9% decline in
October. The robust character of the European markets reflects strong earnings
and optimism that the growth will remain solid.
5
<PAGE> 32
REPORT FROM THE ADVISER
The fiscal year ended October 31, 1997, was an excellent year for investors in
general, including shareholders of Vanguard/Windsor II. In the second half of
the fiscal year, your Fund had a gain of 17.3%, exceeding the returns of 15.9%
for the average value (growth and income) fund, 15.2% for the S&P 500 Index,
and 16.0% for the S&P/BARRA Value Index. For the full year, Windsor II earned
31.3% versus returns of 28.5% for the average value fund, 32.1% for the S&P 500
Index, and 29.7% for the Value Index.
The economy is robust and inflation is low. The Federal Reserve
apparently sees few warning signs of inflation and has not increased interest
rates, even though politically it would be easy to do. Rising prices have been
restricted to areas that do not seem to have much impact on government
statistics, such as professional services, airline tickets, hotel rates,
housing, land, some types of clothing, and wines. The currency devaluation that
has occurred in much of Asia, which makes Asian goods cheaper to U.S. buyers,
will continue to exert deflationary pressure on U.S. imports, but we doubt that
it will dramatically reduce prices at the retail level. Exports to the Far East
might suffer slightly because of the stronger dollar, but in most cases it is
difficult for developing nations to find substitutes for American-manufactured
goods or industrial raw materials. We are hearing from friends and customers
that the U.S. labor market is very tight, and this seems to be having a slight
impact on real wages and disposable personal income. Congress is basking in the
glow of a balanced budget and is thinking of new spending initiatives, quite a
change from the past few years.
We have all read a great deal lately about the high level of the U.S.
stock market and the tenth anniversary of the 1987 "market meltdown." The whole
scenario is a bit like the possible return of Jack the Ripper, and seems to
have scared all but the youngest investors. While there are some vague
similarities between the markets of 1987 and 1997, there are a great many
differences. We would point out that interest rates have not been rising, oil
prices are relatively stable, inflation seems docile, earnings are high and
improving, and the dollar is strong. None of these conditions existed ten years
ago.
In the most recent market jolt, one thing did remind us of that
ill-fated time: International market relationships precipitated the decline. We
are not an island, even when it comes to investments. Currency volatility in
the Pacific Rim has an indirect impact on the United States. The Hong Kong
stock market's decline is probably a result of fundamental factors, while ours
was quite technical in nature and partly the result of program trading. These
computer-generated transactions usually focus on the larger stocks and recently
have corrected some significant discrepancies in market valuations.
It is more pertinent to observe that since August there seems to have
been a subtle shift in the U.S. market in favor of somewhat smaller and more
defensive companies. This shift has helped Windsor II. In comparison to our
benchmarks, we are significantly underweighted in technology issues, as well as
in the health-care, basic industrial commodities, and software groups. These
industries generally do not present opportunities for investors seeking low
price/earnings ratios,
6
<PAGE> 33
low price-to-book values, or high current yields. We feel, however, that these
characteristics are a necessity for value investors.
While returns of the past several years have been high and may not be
repeated, this does not necessarily mean that the seven fat years since 1990
will be followed by seven lean ones. The giant "wall of money" from savings and
retirement plans will not go away, but it may become more manageable.
Corrections will occur over time, so we feel that the Fund's deliberately
conservative construction is appropriate.
Our current emphasis is on financial-services companies, electric and
telephone utilities, and energy companies. In addition to having the price and
yield characteristics we look for, these groups have the potential for earnings
growth and are not favorites of most institutional investors. If actual results
for these stocks are better than the market's modest expectations, the outcome
would be a dramatic return relative to the overall market.
Barrow, Hanley, Mewhinney & Strauss, Inc.
November 12, 1997
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.
7
<PAGE> 34
PORTFOLIO PROFILE
WINDSOR II
This Profile provides a snapshot of the Fund's characteristics as of October
31, 1997, compared where appropriate 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 181 500
Median Market Cap $22.7B $35.7B
Price/Earnings Ratio 16.8x 20.9x
Price/Book Ratio 2.75x 3.9x
Yield 2.4% 1.7%
Return on Equity 15.4% 20.3%
Earnings Growth Rate 18.1% 18.2%
Foreign Holdings 3.8% 2.0%
Turnover Rate 30% --
Expense Ratio 0.37% --
Cash Reserves 7.3% --
</TABLE>
INVESTMENT FOCUS
- -----------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
TEN LARGEST STOCKS (% OF TOTAL NET ASSETS)
- -------------------------------------------------------------------
<S> <C>
Chase Manhattan Corp. 3.4%
International Business Machines Corp. 2.7
Ford Motor Co. 2.7
Exxon Corp. 2.5
GTE Corp. 2.4
Schlumberger Ltd. 2.4
Sears, Roebuck & Co. 2.4
SBC Communications Inc. 2.2
Allstate Corp. 2.2
Travelers Group Inc. 2.2
- -------------------------------------------------------------------
Top Ten Total 25.1%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -------------------------------------------------
WINDSOR II S&P 500
- -------------------------------------------------
<S> <C> <C>
R-Squared 0.92 1.00
Beta 0.86 1.00
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ---------------------------------------------------------------------------------------
OCTOBER 31, 1996 OCTOBER 31, 1997
---------------------------------------------
WINDSOR II WINDSOR II S&P 500
---------------------------------------------
<S> <C> <C> <C>
Auto & Transportation . . . . . . . . . . . . 3.4% 5.8% 3.6%
Consumer Discretionary . . . . . . . . . . . . 6.1 9.9 9.7
Consumer Staples . . . . . . . . . . . . . . . 7.6 6.3 10.9
Financial Services . . . . . . . . . . . . . . 27.7 23.9 17.0
Health Care . . . . . . . . . . . . . . . . . 5.9 1.8 11.3
Integrated Oils . . . . . . . . . . . . . . . 11.4 9.6 7.7
Other Energy . . . . . . . . . . . . . . . . . 2.4 4.9 1.6
Materials & Processing . . . . . . . . . . . . 3.9 3.4 6.5
Producer Durables . . . . . . . . . . . . . . 4.0 4.1 4.2
Technology . . . . . . . . . . . . . . . . . . 3.3 3.8 12.4
Utilities . . . . . . . . . . . . . . . . . . 12.8 15.7 9.7
Other . . . . . . . . . . . . . . . . . . . . 11.5 10.8 5.4
- ---------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 35
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned 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%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing investments.
EARNINGS GROWTH RATE. The average annual 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.
FOREIGN HOLDINGS. The percentage of a portfolio's net assets represented by
stocks or American Depository Receipts of companies based outside the United
States.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of the stocks in a 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 it is and the more likely 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. For a portfolio, the weighted average P/E of the
stocks it holds. 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.
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.
RETURN ON EQUITY. The rate of return generated by a company during the past
year for each dollar of shareholders' equity (net income for the year /
shareholders' equity). For a portfolio, the weighted average return on equity
for the companies represented in the portfolio.
SECTOR DIVERSIFICATION. The percentages of a portfolio's common stocks that
come from each of the major industry groups that compose the stock market.
TEN LARGEST STOCKS. The percentage of net assets that a portfolio has invested
in its ten largest holdings. (The average for stock mutual funds is about 30%).
As this percentage rises, a portfolio's returns are likely to be more volatile,
because they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year.
Portfolios with high turnover rates incur higher transaction costs and are more
likely to distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based
on income earned over the past 30 days and is annualized, or projected forward
for the coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
9
<PAGE> 36
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: JUNE 24, 1985-OCTOBER 31, 1997
- ------------------------------------------
WINDSOR II S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------
<S> <C> <C> <C> <C>
1985 -0.9% 1.1% 0.2% 1.8%
1986 31.2 4.4 35.6 33.2
1987 -0.6 1.5 0.9 6.4
1988 14.5 6.0 20.5 14.8
1989 19.5 5.2 24.7 26.4
1990 -21.5 4.0 -17.5 -7.5
1991 29.4 7.2 36.6 33.5
1992 7.9 4.6 12.5 10.0
1993 15.8 3.7 19.5 14.9
1994 -0.8 3.0 2.2 3.9
1995 19.2 3.9 23.1 26.4
1996 23.8 3.4 27.2 24.1
1997 28.1 3.2 31.3 32.1
- ------------------------------------------
</TABLE>
See Financial Highlights table on page 16 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: OCTOBER 31, 1987-OCTOBER 31, 1997
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
1987 10 10000 10000 10000
1988 01 10886 10440 10290
1988 04 10849 10805 10552
1988 07 12116 11273 11089
1988 10 12701 11677 11480
1989 01 13617 12306 12357
1989 04 13838 12907 12971
1989 07 15092 14211 14631
1989 10 14867 14109 14511
1990 01 13437 13566 14145
1990 04 13382 13704 14340
1990 07 13768 14664 15582
1990 10 10715 12732 13426
1991 01 13101 14392 15332
1991 04 14534 15709 16866
1991 07 14934 16333 17570
1991 10 15503 16968 17923
1992 01 16031 17680 18811 --- MULTI-MANAGER
1992 04 16972 17902 19232 APPROACH ADOPTED
1992 07 17561 18303 19817
1992 10 16945 18485 19707
1993 01 19288 19464 20801
1993 04 19789 19667 21009
1993 07 20778 20265 21547
1993 10 21738 21535 22652
1994 01 23123 22087 23480
1994 04 21573 20861 22127
1994 07 22815 21264 22659
1994 10 23117 22097 23528
1995 01 22191 21593 23604
1995 04 24490 23467 25991
1995 07 27303 25725 28575
1995 10 27233 26680 29749
1996 01 29137 28703 32730
1996 04 30989 29835 33844
1996 07 30185 29155 33309
1996 10 33541 32387 36917
1997 01 38005 35279 41352
1997 04 38092 35319 42350
1997 07 44570 42143 50676
1997 10 42608 41601 48772
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1997
------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Windsor II 31.27% 20.21% 16.95% $47,847
Average Value Fund 28.45 17.61 15.32 41,601
S&P 500 Index 32.11 19.87 17.17 48,772
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997*
- --------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Windsor II 6/24/1985 38.78% 20.54% 10.60% 4.33% 14.93%
- --------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
10
<PAGE> 37
FINANCIAL STATEMENTS
OCTOBER 31, 1997
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 (92.7%)
- --------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (5.4%)
Autoliv, Inc. 50,570 $ 1,994
Burlington Northern
Santa Fe Corp. 84,000 7,980
CNF Transportation, Inc. 93,800 4,186
CSX Corp. 1,469,000 80,336
Chrysler Corp. 13,124,600 462,642
Cooper Tire & Rubber Co. 195,300 4,138
Delta Air Lines, Inc. 149,100 15,022
_ Federal Express Corp. 9,000 601
Ford Motor Co. 13,782,300 602,114
General Motors Corp. 439,200 28,191
Union Pacific Corp. 215,300 13,187
----------
1,220,391
----------
CONSUMER DISCRETIONARY (9.2%)
_ Boston Chicken, Inc. 256,000 2,288
Browning-Ferris Industries, Inc. 2,440,000 79,300
_ Corporate Express, Inc. 118,600 1,735
Dayton-Hudson Corp. 159,900 10,044
Deluxe Corp. 207,300 6,789
Dillard's Inc. 148,100 5,683
The Walt Disney Co. 1,676,044 137,855
R.R. Donnelley & Sons Co. 109,400 3,569
Eastman Kodak Co. 1,602,500 95,950
Gannett Co., Inc. 3,394,500 178,423
IKON Office Solutions 136,000 3,851
_(1) Kmart Corp. 35,140,700 463,418
Russell Corp. 37,000 1,087
Sears, Roebuck & Co. 12,754,200 534,082
Time Warner, Inc. 1,691,000 97,550
Tribune Co. 198,100 10,920
Wal-Mart Stores, Inc. 4,059,800 142,600
Washington Post Co. Class B 10,200 4,427
Waste Management Inc. 8,960,300 209,447
Whirlpool Corp. 1,280,600 77,636
_ Woolworth Corp. 419,800 7,976
----------
2,074,630
----------
CONSUMER STAPLES (5.9%)
American Stores Co. 145,200 3,730
Anheuser-Busch Cos., Inc. 11,963,300 477,784
Campbell Soup Co. 326,900 16,856
The Clorox Co. 29,600 2,072
Dean Foods Corp. 192,000 9,084
H.J. Heinz Co. 2,993,300 139,001
Imperial Tobacco Group ADR 12,448,100 148,599
PepsiCo, Inc. 3,838,700 141,312
Philip Morris Cos., Inc. 6,936,900 274,875
RJR Nabisco Holdings Corp. 286,100 9,066
Sara Lee Corp. 1,916,300 97,971
----------
1,320,350
----------
FINANCIAL SERVICES (22.1%)
Aegon NV ARS 619 49
H.F. Ahmanson & Co. 1,913,800 112,914
Allstate Corp. 5,950,022 493,480
American Express Co. 4,532,808 353,559
American International
Group, Inc. 2,285,987 233,314
AmSouth Bancorp 383,700 18,442
Aon Corp. 3,324,675 179,325
Banc One Corp. 1,414,000 73,705
BankAmerica Corp. 5,891,646 421,253
BankBoston Corp. 231,600 18,774
CIGNA Corp. 109,300 16,969
_ CNA Financial Corp. 16,600 2,059
Chase Manhattan Corp. 6,598,228 761,271
</TABLE>
11
<PAGE> 38
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
MARKET
VALUE*
WINDSOR II SHARES (000)
- --------------------------------------------------------------------
<S> <C> <C>
The Chubb Corp. 1,167,000 $ 77,314
Citicorp 285,600 35,718
Conseco Inc. 142,100 6,199
The Dun & Bradstreet Corp. 73,800 2,108
A.G. Edwards & Sons, Inc. 251,550 8,254
Fannie Mae 4,829,800 233,943
First Chicago NBD Corp. 6,413,871 466,609
First Union Corp. 499,600 24,512
Firstar Corp. 169,900 6,138
Fleet Financial Group, Inc. 10,000 643
The Hartford Financial
Services Group Inc. 105,100 8,513
Merrill Lynch & Co., Inc. 1,417,000 95,825
J.P. Morgan & Co., Inc. 202,200 22,191
Morgan Stanley, Dean Witter,
Discover and Co. 1,916,000 93,884
Northern Trust Corp. 17,472 1,019
Norwest Corp. 770,200 24,695
Old Republic International Corp. 27,200 972
PNC Bank Corp. 9,929,600 471,656
Regions Financial Corp. 103,600 3,807
Salomon, Inc. 86,300 6,704
Star Banc Corp. 24,300 1,192
State Street Corp. 141,400 7,883
Travelers Group Inc. 7,046,473 493,253
_ UICI 223,200 7,394
U.S. Bancorp 211,800 21,537
UnionBanCal Corp. 61,426 5,620
Wells Fargo & Co. 625,900 182,372
----------
4,995,069
----------
HEALTH CARE (1.7%)
Aetna Inc. 839,900 59,685
American Home Products Corp. 2,055,900 152,394
Beckman Instruments, Inc. 79,200 3,119
Becton, Dickinson & Co. 140,600 6,476
Bristol-Myers Squibb Co. 1,274,800 111,864
_ Genesis Health Ventures Inc. 167,500 4,104
Johnson & Johnson 403,700 23,162
_ Tenet Healthcare Corp. 331,000 10,116
United Healthcare Corp. 279,000 12,921
----------
383,841
----------
INTEGRATED OILS (8.9%)
Amoco Corp. 4,655,500 426,851
Atlantic Richfield Co. 1,202,200 98,956
Chevron Corp. 430,900 35,738
Exxon Corp. 9,145,600 561,883
Mobil Corp. 821,000 59,779
Murphy Oil Corp. 42,500 2,462
Phillips Petroleum Co. 7,980,900 386,076
Royal Dutch Petroleum Co. ADR 7,673,200 403,802
Texaco Inc. 452,000 25,736
USX-Marathon Group 32,600 1,165
----------
2,002,448
----------
OTHER ENERGY (4.5%)
Baker Hughes, Inc. 74,000 3,399
Occidental Petroleum Corp. 16,529,000 460,746
Schlumberger Ltd. 6,110,800 534,695
Tidewater, Inc. 241,900 15,890
Tosco Corp. 175,000 5,775
----------
1,020,505
----------
MATERIALS & PROCESSING (3.2%)
Aluminum Co. of America 780,000 56,940
Dow Chemical Co. 108,000 9,801
E.I. du Pont de Nemours & Co. 590,200 33,568
Eastman Chemical Co. 1,235,950 73,694
Ethyl Corp. 78,000 673
Fort James Corp. 2,521,200 100,060
Georgia-Pacific Corp. 77,500 6,573
M.A. Hanna Co. 43,900 1,130
Johns Manville Corp. 277,700 3,350
Masco Corp. 107,800 4,730
The Mead Corp. 183,300 11,090
(1) Millenium Chemicals, Inc. 6,537,442 153,630
_ Owens-Illinois, Inc. 96,700 3,336
Phelps Dodge Corp. 152,900 11,372
The Timken Co. 151,400 5,072
_ USG Corp. 25,000 1,180
USX-U.S. Steel Group, Inc. 110,300 3,750
Union Carbide Corp. 130,300 5,953
(1) Witco Chemical Corp. 5,377,800 233,934
----------
719,836
----------
PRODUCER DURABLES (3.8%)
Caterpillar, Inc. 393,000 20,141
Deere & Co. 31,600 1,663
General Signal Corp. 26,500 1,063
Harnischfeger Industries Inc. 191,600 7,544
Honeywell, Inc. 6,273,400 426,983
Lockheed Martin Corp. 204,000 19,393
Pitney Bowes, Inc. 137,600 10,913
Tecumseh Products Co. Class A 139,800 7,200
Tektronix, Inc. 44,200 2,613
Thomas & Betts Corp. 292,100 14,532
United Technologies Corp. 13,500 945
Xerox Corp. 4,331,021 343,504
----------
856,494
----------
TECHNOLOGY (3.6%)
Electronic Data Systems Corp. 4,208,400 162,812
General Dynamics Corp. 166,100 13,485
International Business
Machines Corp. 6,263,400 614,205
_ NCR Corp. 26,456 802
_ Storage Technology Corp. 214,300 12,577
----------
803,881
----------
UTILITIES (14.5%)
AT&T Corp. 1,091,300 53,405
Ameritech Corp. 348,800 22,672
Bell Atlantic Corp. 622,418 49,716
Boston Edison Co. 288,800 9,115
CMS Energy Corp. 248,900 9,085
(1) Centerior Energy Corp. 12,855,100 167,116
Central & South West Corp. 4,751,200 102,448
Century Telephone
Enterprises, Inc. 296,800 12,595
DTE Energy Co. 344,800 10,603
Edison International 492,700 12,625
Energy Group PLC ADR 4,231,050 170,829
Entergy Corp. 11,484,800 280,660
GPU, Inc. 236,300 8,551
GTE Corp. 12,940,700 549,171
Houston Industries, Inc. 6,376,900 138,698
</TABLE>
12
<PAGE> 39
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------
<S> <C> <C>
New York State Electric
& Gas Corp. 454,000 12,116
Ohio Edison Co. 2,858,900 70,758
Public Service Enterprise
Group, Inc. 4,287,800 111,215
SBC Communications Inc. 7,968,899 507,021
Southern Co. 340,000 7,799
Southern New England
Telecommunications Corp. 188,900 8,099
Texas Utilities Co. 392,800 14,092
(1) Unicom Corp. 15,638,300 437,872
_ U.S. Cellular Corp. 220,800 7,176
U S WEST Communications
Group 11,140,200 443,519
Williams Cos., Inc. 1,284,500 65,429
----------
3,282,385
----------
OTHER (9.9%)
Brunswick Corp. 91,800 3,098
Cooper Industries, Inc. 19,000 990
Crane Co. 61,300 2,548
(1) Dresser Industries, Inc. 10,668,700 449,419
General Electric Co. 2,538,100 163,866
Hanson PLC ADR 3,371,250 85,967
Harris Corp. 126,400 5,514
(1) ITT Industries, Inc. 8,153,100 257,332
Raytheon Co. 8,578,400 465,378
Tenneco, Inc. 7,342,900 329,972
Trinity Industries, Inc. 193,900 8,677
Westinghouse Electric Corp. 17,598,300 465,255
----------
2,238,016
----------
- --------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $14,252,799) 20,917,846
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (8.0%)
- --------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY BILL
(2) 5.02%, 1/22/98 $ 1,500 1,483
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.66%, 11/3/97 1,804,140 1,804,140
5.67%, 11/3/97--Note F 4,845 4,845
- --------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $1,810,468) 1,810,468
- --------------------------------------------------------------------
TOTAL INVESTMENTS (100.7%)
(COST $16,063,267) 22,728,314
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
MARKET
VALUE*
(000)
- --------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.7%)
- --------------------------------------------------------------------
<S> <C>
Other Assets--Note C $ 224,905
Liabilities--Note F (385,359)
----------
(160,454)
- --------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------
Applicable to 768,685,673 outstanding
$.01 par value shares
(authorized 1,150,000,000 shares) $22,567,860
====================================================================
NET ASSET VALUE PER SHARE $29.36
====================================================================
</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. The total market value of
investments in affiliated companies was $2,162,721,000.
(2) Security segregated as initial margin for open futures contracts.
ADR--American Depository Receipt.
ARS--American Registered Share.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
AT OCTOBER 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $13,961,326 $18.16
Undistributed Net
Investment Income 247,438 .32
Accumulated Net
Realized Gains 1,695,234 2.21
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 6,665,047 8.67
Futures Contracts (1,185) --
- --------------------------------------------------------------------
NET ASSETS $22,567,860 $29.36
====================================================================
</TABLE>
13
<PAGE> 40
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, 1997
(000)
- ----------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 451,761
Interest 81,624
----------
Total Income 533,385
----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 23,536
Performance Adjustment 3,689
The Vanguard Group--Note C
Management and Administrative 36,562
Marketing and Distribution 3,669
Taxes (other than income taxes) 1,374
Custodian Fees 47
Auditing Fees 20
Shareholders' Reports 456
Annual Meeting and Proxy Costs 57
Directors' Fees and Expenses 44
----------
Total Expenses 69,454
Expenses Paid Indirectly--Note C (1,768)
----------
Net Expenses 67,686
- ----------------------------------------------------------------------
NET INVESTMENT INCOME 465,699
- ----------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold* 1,693,191
Futures Contracts 4,848
- ----------------------------------------------------------------------
REALIZED NET GAIN 1,698,039
- ----------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 2,755,324
Futures Contracts (1,575)
- ----------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 2,753,749
- ----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,917,487
======================================================================
</TABLE>
*Dividend income and realized net gain from affiliated companies were
$46,434,000 and $1,223,000, respectively.
14
<PAGE> 41
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,
----------------------------------
1997 1996
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 465,699 $ 362,868
Realized Net Gain 1,698,039 714,637
Change in Unrealized Appreciation (Depreciation) 2,753,749 1,828,051
----------------------------------
Net Increase in Net Assets Resulting from Operations 4,917,487 2,905,556
----------------------------------
DISTRIBUTIONS
Net Investment Income (410,609) (309,925)
Realized Capital Gain (716,881) (352,517)
----------------------------------
Total Distributions (1,127,490) (662,442)
----------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 5,466,998 3,658,017
Issued in Lieu of Cash Distributions 1,087,312 550,557
Redeemed (2,534,333) (1,965,967)
----------------------------------
Net Increase from Capital Share Transactions 4,019,977 2,242,607
- -------------------------------------------------------------------------------------------------
Total Increase 7,809,974 4,485,721
- -------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 14,757,886 10,272,165
----------------------------------
End of Year $22,567,860 $14,757,886
=================================================================================================
(1)Shares Issued (Redeemed)
Issued 205,712 166,158
Issued in Lieu of Cash Distributions 45,084 26,223
Redeemed (95,875) (90,590)
----------------------------------
Net Increase in Shares Outstanding 154,921 101,791
=================================================================================================
</TABLE>
15
<PAGE> 42
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 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $24.04 $20.06 $17.33 $17.98 $15.75
- ----------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .64 .62 .58 .55 .50
Net Realized and Unrealized Gain (Loss) on Investments 6.47 4.63 3.17 (.19) 2.47
----------------------------------------------
Total from Investment Operations 7.11 5.25 3.75 .36 2.97
----------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.63) (.58) (.55) (.51) (.52)
Distributions from Realized Capital Gains (1.16) (.69) (.47) (.50) (.22)
----------------------------------------------
Total Distributions (1.79) (1.27) (1.02) (1.01) (.74)
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $29.36 $24.04 $20.06 $17.33 $17.98
==========================================================================================================
TOTAL RETURN 31.27% 27.17% 23.08% 2.22% 19.51%
==========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $22,568 $14,758 $10,272 $8,246 $7,486
Ratio of Total Expenses to Average Net Assets 0.37% 0.39% 0.40% 0.39% 0.39%
Ratio of Net Investment Income to Average Net Assets 2.49% 2.92% 3.27% 3.26% 3.11%
Portfolio Turnover Rate 30% 32% 30% 24% 26%
Average Commission Rate Paid $.0523 $.0483 N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 43
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 to 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
while maintaining liquidity. The Fund may purchase or sell futures contracts to
achieve a desired level of investment, whether to accommodate portfolio
turnover or cash flows from capital shares transactions. 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. Barrow, Hanley, Mewhinney & Strauss, Inc.; Equinox Capital Management,
Inc.; and Tukman Capital Management, Inc. provide investment advisory services
to the Fund for 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 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.
The Vanguard Group provides investment advisory services to a portion of the
Fund on an at-cost basis; the Fund paid Vanguard advisory fees of $196,000 for
the year ended October 31, 1997.
For the year ended October 31, 1997, the aggregate investment advisory fee
represented an effective annual rate of 0.13% of average net assets before an
increase of $3,689,000 (0.02%) based on performance.
17
<PAGE> 44
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, 1997, the Fund had contributed capital of $1,534,000
to Vanguard (included in Other Assets), representing 7.7% of Vanguard's
capitalization. The Fund's Directors and officers are also Directors and
officers of Vanguard.
Vanguard has asked the Fund's investment advisers to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate 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, 1997, these arrangements reduced the Fund's expenses by
$1,768,000 (0.01% of average net assets).
D. During the year ended October 31, 1997, the Fund purchased $7,961,171,000
of investment securities and sold $5,141,085,000 of investment securities,
other than temporary cash investments.
E. At October 31, 1997, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $6,665,047,000,
consisting of unrealized gains of $6,922,031,000 on securities that had risen
in value since their purchase and $256,984,000 in unrealized losses on
securities that had fallen in value since their purchase.
At October 31, 1997, the aggregate settlement value of open S&P 500 Index
futures contracts expiring in December 1997 and the unrealized depreciation on
those contracts were $31,878,000 and $1,185,000, respectively.
F. The market value of securities on loan to broker/dealers at October 31,
1997, was $4,048,000, for which the Fund held cash collateral of $4,845,000.
Cash collateral received is invested in repurchase agreements.
18
<PAGE> 45
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, 1997, the results of its
operations for the year then ended,the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the five years in the period then ended, 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, 1997 by correspondence with the
custodian and the application of alternative auditing procedures where
securities purchased had not been settled, provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 3, 1997
19
<PAGE> 46
SPECIAL 1997 TAX INFORMATION (UNAUDITED) FOR VANGUARD/WINDSOR II
This information for the fiscal year ended October 31, 1997, is included
pursuant to provisions of the Internal Revenue Code.
The Fund designates $1,427,053,000 as capital gain dividends (from net
long-term capital gains), which will be distributed in December 1997. Of the
$1,427,053,000 capital gain dividends, the Fund designates $621,310,000 as a
20% rate gain distribution.
For corporate shareholders, 59.1% of investment income (dividend income plus
short-term gains, if any) qualifies for the dividends-received deduction.
20
<PAGE> 47
[PHOTO]
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.
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.; Managing Director
of Global Health Care Partners/DLJ Merchant Banking Partners; Director of Sun
Company, Inc., and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions,
Inc., Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance
Co., and Ladies Professional Golf Association; Trustee Emerita of Wellesley
College.
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 Telecommunications 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., and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director 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
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R),"
"S&P(R)," and "500" are trademarks of The McGraw-Hill Companies,
Inc. Frank Russell Company is the owner of trademarks and
copyrights relating to the Russell Indexes. "Wilshire 4500" and "Wilshire 5000"
are trademarks of Wilshire Associates.
<PAGE> 48
THE VANGUARD
FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
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Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
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Vanguard/Wellesley Income Fund
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Vanguard Asset Allocation Fund
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GROWTH FUNDS
Vanguard/Morgan Growth Fund
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Vanguard U.S. Growth Portfolio
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Vanguard Explorer Fund
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INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
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INDEX FUNDS
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Vanguard Bond Index Fund
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FIXED-INCOME FUNDS
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Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
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INCOME FUNDS
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FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
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1-800-523-1036
http://www.vanguard.com
[email protected]
All Vanguard funds are offered by prospectus only. Prospectuses
contain more complete information on advisory fees, distribution charges, and
other expenses and should be read carefully before you invest or send money.
Prospectuses can be obtained directly from The Vanguard Group.
[THE VANGUARDGROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
Q730-10/97 -- (C) 1997 Vanguard Marketing Corporation, Distributor
