<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-14336) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [X]
POST-EFFECTIVE AMENDMENT NO. 89 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 92
VANGUARD/WINDSOR FUNDS, INC.
(FORMERLY, THE WINDSOR FUNDS, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
IT IS PROPOSED THAT THIS REGISTRATION STATEMENT BECOME EFFECTIVE:
on February 20, 1998 pursuant to paragraph (b) of Rule 485.
WE HAVE ELECTED TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24f-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. WE FILED OUR RULE
24(f)(2) NOTICE FOR THE YEAR ENDED OCTOBER 31, 1997, ON JANUARY 29, 1998.
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<PAGE> 2
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................. Cover Page
Item 2. Synopsis.................................... Fund Profile; Fund Expenses
Item 3. Condensed Financial Information............. Financial Highlights
Item 4. General Description of Registrant........... The Fund's Objective; Investment
Strategy; Investment Policies;
Investment Limitations; Investment
Performance; General Information
Item 5. Management of the Fund...................... The Fund and Vanguard; Investment
Adviser
Item 5A. Management's Discussion of Fund
Performance................................. Herein incorporated by reference to
Registrant's Annual Report to
Shareholders dated October 31, 1997
filed with the Securities & Exchange
Commission's EDGAR system on December
19, 1997
Item 6. Capital Stock and Other Securities.......... Investing with Vanguard; Buying
Shares; Redeeming Shares; Share Price;
Dividends, Capital Gains and Taxes;
Distribution Options; General
Information
Item 7. Purchase of Securities Being Offered........ Cover Page; Investing with Vanguard;
Buying Shares
Item 8. Redemption or Repurchase.................... Redeeming Shares
Item 9. Legal Proceedings........................... Not Applicable
</TABLE>
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................. Cover Page
Item 11. Table of Contents........................... Cover Page
Item 12. General Information and History............. Investment Objectives and Policies;
Item 13. Investment Objective and Policies........... Investment Objectives and Policies;
Investment Limitations
Item 14. Management of the Registrant................ Management of the Fund
Item 15. Control Persons and Principal Holders
of Securities............................... Management of the Company
Item 16. Investment Advisory and Other Services...... Management of the Company
Item 17. Brokerage Allocation........................ Portfolio Transactions
Item 18. Capital Stock and Other Securities.......... Description of Shares and Voting
Rights
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered................. Purchase of Shares; Redemption of
Shares; Share Price
Item 20. Tax Status.................................. Not Applicable
Item 21. Underwriters................................ Not Applicable
Item 22. Calculations of Performance Data............ Yield and Total Return
Item 23. Financial Statements........................ Financial Statements
</TABLE>
<PAGE> 3
VANGUARD/WINDSOR FUND
Prospectus
February 20, 1998
This prospectus contains financial data for the Fund through the fiscal year
ended October 31, 1997.
[GRAPHIC OF SHIP]
[VANGUARD LOGO]
<PAGE> 4
VANGUARD/WINDSOR FUND
A Growth and Income Stock Mutual Fund
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Fund Profile 1
Fund Expenses 2
Financial Highlights 3
A Word About Risk 4
The Fund's Objectives 4
Who Should Invest 4
Investment Strategy 5
Investment Policies 7
Investment Limitations 8
Investment
Performance 9
Share Price 9
Dividends, Capital
Gains, and Taxes 10
The Fund and
Vanguard 10
Investment Adviser 11
General Information 12
Investing with
Vanguard 13
Services and
Account Features 13
Types of Accounts 14
Distribution Options 15
Buying Shares 15
Redeeming Shares 17
Transferring
Registration 19
Fund and Account
Updates 19
Glossary Inside Back Cover
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
Vanguard/Windsor Fund (the "Fund") is a diversified mutual fund, a part of
Vanguard/Windsor Funds, Inc., an open-end investment company.
The Fund seeks to provide long-term growth of capital by investing mainly in
the equity securities of large and medium-size companies whose stocks are
considered to be undervalued by the Fund's adviser and out of favor with
investors. The Fund's secondary objective is to provide some dividend income.
The Fund is currently closed to new investors. Existing shareholders may
purchase additional Fund shares, but may not invest more than $25,000 each year.
IT IS IMPORTANT TO NOTE THAT THE FUND'S SHARES ARE NOT GUARANTEED OR INSURED
BY THE FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT. AS WITH ANY INVESTMENT
IN COMMON STOCKS, WHICH ARE SUBJECT TO WIDE FLUCTUATIONS IN MARKET VALUE, YOU
COULD LOSE MONEY BY INVESTING IN THE FUND.
FEES AND EXPENSES
Vanguard/Windsor Fund is offered on a no-load basis, which means that you pay no
sales commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the expense ratio.
ADDITIONAL INFORMATION ABOUT THE FUND
A Statement of Additional Information (dated February 20, 1998) containing more
information about the Fund is, by reference, part of this prospectus and may be
obtained without charge by writing to Vanguard, calling our Investor Information
Department at 1-800-662-7447, or visiting the Securities and Exchange
Commission's website (www.sec.gov).
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, risks, and strategy of Vanguard/Windsor
Fund. To highlight terms and concepts important to mutual fund investors, we
have provided "Plain Talk" explanations along the way. Reading the prospectus
will help you to decide whether the Fund is the right investment for you. We
suggest that you keep it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE> 5
FUND PROFILE Vanguard/Windsor Fund
WHO SHOULD INVEST (page 4)
- - Investors seeking a growth and income stock mutual fund as part of a
balanced and diversified investment program.
- - Investors seeking growth of their capital over the long term -- at least
five years.
- - Investors seeking some dividend income.
WHO SHOULD NOT INVEST
- - Investors unwilling to accept significant fluctuations in share price.
RISKS OF THE FUND (pages 4-8)
The Fund's total return will fluctuate within a wide range, so an investor could
lose money over short or even extended periods. The Fund is subject to manager
risk (the chance that poor security selection will cause it to lag the stock
market as a whole) and objective risk (the chance that returns from the types of
stocks that the Fund invests in -- attractively priced or "value" stocks -- will
trail returns from the overall stock market). Because the Fund can invest a
portion of its assets in companies based outside the United States, it is
exposed to several risks unique to foreign securities; see page 7 for details.
DIVIDENDS AND CAPITAL GAINS (page 10)
Dividends are paid in June and December. Capital gains, if any, are paid in
December.
INVESTMENT ADVISER (page 11)
Wellington Management Company, LLP,
Boston, Mass.
MINIMUM INITIAL INVESTMENT: The Fund is not open to new investors.
INCEPTION DATE: October 23, 1958
NET ASSETS AS OF 10/31/1997: $20.7 billion
FUND'S EXPENSE RATIO FOR THE
YEAR ENDED 10/31/1997: 0.27%
LOADS, 12b-1 MARKETING FEES: None
SUITABLE FOR IRAs: Yes
NEWSPAPER ABBREVIATION: Wndsr
VANGUARD FUND NUMBER: 022
CUSIP NUMBER: 922018106
QUOTRON SYMBOL: VWNDX, Q
ACCOUNT FEATURES (page 13)
- - Telephone Redemption
- - Vanguard Direct Deposit Service(TM)
- - Vanguard Automatic Exchange Service(sm)
- - Vanguard Fund Express(R)
- - Vanguard Dividend Express(sm)
AVERAGE ANNUAL TOTAL RETURNS --
PERIODS ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
----------------------------
<S> <C> <C> <C>
Vanguard/Windsor Fund 27.0% 20.3% 15.6%
S&P 500 Index 32.1 19.9 17.2
</TABLE>
QUARTERLY RETURNS (%) 1988 - 1997 (intended to show volatility of returns)
[GRAPH]
<TABLE>
<CAPTION>
Vanguard S&P
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988 10.2 5.7 13.2 6.6 1.9 0.3 1.33
1989 6.9 7.1 7 8.8 8.6 10.7 -7.42
1990 -2.9 -3 1.4 -0.2 -20.3 -13.7 7.8 8.9
1991 18.3 14.5 0.7 -0.2 5.6 5.3 2.2 8.4
1992 4.3 -2.5 5.6 1.9 -2.6 3.2 8.75
1993 8.9 4.4 1.4 0.5 7.4 2.6 0.7 2.3
1994 -1.8 -3.8 3.8 0.4 1.1 4.9 -3.20
1995 8.5 9.7 11.4 9.5 7.9 7.9 -0.26
1996 6.2 5.4 1.5 4.5 5.3 3.1 11.34 8.34
1997 3.5 2.68 11.11 17.46 9.8 7.47
</TABLE>
IN EVALUATING PAST PERFORMANCE, REMEMBER THAT IT IS NOT INDICATIVE OF FUTURE
PERFORMANCE AND THAT RETURNS FROM STOCKS WERE HIGH DURING THE PERIODS SHOWN
RELATIVE TO LONGER-TERM HISTORICAL AVERAGES. PERFORMANCE FIGURES INCLUDE THE
REINVESTMENT OF ANY DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS. THE RETURNS ARE
NET OF EXPENSES, BUT THEY DO NOT REFLECT INCOME TAXES A TAXABLE INVESTOR WOULD
HAVE INCURRED. NOTE, TOO, THAT BOTH THE RETURN AND PRINCIPAL VALUE OF AN
INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
1
<PAGE> 6
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time, have
a dramatic impact on a fund's performance.
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard/Windsor Fund's expense ratio in fiscal year 1997 was 0.27%,
or $2.70 per $1,000 of average net assets. The average growth and income equity
fund had expenses in 1997 of l%, or $l per $1,000 of average net assets,
according to Lipper Analytical Services, which reports on the mutual fund
industry.
FUND EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Fund.
As noted in this table, you do not pay fees of any kind when you buy, sell,
or exchange shares of the Fund:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
</TABLE>
The next table illustrates the operating expenses that you would incur as a
shareholder of the Fund. These expenses are deducted from the Fund's income
before it is paid to you. Expenses include investment advisory fees as well as
the costs of administering the Fund, maintaining accounts, providing shareholder
services, and other activities. The expenses shown in the table are based upon
those incurred in the fiscal year ended October 31, 1997.
ANNUAL FUND OPERATING EXPENSES
<TABLE>
<S> <C> <C>
Management and Administrative Expenses: 0.18%
Investment Advisory Expenses: 0.06%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.01%
Total Other Expenses: ----- 0.03%
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.27%
=====
</TABLE>
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds, by illustrating
the hypothetical expenses that you would incur on a $1,000 investment over
various periods. The example assumes that (1) the Fund provides a return of 5% a
year and (2) you redeem your investment at the end of each period.
<TABLE>
<CAPTION>
---------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------
<S> <C> <C> <C>
$3 $9 $15 $34
---------------------------------------------
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 7
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding of the Fund for each of the fiscal years in the decade ended October
31, 1997. The financial statements that include these financial highlights were
audited by Price Waterhouse LLP, independent accountants. You should read this
information in conjunction with the Fund's financial statements and accompanying
notes, which appear, along with the audit report from Price Waterhouse, in the
Fund's most recent annual report to shareholders. The annual report is
incorporated by reference in the Statement of Additional Information and in this
prospectus, and contains a more complete discussion of the Fund's performance.
You may have the report sent to you without charge by writing to Vanguard or by
calling our Investor Information Department.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.99 $ 15.55 $ 14.55 $ 14.95 $ 12.37 $12.79 $ 9.72 $15.17 $14.13 $14.22
-------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .36 .43 .44 .44 .37 .49 .58 .74 .71 .66
Net Realized and
Unrealized Gain (Loss)
on Investments 3.94 2.85 1.86 .42 2.98 .50 3.55 (4.59) 1.51 2.33
-------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 4.30 3.28 2.30 .86 3.35 .99 4.13 (3.85) 2.22 2.99
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income
Distributions from (.41) (.46) (.44) (.37) (.39) (.57) (.74) (.75) (.63) (.87)
Realized Capital Gains (1.33) (1.38) (.86) (.89) (.38) (.84) (.32) (.85) (.55) (2.21)
-------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.74) (1.84) (1.30) (1.26) (.77) (1.41) (1.06) (1.60) (1.18) (3.08)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $ 19.55 $ 16.99 $ 15.55 $ 14.55 $ 14.95 $12.37 $12.79 $ 9.72 $15.17 $14.13
====================================================================================================================================
TOTAL RETURN 27.04% 23.16% 17.80% 6.35% 28.29% 9.30% 44.69% -27.93% 17.05% 27.01%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $20,678 $15,841 $13,008 $11,406 $10,537 $8,250 $7,859 $5,841 $8,313 $5,920
Ratio of Total Expenses to
Average Net Assets 0.27% 0.31% 0.45% 0.45% 0.40% 0.26% 0.30% 0.37% 0.41% 0.46%
Ratio of Net Investment
Income to Average
Net Assets 1.89% 2.75% 3.01% 3.11% 2.68% 3.89% 4.84% 5.82% 5.07% 5.08%
Portfolio Turnover Rate 61% 34% 2% 34% 25% 32% 36% 21% 34% 24%
Average Commission
Rate Paid $ .0576 $ .0579 N/A N/A N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a historical measure of dividend income, and total return is a
measure of past dividend income (assuming that it has been reinvested) plus
realized and unrealized capital appreciation. Neither yield nor total return
should be used to predict the future performance of a fund.
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1997 with a net asset value (price) of $16.99 per share.
During the year, the Fund earned $.36 per share from investment income (interest
and dividends) and $3.94 per share from investments that had appreciated in
value or that were sold for higher prices than the Fund paid for them. Of those
total earnings of $4.30 per share, $1.74 was returned to shareholders in the
form of distributions ($.41 in dividends, $1.33 in capital gains). The earnings
($4.30 per share) less total distributions ($1.74 per share) resulted in a share
price of $19.55 at the end of the fiscal year, an increase of $2.56 per share
(from $16.99 at the beginning of the period to $19.55 at the end of the period).
Assuming that the shareholder had reinvested the distributions in the purchase
of more shares, the total return from the Fund was 27.04% for the year. As of
October 31, 1997, the Fund had $20.7 billion in net assets; an expense ratio of
0.27% ($2.70 per $1,000 of net assets); and net investment income amounting to
1.89% of its average net assets. It sold and replaced securities valued at 61%
of its total net assets.
3
<PAGE> 8
PLAIN TALK ABOUT
VALUE FUNDS
AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize companies that, considering their
assets and earnings history, are attractively priced; these companies often pay
regular dividend income to shareholders. Growth funds focus on companies that,
due to their strong earnings and revenue potential, offer above-average
prospects for capital growth, with less emphasis on dividend income. Value and
growth stocks have, in the past, produced similar long-term returns, though each
has periods when it outperforms the other. In general, value funds are
appropriate for investors who want some dividend income and the potential for
capital gains but are less tolerant of share-price fluctuations. Growth funds,
by contrast, appeal to investors who will accept more volatility in hope of a
greater increase in share price or who prefer a higher portion of the fund's
returns to come as capital gains, which may be taxed at lower rates than
dividend income.
PLAIN TALK ABOUT
INVESTING FOR THE LONG TERM
Vanguard/Windsor Fund is intended to be a long-term investment vehicle and is
not designed to provide investors with a means of speculating on short-term
fluctuations in the stock market.
A WORD ABOUT RISK
This prospectus describes the risks you would face as an investor in
Vanguard/Windsor Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. However, as you consider an investment in the Fund, you should
also take into account your own tolerance for the daily fluctuations of the
stock market.
Look for this "warning flag" symbol [FLAG] throughout the prospectus. It
is used to mark detailed information about each type of risk that you, as a
shareholder of the Fund, would confront.
THE FUND'S OBJECTIVES
Vanguard/Windsor Fund seeks to provide long-term growth of capital and, as a
secondary objective, some dividend income. These objectives are fundamental,
which means that they cannot be changed unless a majority of shareholders vote
to do so.
[FLAG] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING PAGES,
YOUR INVESTMENT IN THE FUND, AS WITH ANY INVESTMENT IN COMMON STOCKS,
COULD LOSE MONEY.
WHO SHOULD INVEST
Vanguard/Windsor Fund may be suitable for you if:
- - You wish to add a growth and income mutual fund to your existing holdings,
which could include other stock -- as well as bond, money market, and
tax-exempt -- investments.
- - You want a value-oriented investment that seeks to provide long-term
growth as well as some dividend income.
This Fund is not an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of the Fund's shareholders. To minimize
such costs, which reduce the ultimate returns achieved by you and other
shareholders, the Fund has adopted the following policies:
- - The Fund reserves the right to reject any purchase request -- including
exchanges from other Vanguard funds -- that it regards as disruptive to
the efficient management of the Fund. This could be because of the timing
of the investment or because of a history of excessive trading by the
investor.
4
<PAGE> 9
- - There is a limit on the number of times you can exchange into or out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
INVESTMENT STRATEGY
This section explains how the investment adviser pursues the Fund's objectives
of long-term capital growth and some dividend income. It also explains several
important risks -- market risk, objective risk, manager risk, country risk, and
currency risk -- faced by investors in the Fund. Unlike the Fund's investment
objectives, the advisor's investment strategy is not fundamental and can be
changed by the Fund's Board of Directors without shareholder approval. However,
before making any important change in its strategy, the Fund will give
shareholders 30 days' notice, in writing.
MARKET EXPOSURE
The Fund is a value-oriented growth and income fund that invests mainly in
large- and mid-capitalization common stocks that offer favorable prospects for
capital growth and dividend income. At times, the Fund may also invest in
preferred stock and in securities that are convertible into common stock.
[FLAG] THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN EXTENDED PERIODS. STOCK
MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING STOCK PRICES AND
PERIODS OF FALLING STOCK PRICES.
To illustrate the volatility of stock prices, the following table shows
the best, worst, and average total returns (dividend income plus change in
market value) for the U.S. stock market over various periods as measured by the
Standard & Poor's 500 Composite Stock Price Index, a widely used barometer of
stock market activity. Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, how the gap between the best and worst
returns tends to narrow over the long term.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926 - 1997)
- -----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Best 53.9% 23.9% 20.1% 16.9%
Worst - 43.3 - 12.5 - 0.9 3.1
Average 13.0 10.5 10.9 10.9
- -----------------------------------------------------------------
</TABLE>
PLAIN TALK ABOUT
COSTS AND MARKET TIMING
Some investors try to profit from "market-timing" -- switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who did not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
closely monitoring daily transactions.
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP,
AND SMALL-CAP STOCKS
Stocks of publicly traded companies -- and mutual funds that hold these stocks
- -- can be classified by the companies' market value, or capitalization. Vanguard
defines large-capitalization, or large-cap, funds as those holding stocks of
companies with a median market value of their outstanding shares exceeding $7.5
billion. Mid-cap funds hold stocks of companies with a median market value
between $1 billion and $7.5 billion. Small-cap funds hold stocks of companies
with a median market value of up to $1 billion. Historically, large-cap funds
have exhibited lower volatility than mid-cap and small-cap funds.
5
<PAGE> 10
PLAIN TALK ABOUT
PRICE/EARNINGS RATIOS
A widely used measure of common-stock valuation is the price/earnings (P/E)
ratio. The P/E ratio is simply a stock's current price divided by its earnings
per share from the past year (or sometimes its projected earnings for the coming
year). In general, a lower P/E ratio indicates that a stock is out of favor with
investors and is expected to have slow future growth in profits. A higher P/E
ratio indicates that investors expect rapid growth in a company's profits. Keep
in mind, however, that these expectations can sometimes prove incorrect, and
that there is no "ideal" P/E ratio.
PLAIN TALK ABOUT
PORTFOLIO DIVERSIFICATION
In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average U.S. equity mutual fund has
about 30% of its assets invested in its ten largest holdings, while some less
diversified mutual funds have 50% or more of their assets invested in the stocks
of just ten companies.
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1997. For example, while the average return on stocks for all of the
5-year periods was 10.5%, returns for these 5-year periods ranged from a -12.5%
average (from 1928 through 1932), to 23.9% (from 1950 through 1954). These
average returns reflect past performance and should not be regarded as an
indication of future returns from either the stock market as a whole or this
Fund in particular.
Finally, because Vanguard/Windsor Fund does not hold the same securities
held in the S&P 500 Index or any other market index, the performance of the Fund
will not mirror the returns of any particular index.
[FLAG] THE FUND IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE POSSIBILITY THAT
RETURNS FROM THE TYPE OF STOCKS IN WHICH THE FUND INVESTS -- ATTRACTIVELY
PRICED OR "VALUE" STOCKS -- WILL TRAIL RETURNS FROM THE OVERALL STOCK
MARKET. DIFFERENT TYPES OF STOCKS TEND TO GO THROUGH CYCLES OF
OUTPERFORMANCE AND UNDERPERFORMANCE IN COMPARISON TO COMMON STOCKS IN
GENERAL. THESE CYCLES HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL
YEARS.
SECURITY SELECTION
Wellington Management Company, LLP (WMC), adviser to the Fund, selects what it
considers to be undervalued securities of large- and mid-capitalization
companies. Undervalued stocks are generally those that are out of favor with
investors and currently trading at prices that, the adviser feels, are below
what the stocks are worth in relation to their earnings. These stocks typically
- -- but not always -- have lower-than-average price/earnings (P/E) ratios and
higher-than-average dividend yields.
A stock's value is the key element in WMC's selection process. WMC
considers several fundamental factors, including the stock's projected growth
rate, earnings potential, dividend yield, and P/E ratio. WMC then selects the
stock if it has strong prospects for capital appreciation, but is currently
trading at a price that is lower than what is expected of a stock with such
potential. WMC sets a price that it feels more accurately reflects the stock's
overall worth, and when the stock reaches that predetermined price, it will be
sold.
The Fund's top ten holdings (which amounted to 33% of the Fund's total net
assets) as of October 31, 1997, follow:
1. Citicorp
2. AT&T
3. Rhone-Poulenc SA ADR
4. Ford Motor Co.
5. Columbia/HCA Healthcare
6. Delta Air Lines, Inc.
7. Aluminum Co. of America
8. The Boeing Co.
9. Georgia-Pacific Corp.
10. Burlington Resources, Inc.
6
<PAGE> 11
Keep in mind that, because the makeup of the Fund may change, this listing
is only a "snapshot" at one point in time. Note, too, that the Fund's relatively
low level of diversification means that there is a greater chance that the poor
performance of a single stock could hurt the Fund.
The Fund is run by WMC according to traditional methods of active
investment management, which means securities are bought and sold according to
WMC's judgments about companies and their financial prospects, and about the
stock market and the economy in general.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT WMC
MAY DO A POOR JOB OF SELECTING STOCKS.
PORTFOLIO TURNOVER
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long they have been held. The Fund's
average turnover rate for the past ten years has been about 33%. (A turnover
rate of 100% would occur, for example, if the Fund sold and replaced securities
valued at 100% of its total net assets within a one-year period.)
INVESTMENT POLICIES
Besides investing in undervalued common stocks, the Fund may follow a number of
investment policies to achieve its objectives.
The Fund may invest as much as 20% of its assets in securities of
companies based outside the United States and may engage in currency
transactions. These securities can be traded in either U.S. or foreign markets.
[FLAG] THE FUND IS SUBJECT TO COUNTRY RISK AND CURRENCY RISK. COUNTRY RISK IS
THE POSSIBILITY THAT POLITICAL EVENTS (SUCH AS A WAR), FINANCIAL PROBLEMS
(SUCH AS GOVERNMENT DEFAULT), OR NATURAL DISASTERS (SUCH AS AN
EARTHQUAKE) WILL WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN THAT
COUNTRY TO LOSE MONEY. CURRENCY RISK IS THE POSSIBILITY THAT A "STRONGER"
U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS INVESTING OVERSEAS.
GENERALLY, WHEN THE DOLLAR RISES IN VALUE AGAINST A FOREIGN CURRENCY,
YOUR INVESTMENT IN THAT COUNTRY LOSES VALUE BECAUSE ITS CURRENCY IS WORTH
FEWER U.S. DOLLARS. ON THE OTHER HAND, A "WEAKER" DOLLAR GENERALLY LEADS
TO HIGHER RETURNS FOR AMERICANS HOLDING FOREIGN INVESTMENTS.
The Fund may invest in money market instruments, fixed-income securities,
convertible securities, and other equity securities, such as preferred stock.
The Fund may invest up to 15% of its assets in restricted securities with
limited marketability or other illiquid securities.
PLAIN TALK ABOUT
PORTFOLIO TURNOVER
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. Also, funds with high portfolio turnover rates
may be more likely than low-turnover funds to generate capital gains that must
be distributed to shareholders as taxable income. The average turnover rate for
all domestic stock funds is approximately 80%.
PLAIN TALK ABOUT
THE RISKS OF
INTERNATIONAL INVESTING
Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stock may not be as liquid as the stock of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than in the U.S. These
factors, among others, could negatively impact the returns Americans receive
from a foreign investment. For more information, see the Statement of Additional
Information.
7
<PAGE> 12
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new, exotic types of derivatives -- some of which
can carry considerable risks.
PLAIN TALK ABOUT
CASH RESERVES
With mutual funds, holding cash reserves -- or "cash" -- does not mean
literally that the fund holds a stack of currency. Rather, cash reserves refer
to short-term, interest-bearing securities that can easily and quickly be
converted to cash, such as those described in the prospectus glossary. (Most
mutual funds keep at least a small percentage of assets in cash to accommodate
shareholder redemptions.) While some funds strive to keep cash levels at a
minimum and to always remain fully invested in stocks, other funds allow
investment advisers to hold up to 20% of a fund's assets in cash reserves.
The Fund may also invest in derivatives.
[FLAG] THE FUND RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN STOCK
FUTURES AND OPTIONS CONTRACTS, WHICH ARE TRADITIONAL TYPES OF
DERIVATIVES.
Losses (or gains) involving futures can sometimes be substantial -- in
part because a relatively small price movement in a futures contract may result
in an immediate and substantial loss (or gain) for a portfolio. The Fund will
not use futures and options for speculative purposes or as leveraged investments
that magnify the gains or losses of an investment. Rather, the Fund will keep
separate cash reserves or other liquid portfolio securities in the amount of the
obligation underlying the futures or options contract. Only a limited percentage
of the Fund's assets -- 5% -- may be applied toward the deposits required on
futures contracts, and the value of all futures contracts in which the Fund
acquires an interest cannot exceed 20% of the Fund's total assets.
The reasons for which the Fund may invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs by buying futures instead of actual
stocks.
- - To add value to the Fund by buying futures instead of actual stocks when
futures are cheaper.
The Fund will usually hold only a small percentage of its assets in cash
reserves, although if the investment adviser believes that market conditions
warrant a temporary defensive measure, the Fund may hold cash reserves without
limit. No more than 35% of the Fund's assets may be invested in short-term
fixed-income securities for purposes other than taking a temporary defensive
position.
INVESTMENT LIMITATIONS
The Fund has adopted limitations on some of its investment policies. Some of
these limitations are that the Fund will not:
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for temporary or emergency purposes in an amount not
exceeding 10% of its net assets. Whenever the Fund's outstanding borrowing
is more than 5% of its assets, it will stop making investments.
With respect to 75% of its assets, the Fund will not:
- - Invest more than 5% in the securities of any one company.
- - Buy more than 10% of the outstanding voting securities of any company.
A complete list of the Fund's investment limitations can be found in the
Statement of Additional Information. These limitations are fundamental and may
be changed only by approval of a majority of the Fund's shareholders.
8
<PAGE> 13
INVESTMENT PERFORMANCE
Vanguard/Windsor Fund invests primarily in common stocks, so its performance is
closely correlated to the performance of the overall stock market. Historically,
stock market performance, both domestic and foreign, has been characterized by
sharp up-and-down swings in the short term and by more stable growth over the
long term.
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED OCTOBER 31, 1997
[BAR GRAPH]
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years 20 Years 25 Years
------ ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Vanguard/Windsor Fund 27.0% 22.6% 20.3% 15.6% 17.7% 15.5%
S&P 500 Index 32.1% 27.5% 19.9% 17.2% 16.5% 13.1%
</TABLE>
The results shown above represent the Fund's "average annual total return"
performance, which assumes that any distributions of capital gains and dividends
were reinvested for the indicated periods. Also included is comparative
information on the unmanaged Standard & Poor's 500 Composite Stock Price Index.
The chart does not make any allowances for federal, state, or local income taxes
that shareholders must pay on a current basis.
SHARE PRICE
The Fund's share price, also called its net asset value, or NAV, is calculated
each business day after the close of trading (generally 4 p.m. Eastern time) on
the New York Stock Exchange. The net asset value per share is calculated by
adding up the total assets of the Fund, subtracting all of its liabilities, or
debts, and then dividing by the total number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -----------------------------------------
NUMBER OF SHARES OUTSTANDING
The daily net asset value is useful to you as a shareholder because the
NAV, multiplied by the number of Fund shares you own, gives you the dollar
amount you would have received had you sold all of your shares back to the Fund
that day.
The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Funds." Different newspapers use
different abbreviations of the Fund's name, but the most common is WNDSR.
PLAIN TALK ABOUT
PAST PERFORMANCE
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
9
<PAGE> 14
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from the dividends that a fund earns from its holdings as well as
interest it receives from its money market and bond investments. Capital gains
are realized whenever the fund sells securities for higher prices than it paid
for them. These capital gains are either short-term or long-term depending on
whether the fund held the securities for less than or more than one year.
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing in a tax-deferred retirement account (such as an IRA),
it is not to your advantage to buy shares of a fund shortly before it makes a
distribution, because part of your investment will come back to you as a taxable
distribution. This is known as "buying a dividend." For example: on December 15,
you invest $5,000, buying 250 shares for $20 each. If the fund pays a
distribution of $1 per share on December 16, its share price would drop to $19
(not counting market change). You would still have only $5,000 (250 shares x $19
= $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you
would owe tax on the $250 distribution you received, even if you had reinvested
it in more shares. To avoid "buying a dividend," check a fund's distribution
schedule before you invest.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each June and December, the Fund distributes to its shareholders virtually all
of its income from interest and dividends. Any capital gains realized from the
sale of securities are distributed in December. In addition, the Fund may
occasionally be required to make supplemental dividend or capital gains
distributions at other times during the year. You can choose to receive your
distributions of income and capital gains (or of income alone) in cash, or you
can have them automatically invested in more shares of the Fund. In either case,
these distributions are taxable to you. It is important to note that
distributions of dividends and capital gains that are declared in December -- if
paid to you by the end of January -- are taxed as if they had been paid to you
in December. Each year Vanguard will send you a statement showing the tax status
of all your distributions.
- - The dividends and short-term capital gains that you receive are taxable to
you as ordinary dividend income. Any distributions of net long-term
capital gains by the Fund are taxable to you as long-term capital gains,
no matter how long you've owned shares in the Fund. Long-term capital
gains may be taxed at different rates depending on how long the Fund held
the securities. Although the Fund does not seek to realize any particular
amount of capital gains during a year, such gains are realized from time
to time as by-products of the ordinary investment activities of the Fund.
Consequently, distributions may vary considerably from year to year.
- - If you sell or exchange your shares, any gain or loss you have is a
taxable event, which means that you may have a capital gain to report as
income, or a capital loss to report as a deduction, when you complete your
federal income tax return.
- - Distributions of dividends or capital gains, and capital gains or losses
from your sale or exchange of Fund shares, may be subject to state and
local income taxes as well.
The tax information in this prospectus is provided as general information
and will not apply to you if you are investing in a tax-deferred account such as
an IRA. You should consult your tax adviser about the tax consequences of an
investment in the Fund.
THE FUND AND VANGUARD
Vanguard/Windsor Fund is a member of The Vanguard Group, a family of more than
30 investment companies with more than 95 distinct investment portfolios and
total net assets of more than $320 billion. All the Vanguard funds share in the
expenses associated with business operations, such as personnel, office space,
equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1
10
<PAGE> 15
marketing fees, each fund pays its allocated share of The Vanguard Group's
costs.
A list of the Fund's Directors and officers, and their present positions
and principal occupations during the past five years, can be found in the
Statement of Additional Information.
INVESTMENT ADVISER
The Fund employs Wellington Management Company, LLP (WMC), 75 State Street,
Boston, MA 02109, as its investment adviser. WMC manages the Fund subject to the
control of the Directors and officers of the Fund.
WMC is paid a quarterly advisory fee based on an average of the Fund's
month-end net assets during that quarter:
<TABLE>
<CAPTION>
----------------------------------------------
AVERAGE ASSETS MANAGED BASIC FEE
----------------------------------------------
<S> <C>
First $17.5 billion 0.125%
Over $17.5 billion 0.100
----------------------------------------------
</TABLE>
Beginning April 30, 1999, WMC's basic advisory fee may be adjusted based
on the total return performance of the Fund as compared to that of the Standard
& Poor's 500 Index. Under the fee schedule, WMC's basic fee may be increased or
decreased by as much as 67% for the first $17.5 billion of average net assets
managed during the period and by 90% for average net assets over $17.5 billion.
Until this new schedule goes into effect, WMC's basic fee will follow transition
rules set forth by the Securities and Exchange Commission and described in the
Fund's Statement of Additional Information.
For the fiscal year ended October 31, 1997, the net fee paid by
Vanguard/Windsor Fund to its adviser was $11,681,000, after a decrease of
$11,821,000 based on performance.
The current fee agreement with WMC authorizes it to choose brokers and
dealers to handle the purchase and sale of the Fund's securities, and directs
WMC to get the best available price and most favorable execution from these
brokers with respect to all transactions. At times, WMC may choose brokers who
charge higher commissions in the interest of obtaining better execution of a
transaction. If more than one broker can obtain the best available price and
favorable execution of a transaction, then WMC is authorized to choose a broker
who, in addition to executing the transaction, will provide research services to
WMC or the Fund. However, WMC will not pay higher commissions specifically for
the purpose of obtaining research services. The Fund may direct WMC to use a
particular broker for certain transactions in exchange for commission rebates or
research services provided to the Fund.
The Board of Directors may, without prior approval from shareholders,
change the terms of the advisory agreement or hire a new
PLAIN TALK ABOUT
VANGUARD'S UNIQUE
CORPORATE STRUCTURE
The Vanguard Group, Inc., is the only MUTUAL mutual fund company. It is owned
jointly by the funds it oversees and by the shareholders in those funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to fund shareholders in
the form of lower operating expenses.
PLAIN TALK ABOUT
THE FUND'S ADVISER
Wellington Management Company, LLP, is an investment counseling firm founded in
1928; it currently manages more than $169 billion in assets. The manager
responsible for WMC's strategy for Vanguard/Windsor Fund is:
CHARLES T. FREEMAN, Senior Vice President and Partner of WMC; has worked
in investment management since 1967; with WMC since 1969; B.S., M.B.A.,
University of Pennsylvania.
Mr. Freeman was appointed Fund Manager in January 1996, following the
retirement of John B. Neff, who had managed the Fund since 1964.
11
<PAGE> 16
investment adviser as either a replacement for WMC or as an additional adviser.
However, no such change would be made before giving shareholders 30 days'
notice, in writing.
GENERAL INFORMATION
Vanguard/Windsor Fund is one of two Funds of Vanguard/ Windsor Funds, Inc.,
which is organized under the laws of the state of Maryland. The other Fund is
Vanguard/Windsor II (which is open to all investors). The two Funds are combined
under one corporation for administrative purposes, but for investment management
purposes operate like separate companies.
Shareholders of Vanguard/Windsor Fund have rights and privileges similar
to those enjoyed by other corporate shareholders. For example, shareholders will
not be responsible for any liabilities of the corporation. If any matters are to
be voted on by shareholders (such as a change in a fundamental investment
objective or the election of Directors), each share outstanding at that point
would be entitled to one vote. Annual meetings will not be held by the Fund
except as required by the Investment Company Act of 1940. A meeting will be
scheduled to vote on the removal of a Director if the holders of at least 10% of
the Fund's shares request a meeting in writing.
"Standard & Poor's," "Standard & Poor's 500," "S&P," and "500" are trademarks
of The McGraw-Hill Companies, Inc.
12
<PAGE> 17
INVESTING WITH VANGUARD
At this time, shares of Vanguard/Windsor Fund are not being offered or sold
to new investors. As a result, many of the services described on the
following pages are for current shareholders only. Current shareholders may
make additional investments, but the total amount invested during a calendar
year may not exceed $25,000.
The following sections of the prospectus briefly explain the many
services we offer you as a Vanguard/Windsor Fund shareholder. Booklets
providing detailed information are available on the services marked with a
[BOOK GRAPHIC]. Please call us to request copies.
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or
exchange shares.
<TABLE>
<S> <C>
TELEPHONE REDEMPTIONS Automatically set up for this Fund unless you notify us
(SALES AND EXCHANGES) otherwise.
VANGUARD DIRECT DEPOSIT Automatic method for depositing your paycheck or U.S. government
SERVICE payment (including Social Security and government pension checks)
[BOOK GRAPHIC] into your account.
VANGUARD AUTOMATIC EXCHANGE Automatic method for moving a fixed amount of money from
SERVICE one Vanguard fund account to another.*
[BOOK GRAPHIC]
VANGUARD FUND EXPRESS Electronic method for buying or selling shares. You can transfer
[BOOK GRAPHIC] money between your Vanguard fund account and an account at your
bank, savings and loan, or credit union on a systematic schedule or
whenever you wish.*
VANGUARD DIVIDEND EXPRESS Electronic method for transferring dividend and/or capital gains
[BOOK GRAPHIC] distributions directly from your Vanguard fund account to your bank,
savings and loan, or credit union account.
VANGUARD BROKERAGE SERVICES A cost-effective way to trade stocks, bonds, and options on major
(VBS) exchanges, Nasdaq, and other domestic over-the-counter markets at
[BOOK GRAPHIC] reduced rates, and to buy and sell shares of non-Vanguard mutual funds.
Call VBS (1-800-992-8327) for additional information and the appropriate forms.
</TABLE>
*Can be used to "dollar-cost average" [BOOK GRAPHIC] or to contribute to
an IRA or other retirement plan.
[Investor Information 1-800-662-7447 - Client Services 1-800-662-2739 -
Tele-Account 1-800-662-6273]
13
<PAGE> 18
[Investor Information 1-800-662-7447 - Client Services 1-800-662-2739 -
Tele-Account 1-800-662-6273
TYPES OF ACCOUNTS
INDIVIDUAL OR OTHER ENTITY
Currently, shares of Vanguard/Windsor Fund are not being offered or sold to
NEW investors; however, the following accounts may be established through a
transfer of Fund shares. Call Client Services for more information.
<TABLE>
<S> <C>
FOR ONE OR MORE PEOPLE To open an account in the name of one (individual) or more
(joint tenants) people. $3,000 minimum initial investment.
FOR A MINOR CHILD To open an account as an UGMA/UTMA (Uniform Gifts/Transfers
[BOOK GRAPHIC] to Minors Act). Age of majority and other requirements are set by
state law. $1,000 minimum initial investment.
FOR HOLDING TRUST ASSETS To invest assets held in an existing trust. $3,000 minimum initial
[BOOK GRAPHIC] investment.
FOR THIRD-PARTY TRUSTEE To open an account as a retirement trust or plan based on an existing
RETIREMENT INVESTMENTS corporate or institutional plan. These accounts are established by
(Vanguard is not the custodian the custodian or trustee of the existing plan. $1,000 minimum initial
or trustee.) investment.
FOR AN ORGANIZATION To open an account as a corporation, partnership, or other entity.
These accounts may require a corporate resolution or other
documents to name the individuals authorized to act. $3,000 minimum
initial investment.
</TABLE>
RETIREMENT
<TABLE>
<S> <C>
FOR AN INDIVIDUAL RETIREMENT To open a retirement account in the name of an individual. IRAs can
ACCOUNT (IRA) be established with a contribution, a direct rollover from an employer's
(Vanguard Fiduciary Trust plan, such as a 401(k), or an asset transfer or rollover from another
Company is the custodian.) financial institution, such as a bank or mutual fund company. $1,000
minimum initial investment.
FOR A SIMPLIFIED EMPLOYEE To open a retirement account in the name of an employee. SEPs allow
PENSION PLAN ACCOUNT (SEP-IRA) employers to make deductible contributions directly to IRAs
(Vanguard Fiduciary Trust Company established by their employees. A SEP can be established by people who are
is the custodian.) self-employed, small-business owners, partnerships, or corporations.
1-800-823-7412
Individual Retirement Plans
FOR A SAVINGS INCENTIVE MATCH To open a retirement account in the name of an employee. Created as
PLAN FOR EMPLOYEES ACCOUNT part of the Small Business Job Protection Act of 1996, SIMPLEs
(SIMPLE-IRA) replace SAR-SEPs. SIMPLEs are exclusively for employers that had 100 or
(Vanguard Fiduciary Trust Company fewer employees in the most recent calendar year and that do not maintain
is the custodian.) another employer-sponsored retirement plan. SIMPLEs can be established by people
1-800-823-7412 who are self-employed, small-business owners, partnerships, or corporations.
Individual Retirement Plan Salary reduction contributions may be made by the employee, with matching
or nonmatching contributions from the employer.
</TABLE>
14
<PAGE> 19
TYPES OF ACCOUNTS (continued)
<TABLE>
<S> <C>
FOR A QUALIFIED RETIREMENT To open a retirement account that allows small-business owners or
PROGRAM ACCOUNT people who are self-employed to make tax-deductible retirement
(Vanguard Fiduciary Trust contributions for themselves and their employees into Profit-Sharing and Money
Company can be the custodian.) Purchase Pension (Keogh) plans.
1-800-823-7412
Individual Retirement Plans
FOR A 403(B)(7) CUSTODIAL ACCOUNT To open a retirement account that allows employees of tax-exempt
(Vanguard Fiduciary Trust institutions (for example, schools or hospitals) to make pretax
Company is the custodian.) retirement contributions.
1-800-823-7412
Individual Retirement Plans
</TABLE>
DISTRIBUTION OPTIONS
You can receive distributions of dividends and/or capital gains in a number
of ways:
<TABLE>
<S> <C>
REINVESTMENT Dividends and capital gains are automatically reinvested in additional
shares of the Fund unless you request a different distribution method.
DIVIDENDS IN CASH Dividends are paid by check and mailed to your account's address of
record, and capital gains are reinvested in additional shares of the Fund.
CAPITAL GAINS IN CASH Capital gains distributions are paid by check and mailed to your account's
address of record, and dividends are reinvested in additional shares of the Fund.
DIVIDENDS AND CAPITAL GAINS Both dividends and capital gains distributions are paid by check and
IN CASH mailed to your account's address of record.
</TABLE>
To electronically transfer cash dividends and/or capital gains to your bank,
savings and loan, or credit union account, see Vanguard Dividend Express
under "Services and Account Features."
If you have elected to receive dividend and/or capital gains distributions in
cash, but the Postal Service is unable to make delivery to your address of
record, your distribution option will be changed to reinvestment. No interest
will accrue on amounts represented by uncashed distribution checks.
BUYING SHARES
At this time, shares of Vanguard/Windsor Fund are not being offered or sold to
new investors. Current shareholders may make additional investments, but the
total amount invested during a calendar year may not exceed $25,000.
You buy your shares at the Fund's next-determined net asset value after
Vanguard receives your request, provided we receive your request before the
close of trading on the New York Stock Exchange (generally 4 p.m. Eastern time).
The Fund is offered on a no-load basis, meaning that you do not pay sales
commissions or 12b-1 marketing fees.
INVESTOR INFORMATION 1-800-662-7447 -
CLIENT SERVICES 1-800-662-2739 - TELE-ACCOUNT 1-800-662-6273
15
<PAGE> 20
INVESTOR INFORMATION 1-800-662-7447 -
CLIENT SERVICES 1-800-662-2739 - TELE-ACCOUNT 1-800-662-6273
BUYING SHARES (continued)
<TABLE>
<CAPTION>
<S> <C>
ADD TO AN EXISTING ACCOUNT
MINIMUM INVESTMENT ($100 BY MAIL OR EXCHANGE; $1,000 BY WIRE.)
BY MAIL Mail your check with an Invest-By-Mail form detached from your
[ENVELOPE] confirmation statement to the address listed on the form.
FIRST-CLASS mail to:
The Vanguard Group Make your check payable to: The Vanguard Group - 22
P.O. Box 2600 All purchases must be made in U.S. dollars, and checks must be drawn
Valley Forge, PA 19482-2600 on U.S. banks.
EXPRESS OR REGISTERED mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made payable to third parties.
BY TELEPHONE Call Vanguard Tele-Account* 24 hours a day -- or Client Services during
[TELEPHONE RECEIVER] business hours -- to exchange from another Vanguard fund account with
1-800-662-6273 the same registration (name, address, taxpayer I.D., and account type).
Vanguard Tele-Account(R)
1-800-662-2739 Use Vanguard Fund Express (see "Services and Account Features") to
Client Services transfer assets from your bank account. Call Client Services before
your first use to verify that this option is in place.
*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.
</TABLE>
IMPORTANT NOTE: Once a telephone transaction has been approved by you and a
confirmation number assigned, it cannot be revoked. We reserve the right to
refuse any purchase.
<TABLE>
<S> <C>
By Wire Call Client Services to arrange your wire transaction.
[WIRE]
Wire to: Wire transactions are not available for retirement accounts,
CoreStates Bank, N.A. except for asset transfers and direct rollovers.
ABA 031000011
CoreStates No. 0101 9897
[Temporary Account Number]
Vanguard/Windsor Fund
[Account Registration]
Attention: Vanguard
AUTOMATICALLY Vanguard offers a variety of ways that you can add to your account
[GRAPHIC OF ARROWS IN A CIRCLE] automatically. See "Services and Account Features."
</TABLE>
You can redeem (that is, sell or exchange) shares purchased by check or
Vanguard Fund Express at any time. However, while your redemption request
will be processed at the next-determined net asset value after it is
received, your redemption proceeds will not be available until payment for
your purchase is collected, which may take up to ten calendar days.
IMPORTANT NOTE: If you buy Fund shares through a registered broker/dealer or
investment adviser, the broker/dealer or adviser may charge you a service
fee.
16
<PAGE> 21
REDEEMING SHARES
IMPORTANT TAX NOTE: ANY SALE OR EXCHANGE OF SHARES IN A NONRETIREMENT ACCOUNT
COULD RESULT IN A TAXABLE GAIN OR A LOSS.
The ability to redeem (that is, sell or exchange) Fund shares by telephone is
automatically established for your nonretirement account unless you tell us
in writing that you do not want this option.
To protect your account from unauthorized or fraudulent telephone
instructions, Vanguard follows specific security procedures. When we receive
a call requesting an account transaction, we require the caller to provide:
[CHECK MARK] Fund name.
[CHECK MARK] 10-digit account number.
[CHECK MARK] Name and address exactly as registered on that account.
[CHECK MARK] Social Security or employer identification number as
registered on that account.
If you call to sell shares, the sale proceeds will be made payable to you,
as the registered shareholder, and mailed to your account's address of
record.
If we follow reasonable security procedures, neither the Fund nor Vanguard
will be responsible for the authenticity of transaction instructions received
by telephone. We believe that these procedures are reasonable and that, if we
follow them, you bear the risk of any losses resulting from unauthorized or
fraudulent telephone transactions on your account.
HOW TO SELL SHARES
You may withdraw any part of your account, at any time, by selling shares.
Sale proceeds are normally mailed within two business days after Vanguard
receives your request. The sale price of your shares will be the Fund's
next-determined net asset value after Vanguard receives all required
documents in good order. Good order means that the request includes:
[CHECK MARK] Fund name and account number.
[CHECK MARK] Amount of the transaction (in dollars or shares).
[CHECK MARK] Signatures of all owners exactly as registered on the account.
[CHECK MARK] Signature guarantees (if required).
[CHECK MARK] Any supporting legal documentation that may be required.
[CHECK MARK] Any certificates you are holding for the account.
Sales or exchange requests received after the close of trading on the New
York Stock Exchange (generally 4 p.m. Eastern time) are processed at the next
business day's net asset value. No interest will accrue on amounts
represented by uncashed redemption checks. The Fund will not cancel any trade
(e.g., purchase, redemption, or exchange) believed to be authentic once the
trade request has been received in writing or by telephone.
The Fund reserves the right to close any nonretirement or UGMA/UTMA
account in which the balance falls below the minimum initial investment. The
Fund will deduct a $10 annual fee in either June or December if your
nonretirement account balance falls below $2,500 or if your UGMA/UTMA account
balance falls below $500. The fee is waived if your total Vanguard account
assets are $50,000 or more.
SOME WRITTEN REQUESTS REQUIRE A SIGNATURE GUARANTEE FROM A BANK, BROKER, OR
OTHER ACCEPTABLE FINANCIAL INSTITUTION. A NOTARY PUBLIC CANNOT PROVIDE A
SIGNATURE GUARANTEE.
Investor Information 1-800-662-7447 - Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
17
<PAGE> 22
Investor Information 1-800-662-7447 - Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
REDEEMING SHARES (continued)
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one Vanguard fund to purchase shares
of another.
Although we make every effort to maintain the exchange privilege, Vanguard
reserves the right to revise or terminate the exchange privilege, limit the
amount of an exchange, or reject any exchange, at any time, without notice.
Because excessive exchanges can potentially disrupt the management of the
Fund and increase transaction costs, Vanguard limits exchange activity to TWO
SUBSTANTIVE EXCHANGE REDEMPTIONS (at least 30 days apart) from the Fund
during any 12-month period. "Substantive" means either a dollar amount or a
series of movements between Vanguard funds that Vanguard determines, in its
sole discretion, could have a negative impact on the management of the Fund.
Before you exchange into a new Vanguard fund, be sure to read its
prospectus. For a copy and for answers to questions you might have, call
Investor Information.
<TABLE>
<CAPTION>
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
<S> <C>
BY TELEPHONE ALL TYPES EXCEPT RETIREMENT:
[TELEPHONE GRAPHIC] Call Vanguard Tele-Account* 24 hours a day -- or Client Services
1-800-662-6273 during business hours -- to sell or exchange shares. You can exchange
Vanguard Tele-Account shares from this Fund to open an account in another Vanguard fund
or to add to an existing Vanguard fund account with an identical registration.
1-800-662-2739 RETIREMENT:
Client Services You can exchange -- but not sell -- shares by calling Tele-Account or Client
Services.
*You must obtain a Personal Identification Number through Tele-Account at
least seven days before you request your first redemption.
BY MAIL ALL TYPES EXCEPT RETIREMENT:
[ENVELOPE GRAPHIC] Send a letter of instruction signed by all registered account holders.
FIRST-CLASS mail to: Include the fund name and account number and (if you are selling) a
The Vanguard Group dollar amount or number of shares OR (if you are exchanging) the
Vanguard/Windsor Fund name of the fund you want to exchange into and a dollar amount or
P.O. Box 1120 number of shares. In order to exchange into an account with a different
Valley Forge, PA 19482-1120 registration (including a different name, address, or taxpayer
identification number), you must provide Vanguard with written instructions
EXPRESS OR REGISTERED mail to: that include the guaranteed signatures of all current account owners.
The Vanguard Group
Vanguard/Windsor Fund RETIREMENT:
455 Devon Park Drive For information on how to request distributions from:
Wayne, PA 19087-1815 - IRAs -- call Client Services.
- SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and
Profit-Sharing and Money Purchase Pension (Keogh) Plans -- call
Individual Retirement Plans at 1-800-823-7412.
Depending on your account registration type, additional documentation may be
required.
</TABLE>
18
<PAGE> 23
REDEEMING SHARES (continued)
<TABLE>
<S> <C>
EXCHANGING SHARES ONLINE You may use your personal computer to exchange
[COMPUTER GRAPHIC] shares of most Vanguard funds by accessing our
website (www.vanguard.com). To establish this
service for your account, you must first
register through the website. We will then send
to you, by mail, an account access password that
will enable you to make online exchanges.
The Vanguard funds that you cannot purchase or
sell through online exchange are VANGUARD INDEX
TRUST, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL EQUITY INDEX FUND, VANGUARD REIT
INDEX PORTFOLIO, VANGUARD TOTAL INTERNATIONAL
PORTFOLIO, and VANGUARD GROWTH and INCOME
PORTFOLIO (formerly known as Vanguard
Quantitative Portfolios). These funds do permit
online exchanges within IRAs and other
retirement accounts.
AUTOMATICALLY ALL TYPES EXCEPT RETIREMENT:
[GRAPHIC OF ARROWS IN A CIRCLE] Vanguard offers several ways to sell or exchange
shares automatically (see "Services and Account
Features"). Call Investor Information for the
appropriate booklet and application if you did
not elect a feature when you opened your
account.
</TABLE>
It is important that you call Vanguard before you redeem a large dollar
amount. We must consider the interests of all Fund shareholders and so
reserve the right to delay your redemption proceeds -- up to seven days -- if
the amount will disrupt the Fund's operation or performance.
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as determined by the United
States Securities and Exchange Commission. If you experience difficulty
making a telephone redemption during periods of drastic economic or market
change, you can send us your request by regular or express mail. Follow the
instructions on selling or exchanging shares by mail in the "Redeeming
Shares" section.
TRANSFERRING REGISTRATION
HOW TO TRANSFER SHARES
You may transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to: Vanguard Financial Center,
Attention: Transfer Department, P.O. Box 1110, Valley Forge, PA 19482-1110.
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you clear, concise account and tax statements to help you keep
track of your Vanguard/Windsor Fund account throughout the year, as well as
when you are preparing your income tax returns.
INVESTOR INFORMATION 1-800-662-7447 -
CLIENT SERVICES 1-800-662-2739 - TELE-ACCOUNT 1-800-662-6273
19
<PAGE> 24
INVESTOR INFORMATION 1-800-662-7447 -
CLIENT SERVICES 1-800-662-2739 - TELE-ACCOUNT 1-800-662-6273
FUND AND ACCOUNT UPDATES (continued)
In addition, you will receive financial reports about the Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
markets, a report from the adviser, a listing of the Fund's holdings, and
other financial statements.
<TABLE>
<S> <C>
CONFIRMATION STATEMENT Sent each time you buy, sell, or exchange shares;
confirms the trade date and the amount of your
transaction.
PORTFOLIO SUMMARY Mailed quarterly; shows the market value of your
[BOOK GRAPHIC] account at the close of the statement period, as well
as distributions, purchases, sales, and exchanges for
the current calendar year.
FUND FINANCIAL REPORTS Mailed in June and December for this Fund.
TAX STATEMENTS Generally mailed in January; report previous year's
dividend distributions, proceeds from the sale of
shares, and distributions from IRAs or other
retirement accounts.
AVERAGE COST STATEMENT Issued quarterly for most taxable accounts
[BOOK GRAPHIC] (accompanies your Portfolio Summary); shows the
average cost of shares that you redeemed during the
calendar year, using the average cost single category
method.
</TABLE>
AUTOMATED TELEPHONE ACCESS
<TABLE>
<S> <C>
VANGUARD TELE-ACCOUNT Toll-free access to Vanguard fund and account
1-800-662-6273 information -- as well as some transactions -- through
Any time, seven days a week, any TouchTone(TM) telephone. Tele-Account provides
from anywhere in the continental total return, share price, price change, and yield
United States and Canada. quotations for all Vanguard funds; gives your account
[BOOK GRAPHIC] balances and history (e.g., last transaction, latest
dividend distribution); and allows you to sell or
exchange fund shares.
COMPUTER ACCESS
VANGUARD ONLINE(SM) Use your personal computer to learn more about
www.vanguard.com Vanguard's funds and services; keep in touch with your
Vanguard accounts; map out a long-term investment
strategy; initiate certain transactions; and ask
questions, make suggestions, and send messages to
Vanguard.
Our education-oriented website provides timely news
and information about Vanguard funds and services; an
online "university" that offers a variety of mutual
fund classes; and easy-to-use, interactive tools to
help you create your own investment and retirement
strategies.
</TABLE>
20
<PAGE> 25
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments,
U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements,
commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
COUNTRY RISK
The possibility that events within a country such as changes in regulation,
political or financial troubles, or natural disasters will adversely affect the
market value of securities issued by companies or governments in that country.
CURRENCY RISK
The possibility that an American's foreign investment will lose money because of
unfavorable exchange rate movements.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes account management fees, administrative fees, and any
12b-1 marketing fees.
GROWTH AND INCOME STOCK FUND
A mutual fund that seeks moderate capital appreciation and some dividend income
by investing primarily in stocks.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a portfolio's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an attempt to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security, industry, or country.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that focuses on stocks of companies that, considering their
earnings and dividends, are attractively priced; these companies often pay
regular dividend income to shareholders.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low share
prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 26
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, PA 19482
<TABLE>
<S> <C> <C>
INVESTOR INFORMATION VANGUARD BROKERAGE ELECTRONIC ACCESS TO THE
DEPARTMENT SERVICES VANGUARD MUTUAL FUND
1-800-662-7447 (SHIP) 1-800-992-8327 EDUCATION AND INFORMATION
TEXT TELEPHONE: For information on trading CENTER
1-800-952-3335 stocks, bonds, and options World Wide Web
For information on our funds, at reduced commissions www.vanguard.com
fund services, and retirement
accounts; requests for VANGUARD TELE-ACCOUNT(R) E-mail
literature 1-800-662-6273 (ON-BOARD) [email protected]
For 24-hour automated access
CLIENT SERVICES DEPARTMENT to price and yield, information
1-800-662-2739 (CREW) on your account, certain
TEXT TELEPHONE: transactions
1-800-662-2738
For information on your
account, account transactions,
and account statements
</TABLE>
(c) 1998 Vanguard Marketing
Corporation, Distributor
P022N
<PAGE> 27
VANGUARD/
WINDSOR FUND
Institutional Prospectus
February 20, 1998
This prospectus contains financial data for the Fund through the fiscal year
ended October 31, 1997.
[GRAPHIC OF SHIP]
[THE VANGUARD GROUP LOGO]
<PAGE> 28
VANGUARD/WINDSOR FUND
CONTENTS
Fund Profile 1
Fund Expenses 2
Financial Highlights 3
A Word About Risk 4
The Fund's Objectives 4
Who Should Invest 4
Investment Strategy 5
Investment Policies 7
Investment Limitations 8
Investment
Performance 9
Share Price 9
Dividends, Capital
Gains, and Taxes 10
The Fund and
Vanguard 10
Investment Adviser 11
General Information 12
Investing
with Vanguard
- - For Plan Participants 13
- - For Other
Institutional Investors 13
Accessing Fund
Information
By Computer 14
Prospectus Postscript 15
Risk Quiz 16
Glossary Inside Back Cover
A Growth and Income Stock Mutual Fund
INVESTMENT OBJECTIVES AND POLICIES
Vanguard/Windsor Fund (the "Fund") is a diversified mutual fund, a part of
Vanguard/Windsor Funds, Inc., an open-end investment company.
The Fund seeks to provide long-term growth of capital by investing mainly in
the equity securities of large and medium-size companies whose stocks are
considered to be undervalued by the Fund's adviser and out of favor with
investors. The Fund's secondary objective is to provide some dividend income.
The Fund is currently closed to new investors. Existing shareholders may
purchase additional Fund shares, but may not invest more than $25,000 each year.
IT IS IMPORTANT TO NOTE THAT THE FUND'S SHARES ARE NOT GUARANTEED OR INSURED
BY THE FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT. AS WITH ANY INVESTMENT
IN COMMON STOCKS, WHICH ARE SUBJECT TO WIDE FLUCTUATIONS IN MARKET VALUE, YOU
COULD LOSE MONEY BY INVESTING IN THE FUND.
FEES AND EXPENSES
Vanguard/Windsor Fund is offered on a no-load basis, which means that you pay no
sales commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the expense ratio.
IMPORTANT NOTE
This prospectus is intended for institutional clients and for participants in
employer-sponsored retirement or savings plans.
ADDITIONAL INFORMATION ABOUT THE FUND
A Statement of Additional Information (dated February 20, 1998) containing more
information about the Fund is, by reference, part of this prospectus and may be
obtained without charge by contacting Vanguard (see back cover) or visiting the
Securities and Exchange Commission's website (www.sec.gov).
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, risks, and strategy of Vanguard/Windsor
Fund. To highlight terms and concepts important to mutual fund investors, we
have provided "Plain Talk" explanations along the way. Reading the prospectus
will help you to decide whether the Fund is the right investment for you. We
suggest that you keep it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE> 29
FUND PROFILE Vanguard/Windsor Fund
WHO SHOULD INVEST (page 4)
- - Investors seeking a growth and income stock mutual fund as part of a balanced
and diversified investment program.
- - Investors seeking growth of their
capital over the long term -- at least five years.
- - Investors seeking some dividend income.
WHO SHOULD NOT INVEST
- - Investors unwilling to accept significant fluctuations in share price.
RISKS OF THE FUND (pages 4 - 8)
The Fund's total return will fluctuate within a wide range, so an investor could
lose money over short or even extended periods. The Fund is subject to manager
risk (the chance that poor security selection will cause it to lag the stock
market as a whole) and objective risk (the chance that returns from the types of
stock that the Fund invests in -- attractively priced or "value" stocks -- will
trail returns from the overall stock market). Because the Fund can invest a
portion of its assets in companies based outside the United States, it is
exposed to several risks unique to foreign securities; see page 7 for details.
DIVIDENDS AND CAPITAL GAINS (page 10)
Dividends are paid in June and December. Capital gains, if any, are paid in
December. In participant accounts, all distributions are automatically
reinvested.
INVESTMENT ADVISER (page 11)
Wellington Management Company, LLP,
Boston, Mass.
INCEPTION DATE: October 23, 1958
NET ASSETS AS OF 10/31/1997: $20.7 billion
FUND'S EXPENSE RATIO FOR THE
YEAR ENDED 10/31/1997: 0.27%
NEWSPAPER ABBREVIATION: Wndsr
VANGUARD FUND NUMBER: 022
CUSIP NUMBER: 922018106
QUOTRON SYMBOL: VWNDX.Q
AVERAGE ANNUAL TOTAL RETURNS --
PERIODS ENDED OCTOBER 31, 1997
1 YEAR 5 YEARS 10 YEARS
------------------------
Vanguard/Windsor Fund 27.0% 20.3% 15.6%
S&P 500 Index 32.1 19.9 17.2
QUARTERLY RETURNS (%) 1988 - 1997 (intended to show volatility of returns)
[BARCHART]
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------------- ------------------- ---------------- -----------------
Vanguard S&P Vanguard S&P Vanguard S&P Vanguard S&P
<S> <C> <C> <C> <C> <C> <C> <C> <C>
"1988" 10.2 5.7 13.2 6.6 1.9 0.3 1.3 3
"1989" 6.9 7.1 7 8.8 8.6 10.7 -7.4 2
"1990" -2.9 -3 1.4 -0.2 -20.3 -13.7 7.8 8.9
"1991" 18.3 14.5 0.7 -0.2 5.6 5.3 2.2 8.4
"1992" 4.3 -2.5 5.6 1.9 -2.6 3.2 8.7 5
"1993" 8.9 4.4 1.4 0.5 7.4 2.6 0.7 2.3
"1994" -1.8 -3.8 3.8 0.4 1.1 4.9 -3.2 0
"1995" 8.5 9.7 11.4 9.5 7.9 7.9 -0.2 6
"1996" 6.2 5.4 1.5 4.5 5.3 3.1 11.34 8.34
"1997" 3.5 2.68 11.11 17.46 9.8 7.49
</TABLE>
IN EVALUATING PAST PERFORMANCE, REMEMBER THAT IT IS NOT INDICATIVE OF FUTURE
PERFORMANCE AND THAT RETURNS FROM STOCKS WERE HIGH DURING THE PERIODS SHOWN
RELATIVE TO LONGER-TERM HISTORICAL AVERAGES. PERFORMANCE FIGURES INCLUDE THE
REINVESTMENT OF ANY DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS. THE RETURNS ARE
NET OF EXPENSES, BUT THEY DO NOT REFLECT INCOME TAXES A TAXABLE INVESTOR WOULD
HAVE INCURRED. NOTE, TOO, THAT BOTH THE RETURN AND PRINCIPAL VALUE OF AN
INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
1
<PAGE> 30
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time, have
a dramatic impact on a fund's performance.
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard/Windsor Fund's expense ratio in fiscal year 1997 was 0.27%,
or $2.70 per $1,000 of average net assets. The average growth and income equity
fund had expenses in 1997 of -%, or $- per $1,000 of average net assets,
according to Lipper Analytical Services, which reports on the mutual fund
industry.
FUND EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Fund.
As noted in this table, you do not pay fees of any kind when you buy, sell,
or exchange shares of the Fund:
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
The next table illustrates the operating expenses that you would incur as a
shareholder of the Fund. These expenses are deducted from the Fund's income
before it is paid to you. Expenses include investment advisory fees as well as
the costs of administering the Fund, maintaining accounts, providing shareholder
services, and other activities. The expenses shown in the table are based upon
those incurred in the fiscal year ended October 31, 1997.
<TABLE>
<CAPTION>
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
Management and Administrative Expenses: 0.18%
Investment Advisory Expenses: 0.06%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.01%
----
Total Other Expenses: 0.03%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.27%
====
</TABLE>
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds, by illustrating
the hypothetical expenses that you would incur on a $1,000 investment over
various periods. The example assumes that (1) the Fund provides a return of 5% a
year and (2) you redeem your investment at the end of each period.
<TABLE>
<CAPTION>
---------------------------------------------
1 Year 3 Years 5 Years 10 Years
---------------------------------------------
<S> <C> <C> <C> <C>
$3 $9 $15 $34
---------------------------------------------
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 31
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding of the Fund for each of the fiscal years in the decade ended October
31, 1997. The financial statements that include these financial highlights were
audited by Price Waterhouse LLP, independent accountants. You should read this
information in conjunction with the Fund's financial statements and accompanying
notes, which appear, along with the audit report from Price Waterhouse, in the
Fund's most recent annual report to shareholders. The annual report is
incorporated by reference in the Statement of Additional Information and in this
prospectus, and contains a more complete discussion of the Fund's performance.
You may have the report sent to you without charge by contacting Vanguard.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended October 31,
-----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $16.99 $15.55 $14.55 $14.95 $12.37 $12.79 $ 9.72 $15.17 $14.13 $14.22
------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .36 .43 .44 .44 .37 .49 .58 .74 .71 .66
Net Realized and Unrealized
Gain (Loss) on Investments 3.94 2.85 1.86 .42 2.98 .50 3.55 (4.59) 1.51 2.33
-----------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 4.30 3.28 2.30 .86 3.35 .99 4.13 (3.85) 2.22 2.99
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.41) (.46) (.44) (.37) (.39) (.57) (.74) (.75) (.63) (.87)
Distributions from
Realized Capital Gains (1.33) (1.38) (.86) (.89) (.38) (.84) (.32) (.85) (.55) (2.21)
TOTAL DISTRIBUTIONS (1.74) (1.84) (1.30) (1.26) (.77) (1.41) (1.06) (1.60) (1.18) (3.08)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $19.55 $16.99 $15.55 $14.55 $14.95 $12.37 $12.79 $ 9.72 $15.17 $14.13
===============================================================================================================================
TOTAL RETURN 27.04% 23.16% 17.80% 6.35% 28.29% 9.30% 44.69% - 27.93% 17.05% 27.01%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $20,678 $15,841 $13,008 $11,406 $10,537 $8,250 $7,859 $5,841 $8,313 $5,920
Ratio of Total Expenses to
Average Net Assets 0.27% 0.31% 0.45% 0.45% 0.40% 0.26% 0.30% 0.37% 0.41% 0.46%
Ratio of Net Investment
Income to Average
Net Assets 1.89% 2.75% 3.01% 3.11% 2.68% 3.89% 4.84% 5.82% 5.07% 5.08%
Portfolio Turnover Rate 61% 34% 32% 34% 25% 32% 36% 21% 34% 24%
Average Commission
Rate Paid $.0576 $.0579 N/A N/A N/A N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a historical measure of dividend income, and total return is a
measure of past dividend income (assuming that it has been reinvested) plus
realized and unrealized capital appreciation. Neither yield nor total return
should be used to predict the future performance of a fund.
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1997 with a net asset value (price) of $16.99 per share.
During the year, the Fund earned $.36 per share from investment income (interest
and dividends) and $3.94 per share from investments that had appreciated in
value or that were sold for higher prices than the Fund paid for them. Of those
total earnings of $4.30 per share, $1.74 was returned to shareholders in the
form of distributions ($.41 in dividends, $1.33 in capital gains). The earnings
($4.30 per share) less distributions ($1.74 per share) resulted in a share price
of $19.55 at the end of the fiscal year, an increase of $2.56 per share (from
$16.99 at the beginning of the period to $19.55 at the end of the period).
Assuming that the shareholder had reinvested the distributions in the purchase
of more shares, the total return from the Fund was 27.04% for the year.
As of October 31, 1997, the Fund had $20.7 billion in net assets; an expense
ratio of 0.27% ($2.70 per $1,000 of net assets); and net investment income
amounting to 1.89% of its average net assets. It sold and replaced securities
valued at 61% of its total net assets.
3
<PAGE> 32
PLAIN TALK ABOUT
VALUE FUNDS
AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize companies that, considering their
assets and earnings history, are attractively priced; these companies often
pay regular dividend income to shareholders. Growth funds focus on companies
that, due to their strong earnings and revenue potential, offer above-average
prospects for capital growth, with less emphasis on dividend income. Value and
growth stocks have, in the past, produced similar long-term returns, though each
has periods when it outperforms the other. In general, value funds are
appropriate for investors who want some dividend income and the potential for
capital gains but are less tolerant of share-price fluctuations. Growth funds,
by contrast, appeal to investors who will accept more volatility in hope of a
greater increase in share price or who prefer a higher portion of the Fund's
returns to come as capital gains, which may be taxed at lower rates than
dividend income.
PLAIN TALK ABOUT
INVESTING FOR THE LONG TERM
Vanguard/Windsor Fund is intended to be a long-term investment vehicle and is
not designed to provide investors with a means of speculating on short-term
fluctuations in the stock market.
A WORD ABOUT RISK
This prospectus describes the risks you would face as an investor in
Vanguard/Windsor Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. However, as you consider an investment in the Fund, you should
also take into account your own tolerance for the daily fluctuations of the
stock market.
Look for this "warning flag" symbol [FLAG] throughout the prospectus. It
is used to mark detailed information about each type of risk that you, as a
shareholder of the Fund, would confront.
THE FUND'S OBJECTIVES
Vanguard/Windsor Fund seeks to provide long-term growth of capital and, as a
secondary objective, some dividend income. These objectives are fundamental,
which means that they cannot be changed unless a majority of shareholders vote
to do so.
[FLAG] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING PAGES,
YOUR INVESTMENT IN THE FUND, AS WITH ANY INVESTMENT IN COMMON STOCKS,
COULD LOSE MONEY.
WHO SHOULD INVEST
Vanguard/Windsor Fund may be suitable for you if:
- - You wish to add a growth and income mutual fund to your existing holdings,
which could include other stock -- as well as bond, money market, and
tax-exempt -- investments.
- - You want a value-oriented investment that seeks to provide long-term growth,
as well as some dividend income.
This Fund is not an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all the Fund's shareholders. To minimize such
costs, which reduce the ultimate returns achieved by you and other shareholders,
the Fund has adopted the following policies:
- - The Fund reserves the right to reject any purchase request -- including
exchanges from other Vanguard funds -- that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of the
investment or because of a history of excessive trading by the investor.
- - There is a limit on the number of times you can exchange into or out of the
Fund. If you own shares of the Fund as an investment option in an
employer-sponsored retirement or savings
4
<PAGE> 33
plan, your plan dictates the rules governing exchanges. Contact your plan
administrator for details.
- - The Fund reserves the right to stop offering shares at any time.
INVESTMENT STRATEGY
This section explains how the investment adviser pursues the Fund's objectives
of long-term capital growth and some dividend income. It also explains several
important risks -- market risk, objective risk, manager risk, country risk, and
currency risk -- faced by investors in the Fund. Unlike the Fund's investment
objectives, the advisor's investment strategy is not fundamental and can be
changed by the Fund's Board of Directors without shareholder approval. However,
before making any important change in its strategy, the Fund will give
shareholders 30 days' notice, in writing.
MARKET EXPOSURE
The Fund is a value-oriented growth and income fund that invests mainly in
large- and mid-capitalization common stocks that offer favorable prospects for
capital growth and dividend income. At times, the Fund may also invest in
preferred stock and in securities that are convertible into common stock.
[FLAG] THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN EXTENDED PERIODS. STOCK
MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING STOCK PRICES AND
PERIODS OF FALLING STOCK PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns (dividend income plus change in market
value) for the U.S. stock market over various periods as measured by the
Standard & Poor's 500 Composite Stock Price Index, a widely used barometer of
stock market activity. Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, how the gap between the best and worst
returns tends to narrow over the long term.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926 - 1997)
- -----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Best 53.9% 23.9% 20.1% 16.9%
Worst - 43.3 - 12.5 - 0.9 3.1
Average 13.0 10.5 10.9 10.9
- -----------------------------------------------------------------
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1997. For example, while the average return on stocks for all of the
5-year periods was 10.5%, returns for these 5-year periods ranged from a -12.5%
average (from 1928 through 1932), to 23.9% (from 1950 through 1954). These
average returns reflect past performance and should not be regarded as an
indication of future returns from either the stock market as a whole or this
Fund in particular.
Finally, because Vanguard/Windsor Fund does not hold the same securities held
in the S&P 500 Index or any other market index, the performance of the Fund will
not mirror the returns of any particular index.
[FLAG] THE FUND IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE POSSIBILITY THAT
RETURNS FROM THE TYPE OF STOCKS IN WHICH THE FUND INVESTS --
ATTRACTIVELY PRICED OR "VALUE" STOCKS -- WILL TRAIL RETURNS FROM THE
OVERALL STOCK MARKET. DIFFERENT TYPES OF STOCKS TEND TO GO THROUGH
CYCLES OF OUTPERFORMANCE AND UNDERPERFORMANCE IN COMPARISON TO COMMON
STOCKS IN GENERAL. THESE CYCLES HAVE, IN THE PAST, LASTED FOR AS LONG
AS SEVERAL YEARS.
PLAIN TALK ABOUT
COSTS AND MARKET TIMING
Some investors try to profit from "market-timing" -- switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who did not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
closely monitoring daily transactions.
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP,
AND SMALL-CAP STOCKS
Stocks of publicly traded companies -- and mutual funds that hold these stocks
- -- can be classified by the companies' market value, or capitalization. Vanguard
defines large-capitalization, or large-cap, funds as those holding stocks of
companies with a median market value of their outstanding shares exceeding $7.5
billion. Mid-cap funds hold stocks of companies with a median market value
between $1 billion and $7.5 billion. Small-cap funds hold stocks of companies
with a median market value of up to $1 billion. Historically, large-cap funds
have exhibited lower volatility than mid-cap and small-cap funds.
5
<PAGE> 34
PLAIN TALK ABOUT
PRICE/EARNINGS RATIO
A widely used measure of common-stock valuation is the price/earnings (P/E)
ratio. The P/E ratio is simply a stock's current price divided by its earnings
per share from the past year (or sometimes its projected earnings for the coming
year). In general, a lower P/E ratio indicates that a stock is out of favor with
investors and is expected to have slow future growth in profits. A higher P/E
ratio indicates that investors expect rapid growth in a company's profits. Keep
in mind, however, that these expectations can sometimes prove incorrect, and
that there is no "ideal" P/E ratio.
PLAIN TALK ABOUT
PORTFOLIO DIVERSIFICATION
In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average U.S. equity mutual fund has
about 30% of its assets invested in its ten largest holdings, while some less
diversified mutual funds have 50% or more of their assets invested in the stocks
of just ten companies.
SECURITY SELECTION
Wellington Management Company, LLP (WMC), adviser to the Fund, selects what it
considers to be undervalued securities of large- and mid-capitalization
companies. Undervalued stocks are generally those that are out of favor with
investors and currently trading at prices that, the adviser feels, are below
what the stocks are worth in relation to their earnings. These stocks typically
- -- but not always -- have lower-than-average price/earnings (P/E) ratios and
higher-than-average dividend yields.
A stock's value is the key element in WMC's selection process. WMC considers
several fundamental factors, including the stock's projected growth rate,
earnings potential, dividend yield, and P/E ratio. WMC then selects the stock if
it has strong prospects for capital appreciation, but is currently trading at a
price that is lower than what is expected of a stock with such potential. WMC
sets a price that it feels more accurately reflects the stock's overall "worth,
and when the stock reaches that predetermined price, it will be sold.
The Fund's top ten holdings (which amounted to 33% of the Fund's total net
assets) as of October 31, 1997, follow:
1. Citicorp
2. AT&T
3. Rhone-Poulenc SA ADR
4. Ford Motor Co.
5. Columbia/HCA Healthcare
6. Delta Air Lines, Inc.
7. Aluminum Co. of America
8. The Boeing Co.
9. Georgia-Pacific Corp.
10. Burlington Resources, Inc.
6
<PAGE> 35
Keep in mind that, because the makeup of the Fund may change, this listing is
only a "snapshot" at one point in time. Note, too, that the Fund's relatively
low level of diversification means that there is a greater chance that the poor
performance of a single stock could hurt the Fund.
The Fund is run by WMC according to traditional methods of active investment
management, which means securities are bought and sold according to WMC's
judgments about companies and their financial prospects, and about the stock
market and the economy in general.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT WMC
MAY DO A POOR JOB OF SELECTING STOCKS.
PORTFOLIO TURNOVER
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long they have been held. The Fund's
average turnover rate for the past ten years has been about 33%. (A turnover
rate of 100% would occur, for example, if the Fund sold and replaced securities
valued at 100% of its total net assets within a one-year period.)
INVESTMENT POLICIES
Besides investing in undervalued common stocks, the Fund may follow a number of
investment policies to achieve its objectives.
The Fund may invest as much as 20% of its assets in securities of companies
based outside the United States and may engage in currency transactions. These
securities can be traded in either U.S. or foreign markets.
[FLAG] THE FUND IS SUBJECT TO COUNTRY RISK AND CURRENCY RISK. COUNTRY RISK IS
THE POSSIBILITY THAT POLITICAL EVENTS (SUCH AS A WAR), FINANCIAL
PROBLEMS (SUCH AS GOVERNMENT DEFAULT), OR NATURAL DISASTERS (SUCH AS AN
EARTHQUAKE) WILL WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN
THAT COUNTRY TO LOSE MONEY. CURRENCY RISK IS THE POSSIBILITY THAT A
"STRONGER" U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS INVESTING
OVERSEAS. GENERALLY, WHEN THE DOLLAR RISES IN VALUE AGAINST A FOREIGN
CURRENCY, YOUR INVESTMENT IN THAT COUNTRY LOSES VALUE BECAUSE ITS
CURRENCY IS WORTH FEWER U.S. DOLLARS. ON THE OTHER HAND, A "WEAKER"
DOLLAR GENERALLY LEADS TO HIGHER RETURNS FOR AMERICANS HOLDING FOREIGN
INVESTMENTS.
The Fund may invest in money market instruments, fixed-income securities,
convertible securities, and other equity securities such as preferred stock. The
Fund may invest up to 15% of its
PLAIN TALK ABOUT
PORTFOLIO TURNOVER
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. The average turnover rate for all domestic stock
funds is approximately 80%.
PLAIN TALK ABOUT
THE RISKS OF
INTERNATIONAL INVESTING
Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stock may not be as liquid as the stock of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than their
counterparts in the United States. These factors, among others, could negatively
impact the returns Americans receive from a foreign investment. For more
information, see the Statement of Additional Information.
7
<PAGE> 36
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new, exotic types of derivatives -- some of which
can carry considerable risks.
PLAIN TALK ABOUT
CASH RESERVES
With mutual funds, holding cash reserves -- or "cash" -- does not mean literally
that the fund holds a stack of currency. Rather, cash reserves refer to
short-term, interest-bearing securities that can easily and quickly be converted
to cash, such as those described in the prospectus glossary. (Most mutual funds
keep at least a small percentage of assets in cash to accommodate shareholder
redemptions.) While some funds strive to keep cash levels at a minimum and to
always remain fully invested in stocks, other funds allow investment advisers to
hold up to 20% of a fund's assets in cash reserves.
assets in restricted securities with limited marketability or other illiquid
securities.
The Fund may also invest in derivatives.
[FLAG] THE FUND RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN STOCK
FUTURES AND OPTIONS CONTRACTS, WHICH ARE TRADITIONAL TYPES OF
DERIVATIVES.
Losses (or gains) involving futures can sometimes be substantial -- in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a portfolio. The Fund will not use
futures and options for speculative purposes or as leveraged investments that
magnify the gains or losses of an investment. Rather, the Fund will keep
separate cash reserves or other liquid portfolio securities in the amount of the
obligation underlying the futures or options contract. Only a limited percentage
of the Fund's assets -- 5% -- may be applied toward the deposits required on
futures contracts, and the value of all futures contracts in which the Fund
acquires an interest cannot exceed 20% of the Fund's total assets.
The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs by buying futures instead of actual
stocks.
- - To add value to the Fund by buying futures instead of actual stocks when
futures are cheaper.
The Fund will usually hold only a small percentage of its assets in cash
reserves, although if the investment adviser believes that market conditions
warrant a temporary defensive measure, the Fund may hold cash reserves without
limit. No more than 35% of the Fund's assets may be invested in short-term
fixed-income securities for purposes other than taking a temporary defensive
position.
INVESTMENT LIMITATIONS
The Fund has adopted limitations on some of its investment policies. Some of
these limitations are that the Fund will not:
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for temporary or emergency purposes in an amount not
exceeding 10% of its net assets. Whenever the Fund's outstanding borrowing is
more than 5% of its assets, it will stop making investments.
With respect to 75% of its assets, this Fund will not:
- - Invest more than 5% in the securities of any one company.
- - Buy more than 10% of the outstanding voting shares of any company.
8
<PAGE> 37
A complete list of the Fund's investment limitations can be found in the
Statement of Additional Information. These limitations are fundamental and may
be changed only by approval of a majority of the Fund's shareholders.
INVESTMENT PERFORMANCE
Vanguard/Windsor Fund invests primarily in common stocks, so its performance is
closely correlated to the performance of the overall stock market. Historically,
stock market performance, both domestic and foreign, has been characterized by
sharp up-and-down swings in the short term and by more stable growth over the
long term.
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED OCTOBER 31, 1997
[BAR GRAPH]
<TABLE>
<CAPTION>
Vanguard/Windsor S&P 500
Fund Index
---------------- -------
<S> <C> <C>
1 year 27.0% 32.1%
3 years 22.6% 27.5%
5 years 20.3% 19.9%
10 years 15.6% 17.2%
20 years 17.7% 16.5%
25 years 15.5% 13.1%
</TABLE>
The results shown above represent the Fund's "average annual total return"
performance, which assumes that any distributions of capital gains and dividends
were reinvested for the indicated periods. Also included is comparative
information on the unmanaged Standard & Poor's 500 Composite Stock Price Index.
The chart does not make any allowances for federal, state, or local income taxes
that shareholders must pay on a current basis.
SHARE PRICE
The Fund's share price, also called its net asset value, or NAV, is calculated
each business day after the close of trading (generally 4 p.m. Eastern time) on
the New York Stock Exchange. The net asset value per share is calculated by
adding up the total assets of the Fund, subtracting all its liabilities, or
debts, and then dividing by the total number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -------------------------------------------
NUMBER OF SHARES OUTSTANDING
The daily net asset value is useful to you as a shareholder because the NAV,
multiplied by the number of Fund shares you
PLAIN TALK ABOUT
PAST PERFORMANCE
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
9
<PAGE> 38
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of a fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from the dividends that a fund earns from its holdings as well as
interest it receives from money market and bond investments. Capital gains are
realized whenever the fund sells securities for higher prices than it paid for
them. The capital gains are either short-term or long-term depending on whether
the fund held the securities for less than or more than one year.
PLAIN TALK ABOUT
VANGUARD'S UNIQUE
CORPORATE STRUCTURE
The Vanguard Group, Inc. is the only MUTUAL mutual fund company. It is owned
jointly by the funds it oversees and by the shareholders in those funds.Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to fund shareholders in
the form of lower operating expenses.
own, gives you the dollar amount you would have received had you sold all of
your shares back to the Fund that day.
The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Funds." Different newspapers use
different abbreviations of the Fund's name, but the most common is Wndsr.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each June and December, the Fund distributes to its shareholders virtually all
of its income from interest and dividends. Any capital gains realized from the
sale of securities are distributed in December. In addition, the Fund may
occasionally be required to make supplemental dividend or capital gains
distributions at other times during the year.
If you own shares of the Fund as an investment option in an
employer-sponsored retirement or savings plan, these dividend and capital gains
distributions will be reinvested in additional Fund shares and accumulate on a
tax-deferred basis. You will not owe taxes on these distributions until you
begin withdrawals. You should consult your plan administrator, your plan's
Summary Plan Document, or your tax adviser about the tax consequences of an
investment in the Fund and of any plan withdrawals.
If your Vanguard/Windsor Fund investment is not part of an employer-sponsored
plan, you can receive distributions of income or capital gains in cash, or you
may have them automatically reinvested in more shares of the Fund. Both dividend
and capital gains distributions -- whether received in cash or reinvested in
additional shares -- are subject to federal (and possibly state and local)
income taxes, no matter how long you have held the shares in the Fund. You
should consult your tax adviser about other tax consequences of an investment in
the Fund.
THE FUND AND VANGUARD
Vanguard/Windsor Fund is a member of The Vanguard Group, a family of more than
30 investment companies with more than 95 distinct investment portfolios and
total net assets of more than $320 billion. All of the Vanguard funds share in
the expenses associated with business operations, such as personnel, office
space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each fund pays its
allocated share of The Vanguard Group's costs.
A list of the Fund's Directors and officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.
10
<PAGE> 39
INVESTMENT ADVISER
The Fund employs Wellington Management Company, LLP (WMC), 75 State Street,
Boston, MA 02109, as its investment adviser. WMC manages the Fund subject to the
control of the officers and Directors of the Fund.
WMC is paid a quarterly advisory fee based on an average of the Fund's
month-end net assets during that quarter:
<TABLE>
<CAPTION>
----------------------------------------------
AVERAGE ASSETS MANAGED BASIC FEE
----------------------------------------------
<S> <C>
First $17.5 billion 0.125%
Over $17.5 billion 0.100
----------------------------------------------
</TABLE>
Beginning April 30, 1999, WMC's basic advisory fee may be adjusted based on
the total return performance of the Fund as compared to that of the Standard &
Poor's 500 Index. Under the fee schedule, WMC's basic fee may be increased or
decreased by as much as 67% for the first $17.5 billion of average net assets
managed during the period and by 90% for average net assets over $17.5 billion.
Until this new schedule goes into effect, WMC's basic fee will follow transition
rules set forth by the Securities and Exchange Commission and described in the
Fund's Statement of Additional Information.
For the fiscal year ended October 31, 1997, the net fee paid by
Vanguard/Windsor Fund to its adviser was $11,681,000, after a decrease of
$11,821,000 based on performance.
The current fee agreement with WMC authorizes it to choose brokers and
dealers to handle the purchase and sale of the Fund's securities, and directs
WMC to get the best available price and most favorable execution from these
brokers with respect to all transactions. At times, WMC may choose brokers who
charge higher commissions in the interest of obtaining better execution of a
transaction. If more than one broker can obtain the best available price and
favorable execution of a transaction, then WMC is authorized to choose a broker
who, in addition to executing the transaction, will provide research services to
WMC or the Fund. However, WMC will not pay higher commissions specifically for
the purpose of obtaining research services. The Fund may direct WMC to use a
particular broker for certain transactions in exchange for commission rebates or
research services provided to the Fund.
The Board of Directors may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser as either a
replacement for WMC or as an additional adviser. However, no such change would
be made before giving shareholders 30 days' notice, in writing.
PLAIN TALK ABOUT
THE FUND'S ADVISER
Wellington Management Company, LLP, is an investment counseling firm that was
founded in 1928; it currently manages more than $169 billion in assets. The
manager responsible for WMC's strategy for Vanguard/Windsor Fund is:
CHARLES T. FREEMAN, Senior Vice President and Partner of WMC; has worked in
investment management since 1967; with WMC since 1969; B.S., M.B.A., University
of Pennsylvania.
Mr. Freeman was appointed Fund Manager in January 1996, following the
retirement of John B. Neff, who had managed the Fund since 1964.
11
<PAGE> 40
GENERAL INFORMATION
Vanguard/Windsor Fund is one of two Funds of Vanguard/Windsor Funds, Inc.,
which is organized under the laws of the state of Maryland. The other Fund is
Vanguard/Windsor II (which is open to all investors). The two Funds are combined
under one corporation for administrative purposes, but for investment
management purposes operate like separate companies.
Shareholders of Vanguard/Windsor Fund have rights and privileges similar to
those enjoyed by other corporate shareholders. For example, shareholders will
not be responsible for any liabilities of the corporation. If any matters are
to be voted on by shareholders (such as a change in a fundamental investment
objective or the election of Directors), each share outstanding at that point
would be entitled to one vote. Annual meetings will not be held by the Fund
except as required by the Investment Company Act of 1940. A meeting will be
scheduled to vote on the removal of a Director if the holders of at least 10% of
the Fund's shares request a meeting in writing.
"Standard & Poor's," "Standard & Poor's 500," "S&P," and "500" are trademarks
of The McGraw-Hill Companies, Inc.
12
<PAGE> 41
INVESTING WITH VANGUARD
FOR PLAN PARTICIPANTS
Vanguard/Windsor Fund is an investment option in your retirement or savings
plan. Your plan administrator or your employee benefits office can provide you
with detailed information on how to participate in your plan and how to elect
the Fund as an investment option.
- - If you have any questions about the Fund or Vanguard, including the Fund's
investment objectives, strategy, or risks, contact Vanguard's Participant
Services Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator or
the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate the exchange privilege, limit the amount of an
exchange, or reject any exchange, at any time, without notice. Because excessive
exchanges can potentially disrupt the management of a Fund and increase its
transaction costs, Vanguard limits exchange activity to TWO SUBSTANTIVE EXCHANGE
REDEMPTIONS (at least 30 days apart) from any Fund during any 12-month period.
"Substantive" means either a dollar amount or a series of movements between
Vanguard funds that Vanguard determines, in its sole discretion, could have a
negative impact on the management of the Fund. In addition, certain investment
options, particularly funds made up of company stock or investment contracts,
may be subject to unique restrictions. Contact your plan administrator for
details on the exchange policies that apply to your plan.
Before making an exchange, you should consider the following:
- - Before you exchange to another Vanguard fund available in your plan, you
should read that fund's prospectus. Contact Vanguard's Participant Services
Center, toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Your plan
administrator can explain how frequently exchanges are allowed.
FOR OTHER INSTITUTIONAL INVESTORS
AT THIS TIME, SHARES OF VANGUARD/WINDSOR FUND ARE NOT BEING OFFERED OR SOLD TO
NEW INVESTORS. Current shareholders may make additional investments, but the
total amount of purchases during a calendar year may not exceed $25,000.
If you have questions about an existing account, contact your Vanguard
account administrator.
13
<PAGE> 42
INVESTING WITH VANGUARD (continued)
TRANSACTIONS
Purchases, exchanges, or redemptions of the Fund's shares are processed as soon
as they have been received by Vanguard in good order. Good order means that your
request includes complete information on your purchase, exchange, or redemption,
and that Vanguard has received the appropriate assets. The price of shares
bought, exchanged, or sold will be the Fund's next-determined net asset value
after Vanguard has processed your request, provided your request has been
received before the close of trading on the New York Stock Exchange (generally 4
p.m. Eastern time).
Vanguard must consider the interests of all Fund shareholders and so reserves
the right to:
- - Delay or reject any purchase or exchange request that may disrupt the Fund's
operation or performance.
- - Revise or terminate the exchange privilege or limit the amount of an
exchange, at any time, without notice.
- - Take up to seven days to deliver your redemption proceeds.
- - Pay redemption proceeds--in whole or in part--through a distribution in kind
of readily marketable securities.
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ONLINE(SM) Use your personal computer to learn more
www.vanguard.com about Vanguard's funds and services;
keep in touch with your Vanguard
accounts; map out a long-term investment
strategy; initiate certain transactions;
and ask questions, make suggestions, and
send messages to Vanguard.
Our education-oriented website provides
timely news and information about
Vanguard funds and services; an online
"university" that offers a variety of
mutual fund classes; and easy-to-use,
interactive tools to help you create
your own investment and retirement
strategies.
14
<PAGE> 43
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about
Vanguard/Windsor Fund, including its investment objectives, risks, strategy, and
expenses, as well as services available to you as a shareholder.
It is important that you understand these facts so that you can decide
whether an investment in this Fund is right for you. The following questions
offer a quick review of some of the subjects covered by this prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN :
\ \ The Fund's objectives? (page 4)
\ \ The Fund's investment strategy? (page 5)
\ \ Who should invest in the Fund? (page 4)
\ \ The risks associated with the Fund? (pages 4-8)
\ \ Whether the Fund is federally insured?
(inside front cover)
\ \ The Fund's expenses? (page 2)
\ \ The background of the Fund's investment manager?
(page 11)
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
Reading this prospectus will help you to decide whether Vanguard/Windsor Fund is
suitable for your investment goals. If you decide to invest, don't throw the
prospectus out: you will no doubt need it for future reference.
15
<PAGE> 44
ABOUT THE QUIZ
Knowing your risk tolerance is important when you are making an investment
decision. To give you a general idea of your comfort level with investing,
circle the response that most closely matches your personal situation. Keep in
mind, though, that there is no "foolproof" way to gauge your risk tolerance.
Scoring for the quiz is below.
HOW TO SCORE THE QUIZ
Use the number of your answer as the number of points scored. For instance, if
you chose answer #3 to a question, that's worth three points. Add up your points
and check below for the type of investor you are. (Note: if you chose answer #1
or #2 to Question C, subtract five points from your total score.)
- - If you scored between 0 and 25 points, you are considered a conservative
investor.
- - If you scored between 26 and 32 points, you are considered a moderate
investor.
- - If you scored between 33 and 35 points, you are considered an aggressive
investor.
A SIMPLE RISK QUIZ
A. I HAVE BEEN INVESTING IN STOCK AND BOND MUTUAL FUNDS (OR IN INDIVIDUAL STOCKS
OR BONDS) FOR . . .
1. Less than a year
2. 1 - 2 years
3. 3 - 4 years
4. 5 - 9 years
5. 10 years or more
B. WHEN IT COMES TO INVESTING IN STOCK OR BOND MUTUAL FUNDS (OR INDIVIDUAL
STOCKS OR BONDS), I WOULD SAY I'M . . .
1. A very inexperienced investor
2. A somewhat inexperienced investor
3. A somewhat experienced investor
4. An experienced investor
5. A very experienced investor
C. I AM COMFORTABLE WITH INVESTMENTS THAT MAY LOSE MONEY FROM TIME TO TIME IF
THEY OFFER THE POTENTIAL FOR HIGHER RETURNS.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
D. I WILL KEEP AN INVESTMENT EVEN IF IT LOSES 10% OF ITS VALUE OVER THE COURSE
OF A YEAR.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
E. IN ADDITION TO MY LONG-TERM INVESTMENTS, I HAVE EMERGENCY SAVINGS EQUAL TO
____ MONTHS OF MY TAKE-HOME PAY.
1. Zero
2. One
3. Two
4. Three
5. Four or more
F. I FIND IT EASY TO PAY MY MONTHLY BILLS FROM MY CURRENT PAY.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
G. OVERALL, MY PERSONAL FINANCIAL SITUATION IS SECURE.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
16
<PAGE> 45
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments,
U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements,
commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
COUNTRY RISK
The possibility that events within a country such as changes in regulation,
political or financial troubles, or natural disasters will adversely affect the
market value of securities issued by companies or governments in that country.
CURRENCY RISK
The possibility that an American's foreign investment will lose money because of
unfavorable exchange rate movements.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes account management fees, administrative fees, and any
12b-1 marketing fees.
GROWTH AND INCOME STOCK FUND
A mutual fund that seeks moderate capital appreciation and some dividend income
by investing primarily in stocks.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a portfolio's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an attempt to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security, industry, or country.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that focuses on stocks of companies that, considering their
earnings and dividends, are attractively priced; these companies often pay
regular dividend income to shareholders.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low share
prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 46
[THE VANGUARD GROUP LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482
FOR PARTICIPANTS IN
EMPLOYER-SPONSORED PLANS
PARTICIPANT SERVICES DEPARTMENT
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
For information on the
Vanguard funds in your plan, Monday through Friday
8:30 a.m. to 9 p.m.,
Eastern time
FOR OTHER INSTITUTIONAL INVESTORS
1-800-523-1036
For information on Vanguard funds and services
ELECTRONIC ACCESS TO THE VANGUARD MUTUAL FUND EDUCATION AND INFORMATION CENTER
World Wide Web
www.vanguard.com
E-mail
[email protected]
(C) 1998 Vanguard Marketing
Corporation, Distributor
I022N
<PAGE> 47
VANGUARD/WINDSOR II
Prospectus
February 20, 1998
This prospectus contains financial data for the Fund through the fiscal year
ended October 31, 1997.
[GRAPHIC OF SHIP]
[VANGUARD LOGO]
<PAGE> 48
VANGUARD/WINDSOR II
A Growth and Income Stock Mutual Fund
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Fund Profile 1
Fund Expenses 2
Financial Highlights 3
A Word About Risk 4
The Fund's Objectives 4
Who Should Invest 4
Investment Strategy 5
Investment Policies 7
Investment Limitations 8
Investment
Performance 9
Share Price 9
Dividends, Capital
Gains, and Taxes 10
The Fund and
Vanguard 11
Investment Advisers 11
General Information 13
Investing with
Vanguard 14
Services and
Account Features 14
Types of Accounts 15
Distribution Options 16
Buying Shares 16
Redeeming Shares 18
Transferring Registration 20
Fund and Account
Updates 21
Prospectus Postscript 22
Risk Quiz 23
An Investment Primer 24
Glossary Inside Back Cover
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
Vanguard/Windsor II (the "Fund") is a diversified mutual fund, a part of
Vanguard/Windsor Funds, Inc., an open-end investment company.
The Fund seeks to provide long-term growth of capital by investing mainly in
the equity securities of large and medium-size companies whose stocks are
considered by the Fund's advisers to be undervalued and out of favor with
investors. The Fund's secondary objective is to provide some dividend income.
IT IS IMPORTANT TO NOTE THAT THE FUND'S SHARES ARE NOT GUARANTEED OR INSURED
BY THE FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT. AS WITH ANY INVESTMENT
IN COMMON STOCKS, WHICH ARE SUBJECT TO WIDE FLUCTUATIONS IN MARKET VALUE, YOU
COULD LOSE MONEY BY INVESTING IN THE FUND.
FEES AND EXPENSES
Vanguard/Windsor II is offered on a no-load basis, which means that you pay no
sales commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the Fund's expense ratio.
ADDITIONAL INFORMATION ABOUT THE FUND
A Statement of Additional Information (dated February 20, 1998) containing more
information about the Fund is, by reference, part of this prospectus and may be
obtained without charge by writing to Vanguard, calling our Investor Information
Department at 1-800-662-7447, or visiting the Securities and Exchange
Commission's website (www.sec.gov).
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, risks, and strategy of Vanguard/Windsor
II. To highlight terms and concepts important to mutual fund investors, we have
provided "Plain Talk" explanations along the way. Reading the prospectus will
help you to decide whether the Fund is the right investment for you. We suggest
that you keep it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE> 49
FUND PROFILE VANGUARD/WINDSOR II
WHO SHOULD INVEST (page 4)
- - Investors seeking a growth and income stock mutual fund as part of a
balanced and diversified investment program.
- - Investors seeking growth of capital over the long term--at least five years.
- - Investors seeking some dividend income.
WHO SHOULD NOT INVEST
- - Investors unwilling to accept significant fluctuations in share price.
RISKS OF THE FUND (pages 4-8)
The Fund's total return will fluctuate within a wide range, so an investor could
lose money over short or even extended periods. The Fund is subject to manager
risk (the chance that poor security selection will cause it to lag the stock
market as a whole) and objective risk (the chance that returns from the type of
stocks that the Fund invests in--attractively priced or "value" stocks--will
trail returns from the overall stock market). Because the Fund can invest a
portion of its assets in companies based outside the United States, it is
exposed to several risks unique to foreign securities. See page 7 for details.
DIVIDENDS AND CAPITAL GAINS (page 10)
Dividends are paid in June and December. Capital gains, if any, are paid in
December.
INVESTMENT ADVISERS (page 11)
Vanguard/Windsor II follows a multiadviser approach:
- - Barrow, Hanley, Mewhinney & Strauss, Inc., Dallas, Texas.
- - Equinox Capital Management, Inc., New York City, N.Y.
- - Tukman Capital Management, Inc., Larkspur, Calif.
- - Vanguard Core Management Group, Valley Forge, Pa.
MINIMUM INITIAL INVESTMENT: $3,000; $1,000 for IRAs and custodial accounts for
minors
INCEPTION DATE: June 24, 1985
NET ASSETS AS OF 10/31/1997: $22.6 billion
FUND'S EXPENSE RATIO FOR THE
YEAR ENDED 10/31/1997: 0.37%
LOADS, 12b-1 MARKETING FEES: None
SUITABLE FOR IRAs: Yes
NEWSPAPER ABBREVIATION: WndsrII
VANGUARD FUND NUMBER: 073
CUSIP NUMBER: 922018205
QUOTRON SYMBOL: VWNFX.Q
ACCOUNT FEATURES (page 14)
- - Telephone Redemption
- - Vanguard Direct Deposit Service(TM)
- - Vanguard Automatic Exchange Service(SM)
- - Vanguard Fund Express(R)
- - Vanguard Dividend Express(SM)
AVERAGE ANNUAL TOTAL RETURNS--
PERIODS ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
----------------------------
<S> <C> <C> <C>
Vanguard/Windsor II 31.3% 20.2% 17.0%
S&P 500 Index 32.1 19.9 17.2
</TABLE>
QUARTERLY RETURNS (%) 1988-1997 (intended to show volatility of returns)
[BARCHART]
<TABLE>
<CAPTION>
Vanguard S&P
<S> <C> <C> <C> <C> <C> <C> <C> <C>
"1988" 9.1 5.7 7.2 6.6 4.3 0.3 2.3 3
"1989" 9.5 7.1 7.8 8.8 9 10.7 -0.7 2
"1990" -4.4 -3 1.4 -0.2 -15.1 -13.7 9.3 8.9
"1991" 17.9 14.5 -1.7 -0.2 4.9 5.3 6 8.4
"1992" 0.1 -2.5 4 1.9 4 3.2 3.4 5
"1993" 6.7 4.4 0.9 0.5 5.4 2.6 0.2 2.3
"1994" -4.5 -3.8 2.6 0.4 2.9 4.9 -2 0
"1995" 9.9 9.7 8.1 9.5 10.2 7.9 6.1 6
"1996" 6.8 5.4 3 4.5 3.4 3.1 9.19 8.34
"1997" 1.59 2.68 14.7 17.46 9.07 7.49
</TABLE>
In evaluating past performance, remember that it is not indicative of future
performance and that returns from stocks were high during the periods shown
relative to longer-term historical averages. Performance figures include the
reinvestment of any dividend and capital gains distributions. The returns are
net of expenses, but they do not reflect income taxes a taxable investor would
have incurred. Note, too, that both the return and principal value of an
investment will fluctuate so that investors' shares, when redeemed, may be worth
more or less than their original cost.
1
<PAGE> 50
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time, have
a dramatic impact on a fund's performance.
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard/Windsor II's expense ratio in fiscal year 1997 was 0.37%, or
$3.70 per $1,000 of average net assets. The average growth and income equity
fund had expenses in 1997 of -%, or $- per $1,000 of average net assets,
according to Lipper Analytical Services which reports on the mutual fund
industry.
FUND EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Fund.
As noted in this table, you do not pay fees of any kind when you buy, sell, or
exchange shares of the Fund:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
</TABLE>
The next table illustrates the operating expenses that you would incur as a
shareholder of the Fund. These expenses are deducted from the Fund's income
before it is paid to you. Expenses include investment advisory fees as well as
the costs of administering the Fund, maintaining accounts, providing shareholder
services, and other activities. The expenses shown in the table are based upon
those incurred in the fiscal year ended October 31, 1997.
ANNUAL FUND OPERATING EXPENSES
<TABLE>
<S> <C> <C>
Management and Administrative Expenses: 0.19%
Investment Advisory Expenses: 0.15%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.01%
-----
Total Other Expenses: 0.03%
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.37%
=====
</TABLE>
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds, by illustrating the
hypothetical expenses that you would incur on a $1,000 investment over various
periods. The example assumes that (1) the Fund provides a return of 5% a year
and (2) you redeem your investment at the end of each period.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------
<S> <C> <C> <C>
$4 $12 $21 $47
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 51
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding of the Fund for each of the fiscal years in the decade ended October
31, 1997. The financial statements that include these financial highlights were
audited by Price Waterhouse LLP, independent accountants. You should read this
information in conjunction with the Fund's financial statements and accompanying
notes, which appear, along with the audit report from Price Waterhouse, in the
Fund's most recent annual report to shareholders. The annual report is
incorporated by reference in the Statement of Additional Information and in this
prospectus, and contains a more complete discussion of the Fund's performance.
You may have the report sent to you without charge by writing to Vanguard or by
calling our Investor Information Department.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended October 31,
-----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 24.04 $ 20.06 $ 17.33 $17.98 $15.75 $15.07 $11.91 $ 15.81 $13.23 $12.41
INVESTMENT OPERATIONS
Net Investment Income .64 .62 .58 .55 .50 .56 .62 .67 .73 .60
Net Realized and Unrealized
Gain (Loss) on Investments 6.47 4.63 3.17 (.19) 2.47 1.17 3.55 (3.22) 2.42 1.63
-----------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 7.11 5.25 3.75 .36 2.97 1.73 4.17 (2.55) 3.15 2.23
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income (.63) (.58) (.55) (.51) (.52) (.61) (.73) (.74) (.57) (.61)
Distributions from Realized
Capital Gains (1.16) (.69) (.47) (.50) (.22) (.44) (.28) (.61) -- (.80)
-----------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.79) (1.27) (1.02) (1.01) (.74) (1.05) (1.01) (1.35) (.57) (1.41)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 29.36 $ 24.04 $ 20.06 $17.33 $17.98 $15.75 $15.07 $ 11.91 $15.81 $13.23
====================================================================================================================================
TOTAL RETURN 31.27% 27.17% 23.08% 2.22% 19.51% 12.50% 36.61% -17.48% 24.68% 20.54%
====================================================================================================================================
RADIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions) $22,568 $14,758 $10,272 $8,246 $7,486 $4,878 $3,298 $ 2,087 $2,162 $1,485
Ratio of Total Expenses to
Average Net Assets 0.37% 0.39% 0.40% 0.39% 0.39% 0.41% 0.48% 0.52% 0.53% 0.58%
Ratio of Net Investment Income to
Average Net Assets 2.49% 2.92% 3.27% 3.26% 3.11% 3.72% 4.51% 4.93% 5.29% 4.94%
Portfolio Turnover Rate 30% 32% 30% 24% 26% 23% 41% 20% 22% 25%
Average Commission Rate Paid $ .0523 $ .0483 N/A N/A N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a historical measure of dividend income, and total return is a
measure of past dividend income (assuming that it has been reinvested) plus
realized and unrealized capital appreciation. Neither yield nor total return
should be used to predict the future performance of a fund.
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1997 with a net asset value (price) of $24.04 per share.
During the year, the Fund earned $.64 per share from investment income (interest
and dividends) and $6.47 per share from investments that had appreciated in
value or that were sold for higher prices than the Fund paid for them. Of those
total earnings of $7.11 per share, $1.79 was returned to shareholders in the
form of distributions ($.63 in dividends, $1.16 in capital gains). The earnings
($7.11 per share) less total distributions ($1.79 per share) resulted in a share
price of $29.36 at the end of the fiscal year, an increase of $5.32 per share
(from $24.04 at the beginning of the period to $29.36 at the end of the period).
Assuming that the shareholder had reinvested the distributions in the purchase
of more shares, the total return from the Fund was 31.27% for the year.
As of October 31, 1997, the Fund had $22.6 billion in net assets; an expense
ratio of 0.37% ($3.70 per $1,000 of net assets); and net investment income
amounting to 2.49% of its average net assets. It sold and replaced securities
valued at 30% of its total net assets.
3
<PAGE> 52
PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize companies that, considering their
assets and earnings history, are attractively priced; these companies often pay
regular dividend income to shareholders. Growth funds focus on companies that,
due to their strong earnings and revenue potential, offer above-average
prospects for capital growth, with less emphasis on dividend income. Value and
growth stocks have, in the past, produced similar long-term returns, though each
has periods when it outperforms the other. In general, value funds are
appropriate for investors who want some dividend income and the potential for
capital gains but are less tolerant of share-price fluctuations. Growth funds,
by contrast, appeal to investors who will accept more volatility in hope of a
greater increase in share price or who prefer a higher portion of the Fund's
returns to come as capital gains, which may be taxed at lower rates than
dividend income.
A WORD ABOUT RISK
This prospectus discusses the risks you would face as an investor in
Vanguard/Windsor II. It is important to keep in mind one of the main axioms of
investing: the higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: the lower the risk, the lower the
potential reward. However, as you consider an investment in the Fund, you should
also take into account your own tolerance for the daily fluctuations of the
stock market.
Look for this "warning flag" symbol [FLAG] throughout the prospectus. It is
used to mark detailed information about each type of risk that you, as a
shareholder of the Fund, would confront.
THE FUND'S OBJECTIVES
Vanguard/Windsor II seeks to provide long-term growth of capital and, as a
secondary objective, some dividend income. These objectives are fundamental,
which means that they cannot be changed unless a majority of shareholders vote
to do so.
[FLAG] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING PAGES,
YOUR INVESTMENT IN THE FUND, AS WITH ANY INVESTMENT IN COMMON STOCKS,
COULD LOSE MONEY.
WHO SHOULD INVEST
Vanguard/Windsor II may be suitable for you if:
- - You wish to add a growth and income stock mutual fund to your existing
holdings, which could include other stock--as well as bond, money market,
and tax-exempt--investments.
- - You want a value-oriented investment that seeks to provide long-term growth
as well as some dividend income.
This Fund is not an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all the Fund's shareholders. To minimize such
costs, which reduce the ultimate returns achieved by you and the other
shareholders, the Fund has adopted the following policies:
- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of the
investment or because of a history of excessive trading by the investor.
- - There is a limit on the number of times you can exchange into or out of the
Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
PLAIN TALK ABOUT
INVESTING FOR THE LONG TERM
Vanguard/Windsor II is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on short-term
fluctuations in the stock market.
4
<PAGE> 53
INVESTMENT STRATEGY
This section explains how the investment advisers pursue the Fund's objectives
of long-term capital growth and some dividend income. It also explains three
important risks--market risk, objective risk, and manager risk--faced by
investors in the Fund. Unlike the Fund's investment objectives, the advisers'
investment strategy is not fundamental and can be changed by the Fund's Board of
Directors without shareholder approval. However, before making any important
change in its strategy, the Fund will give shareholders 30 days' notice, in
writing.
MARKET EXPOSURE
The Fund is a value-oriented growth and income fund that invests mainly in
large- and mid-capitalization common stocks that offer favorable prospects for
capital growth and dividend income. At times, the Fund may also invest in
preferred stock.
[FLAG] THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN EXTENDED PERIODS. STOCK
MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING STOCK PRICES AND
PERIODS OF FALLING STOCK PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns (dividend income plus change in market
value) for the U.S. stock market over various periods as measured by the
Standard & Poor's 500 Composite Stock Price Index, a widely used barometer of
stock market activity. Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, how the gap between the best and worst
returns tends to lessen over the long term.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926 -1997)
- ---------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Best 53.9% 23.9% 20.1% 16.9%
Worst -43.3 -12.5 -0.9 3.1
Average 13.0 10.5 10.9 10.9
- ---------------------------------------------------------
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1997. For example, while the average return on stocks for all of the
5-year periods was 10.5%, returns for these 5-year periods ranged from a -12.5%
average (from 1928 through 1932), to 23.9% (from 1950 through 1954). These
average returns reflect past performance of common stocks and should not be
regarded as an indication of future returns from either the stock market as a
whole or this Fund in particular.
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from "market-timing"--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who did not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
closely monitoring daily transactions.
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Vanguard defines large-capitalization, or large-cap, funds as those holding
stocks of companies with a median market value exceeding $7.5 billion. Mid-cap
funds hold stocks of companies with a median market value between $1 billion and
$7.5 billion. Small-cap funds hold stocks of companies with a median market
value of up to $1 billion. Historically, large-cap funds have exhibited lower
volatility than mid-cap and small-cap funds.
5
<PAGE> 54
PLAIN TALK ABOUT
PRICE/EARNINGS RATIOS
A widely used measure of common-stock valuation is the price/earnings (P/E)
ratio. The P/E ratio is simply a stock's current price divided by its earnings
per share from the past year (or sometimes its projected earnings for the coming
year). In general, a lower P/E ratio indicates that a stock is out of favor with
investors and is expected to have slow future growth in profits. A higher P/E
ratio indicates that investors expect rapid growth in a company's profits. Keep
in mind, however, that these expectations sometimes prove incorrect, and that
there is no "ideal" P/E ratio.
Finally, because Vanguard/Windsor II does not hold the same securities held in
the S&P 500 Index or any other market index, the performance of the Fund will
not mirror the returns of any particular index.
[FLAG] THE FUND IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE POSSIBILITY THAT THE
RETURNS FROM THE TYPES OF STOCKS IN WHICH THE FUND INVESTS--ATTRACTIVELY
PRICED OR "VALUE" STOCKS--WILL TRAIL RETURNS FROM THE OVERALL STOCK
MARKET. DIFFERENT TYPES OF STOCKS TEND TO GO THROUGH CYCLES OF
OUTPERFORMANCE AND UNDERPERFORMANCE IN COMPARISON TO COMMON STOCKS IN
GENERAL. THESE CYCLES HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL
YEARS.
SECURITY SELECTION
Vanguard/Windsor II employs four investment advisers, each of whom independently
chooses and maintains a portfolio of common stocks for the Fund.
Each adviser is responsible for a specific percentage of the Fund's assets.
Before the Fund makes a significant change in an adviser's percentage,
shareholders will receive 30 days' notice, in writing.
The four investment advisers employ active investment management methods,
which means securities are bought and sold according to the advisers' judgments
about companies and their financial prospects, and about the stock market and
the economy in general.
While the advisers use different processes to select securities for their
portfolios, all four are committed to investing in large- and mid-cap stocks
that, in their opinion, are undervalued. Undervalued stocks are generally those
that are out of favor with investors and currently trading at prices that, the
adviser feels, are below what the stocks are worth in relation to their
earnings. These stocks typically--but not always--have lower-than-average
price/earnings (P/E) ratios and higher-than-average dividend yields.
Barrow, Hanley, Mewhinney & Strauss, Inc. (BHM&S), which is responsible for
about 73% of the Fund's assets, uses traditional methods of stock
selection--research and analysis--to identify undervalued securities. A security
will be sold when, in BHM&S's opinion, its share price accurately reflects the
security's overall worth. At that point, another undervalued security will be
chosen. No more than 15% of BHM&S's portfolio is devoted to a single industry.
Like BHM&S, Tukman Capital Management, Inc. (Tukman), which manages about 10%
of the Fund's assets, uses traditional research methods to select undervalued
securities. Tukman typically buys stocks of financially sound companies in
growing business sectors only and holds them for three to five years.
Equinox Capital Management, Inc. (Equinox), which manages about 10% of the
Fund's assets, uses its own fundamental research and proprietary software to
identify undervalued securities with attractive growth and dividend prospects.
Like BHM&S, it avoids large concentrations in a single industry.
6
<PAGE> 55
Vanguard Core Management Group, which is responsible for about 7% of the
Fund's assets, selects stocks from a "universe" of about 550 companies. Vanguard
Core Management Group evaluates the stocks using several fundamental factors,
such as a stock's price in relation to its projected growth rate. All of the
stocks selected are expected, as a group, to outperform the Russell 1000 Value
Index, a benchmark of undervalued large- and mid-cap stocks.
The balance of Vanguard/Windsor II Fund's assets (about 5%) is held in cash
reserves, also managed by Vanguard. Vanguard may invest the Fund's cash reserves
in stock futures. This strategy is intended to keep the Fund more fully invested
in common stocks while retaining cash on hand to meet liquidity needs. See page
8 for more details on the Fund's policy on futures.
The top ten holdings (which amounted to 25% of the Fund's total net assets) as
of October 31, 1997, follow:
1. Chase Manhattan Corp.
2. International Business Machines Corp.
3. Ford Motor Co.
4. Exxon Corp.
5. GTE Corp.
6. Schlumberger Ltd.
7. Sears, Roebuck & Co.
8. SBC Communications Inc.
9. Allstate Corp.
10. Travelers Group Inc.
Keep in mind that, because the makeup of the Fund may change, this listing is
only a "snapshot" at one point in time.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT ONE
OR MORE OF THE FUND'S ADVISERS MAY DO A POOR JOB OF SELECTING STOCKS.
PORTFOLIO TURNOVER
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long they have been held. The Fund's
average turnover rate for the past ten years has been about 27%. (A turnover
rate of 100% would occur, for example, if the Fund sold and replaced securities
valued at 100% of its total net assets within a one-year period.)
INVESTMENT POLICIES
Besides investing in undervalued common stocks, the Fund may follow a
number of investment policies to achieve its objectives.
The Fund may invest as much as 20% of its assets in securities of companies
based outside the United States and may engage in currency transactions. These
securities can be traded in either U.S. or foreign markets.
PLAIN TALK ABOUT
PORTFOLIO DIVERSIFICATION
In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average U.S. equity mutual fund has
about 30% of its assets invested in its ten largest holdings, while some less
diversified mutual funds have 50% or more of their assets invested in the stocks
of just ten companies.
PLAIN TALK ABOUT
PORTFOLIO TURNOVER
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. Also, funds with high portfolio turnover rates
may be more likely than low-turnover funds to generate capital gains that must
be distributed to shareholders as taxable income. The average turnover rate for
all domestic stock funds is approximately 80%.
7
<PAGE> 56
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new, exotic types of derivatives--some of which can
carry considerable risks.
PLAIN TALK ABOUT
CASH RESERVES
With mutual funds, holding cash reserves--or "cash"--does not mean literally
that the fund holds a stack of currency. Rather, cash reserves refer to
short-term, interest-bearing securities that can easily and quickly be converted
to cash. (Most mutual funds keep at least a small percentage of assets in cash
to accommodate shareholder redemptions.) While some funds strive to keep cash
levels at a minimum and to always remain fully invested in stocks, other funds
allow investment advisers to hold up to 20% of a fund's assets in cash reserves.
[FLAG] THE FUND IS SUBJECT TO COUNTRY RISK AND CURRENCY RISK. COUNTRY RISK IS
THE POSSIBILITY THAT POLITICAL EVENTS (SUCH AS A WAR), FINANCIAL
PROBLEMS (SUCH AS GOVERNMENT DEFAULT), OR NATURAL DISASTERS (SUCH AS AN
EARTHQUAKE) WILL WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN
THAT COUNTRY TO LOSE MONEY. CURRENCY RISK IS THE POSSIBILITY THAT A
"STRONGER" U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS INVESTING
OVERSEAS. GENERALLY, WHEN THE DOLLAR RISES IN VALUE AGAINST A FOREIGN
CURRENCY, YOUR INVESTMENT IN THAT COUNTRY LOSES VALUE BECAUSE ITS
CURRENCY IS WORTH FEWER U.S. DOLLARS. ON THE OTHER HAND, A "WEAKER"
DOLLAR GENERALLY LEADS TO HIGHER RETURNS FOR AMERICANS HOLDING FOREIGN
INVESTMENTS.
The Fund may invest in money market instruments, fixed-income securities,
convertible securities, and other equity securities such as preferred stock. The
Fund may invest up to 15% of its assets in restricted securities with limited
marketability or other illiquid securities.
[FLAG] THE FUND RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN STOCK
FUTURES AND OPTIONS CONTRACTS, WHICH ARE TRADITIONAL TYPES OF
DERIVATIVES.
Losses (or gains) involving futures can sometimes be substantial--in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a portfolio. The Fund will not use
futures and options for speculative purposes or as leveraged investments that
magnify the gains or losses of an investment. Rather, the Fund will keep
separate cash reserves or other liquid portfolio securities in the amount of the
obligation underlying the futures or options contract. Only a limited percentage
of the Fund's assets--5%--may be applied toward the deposits required on futures
contracts, and the value of all futures contracts in which the Fund acquires an
interest cannot exceed 20% of the Fund's total assets.
The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs by buying futures instead of actual
stocks.
- - To add value to the Fund by buying futures instead of actual stocks when
futures are cheaper.
The Fund will usually hold only a small percentage of its assets in cash
reserves, although if the investment adviser believes that market conditions
warrant a temporary defensive measure, the Fund may hold cash reserves without
limit.
8
<PAGE> 57
INVESTMENT LIMITATIONS
The Fund has adopted limitations on some of its investment policies. Some of
these limitations are that the Fund will not:
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for temporary or emergency purposes in an amount not
exceeding 10% of its net assets. Whenever the Fund's outstanding borrowing
is more than 5% of its assets, it will stop making investments.
With respect to 75% of its assets, the Fund will not:
- - Invest more than 5% in the securities of any one company.
- - Buy more than 10% of the outstanding voting shares of any company.
A complete list of the Fund's investment limitations can be found in the
Statement of Additional Information. These limitations are fundamental and may
be changed only by approval of a majority of the Fund's shareholders.
INVESTMENT PERFORMANCE
Vanguard/Windsor II invests primarily in common stocks, so its performance is
closely correlated to the performance of the overall stock market. Historically,
stock market performance has been characterized by sharp up-and-down swings in
the short term and by more stable growth over the long term.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED OCTOBER 31, 1997
* VANGUARD/WINDSOR II
# S&P 500 INDEX
31.3%* 32.1%# 27.1%* 27.5%# 20.2%* 19.9%# 17.0%* 17.2%#
1 YEAR 3 YEARS 5 YEARS 10 YEARS
The results shown above represent the Fund's "average annual total return"
performance, which assumes that any distributions of capital gains and dividends
were reinvested for the indicated periods. Also included is comparative
information on the unmanaged Standard & Poor's 500 Composite Stock Price Index.
The chart does not make any allowances for federal, state, or local income taxes
that shareholders must pay on a current basis.
In weighing these performance figures, note that the Fund has been in
operation since June 24, 1985. BHM&S has been adviser for the majority of Fund
assets from the Fund's inception. Equinox, Tukman, and Vanguard Core Management
Group were added as advisers on November 1, 1991.
PLAIN TALK ABOUT
PAST PERFORMANCE
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
9
<PAGE> 58
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from the dividends that a fund earns from its holdings as well as
interest it receives from its money market and bond investments. Capital gains
are realized whenever the fund sells securities for higher prices than it paid
for them. These capital gains are either short-term or long-term depending on
whether the fund held the securities for less than or more than one year.
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing in a tax-deferred retirement account (such as an IRA),
it is not to your advantage to buy shares of a fund shortly before it makes a
distribution, because part of your investment will come back to you as a taxable
distribution. This is known as "buying a dividend." For example: on December 15,
you invest $5,000, buying 250 shares for $20 each. If the fund pays a
distribution of $1 per share on December 16, its share price would drop to $19
(not counting market change). You would still have only $5,000 (250 shares x $19
= $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you
would owe tax on the $250 distribution you received, even if you had reinvested
it in more shares. To avoid "buying a dividend," check a fund's distribution
schedule before you invest.
SHARE PRICE
The Fund's share price, also called its net asset value, or NAV, is calculated
each business day after the close of trading (generally 4 p.m. Eastern time) on
the New York Stock Exchange. The net asset value per share is calculated by
adding up the total assets of the Fund, subtracting all its liabilities, or
debts, and then dividing by the total number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -------------------------------------
NUMBER OF SHARES OUTSTANDING
The daily net asset value is useful to you as a shareholder because the NAV,
multiplied by the number of Fund shares you own, gives you the dollar amount you
would have received had you sold all of your shares back to the Fund that day.
The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Funds." Different newspapers use
different abbreviations of the Fund's name, but the most common is WndsrII.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each June and December, the Fund distributes to shareholders virtually all of
its income from interest and dividends. Any capital gains realized from the sale
of securities are distributed in December. In addition, the Fund may
occasionally be required to make supplemental dividend or capital gains
distributions at other times during the year.
You can choose to receive your reinvested distributions of income and capital
gains (or of income alone) in cash, or you can have them automatically
re-invested in more shares of the Fund. In either case, these distributions are
taxable to you. It is important to note that distributions of dividends and
capital gains that are declared in December--if paid to you by the end of
January--are taxed as if they had been paid to you in December. Each year
Vanguard will send you a statement showing the tax status of all your
distributions.
- - The dividends and short-term capital gains that you receive are taxable to
you as ordinary dividend income. Any distributions of net long-term
capital gains are taxable to you as long-term capital gains, no matter how
long you've owned shares in the Fund. Long-term capital gains may be taxed
at different rates, depending on how long the Fund held the securities.
Although the Fund does not seek to realize any particular amount of
capital gains during a year, such gains are realized from time to time as
by-products of the ordinary investment activities of the Fund.
Consequently, distributions may vary considerably from year to year.
- - If you sell or exchange your shares, any gain or loss you have is a
taxable event, which means that you may have a capital gain
10
<PAGE> 59
to report as income, or a capital loss to report as a deduction, when you
complete your federal income tax return.
- - Distributions of dividends or capital gains, and capital gains or losses
from your sale or exchange of Fund shares, may be subject to state and
local income taxes as well.
The tax information in this prospectus is provided as general information and
will not apply to you if you are investing in a tax-deferred account such as an
IRA. You should consult your tax adviser about the tax consequences of an
investment in the Fund.
THE FUND AND VANGUARD
Vanguard/Windsor II is a member of The Vanguard Group, a family of more than 30
investment companies with more than 95 distinct investment portfolios and total
net assets of more than $320 billion. All of the Vanguard funds share in the
expenses associated with business operations, such as personnel, office space,
equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each fund pays its
allocated share of The Vanguard Group's costs.
A list of the Fund's Directors and officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.
INVESTMENT ADVISERS
The Fund employs four investment advisers. Each manages its portion of the
Fund's assets subject to the control of the Directors and officers of the Fund.
Barrow, Hanley, Mewhinney & Strauss, Inc. (BHM&S), One McKinney Plaza, 3232
McKinney Avenue, 15th Floor, Dallas, TX 75204, is an investment advisory firm
founded in 1979. BHM&S is owned by United Asset Management, 1 International
Place, Boston, MA 02110. BHM&S currently manages approximately $27 billion in
stock and bond portfolios.
BHM&S is paid a quarterly advisory fee that is based on the average month-end
Fund assets it manages:
<TABLE>
<CAPTION>
- ---------------------------------------
AVERAGE ASSETS MANAGED BASIC FEE
- ---------------------------------------
<S> <C>
First $200 million 0.300%
Next $300 million 0.200
Next $500 million 0.150
Assets over $1 billion 0.125
- ---------------------------------------
</TABLE>
BHM&S's advisory fee may be adjusted based on the total return performance of
its portion of the Fund as compared to that
PLAIN TALK ABOUT
VANGUARD'S UNIQUE
CORPORATE STRUCTURE
The Vanguard Group, Inc., is the only MUTUAL mutual fund company. It is owned
jointly by the funds it oversees and by the shareholders in those funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to fund shareholders in
the form of lower operating expenses.
11
<PAGE> 60
PLAIN TALK ABOUT
THE FUND'S ADVISERS
The manager responsible for BHM&S's portion of Vanguard/Windsor II since 1985 is
JAMES P. BARROW, Partner and Vice President of BHM&S; has worked in investment
management since 1965; with BHM&S since 1980; B.S., University of South
Carolina.
The manager responsible for Equinox's portion of the Fund since 1991 is RONALD
J. ULRICH, President, Director, and founder of Equinox Capital Management; has
worked in investment management since 1973; B.S., Lehigh University, M.B.A., New
York University.
The manager responsible for Tukman's portion of the Fund since 1991 is MELVIN
T. TUKMAN, President, Director, and founder of Tukman; has worked in investment
management since 1971; A.B., Hunter College, M.B.A., Harvard Business School.
The manager responsible for Vanguard Core Management Group's portion of the
Fund since 1991 is GEORGE U. SAUTER, a Managing Director of Vanguard; has worked
in investment management since 1985; A.B., Dartmouth College, M.B.A., University
of Chicago.
of the Standard & Poor's/BARRA Value Index, a benchmark of stocks from the S&P
500 Index with lower than average price/book ratios. Under the fee schedule,
BHM&S's basic fee may be increased or decreased by as much as 25%.
Equinox Capital Management, Inc., 590 Madison Avenue, 41st Floor, New York
City, NY 10022, is a professional investment advisory firm founded in 1989. It
currently manages approximately $9.3 billion in assets.
Equinox is paid a quarterly advisory fee based on the average month-end assets
of its portion of Windsor II:
<TABLE>
<CAPTION>
- --------------------------------------------
AVERAGE ASSETS MANAGED BASIC FEE
- --------------------------------------------
<S> <C>
First $400 million 0.200%
Next $600 million 0.150
Next $1 billion 0.125
Assets over $2 billion 0.100
- --------------------------------------------
</TABLE>
Equinox's advisory fee may be adjusted based on the total return performance
of its portion of Windsor II as compared to that of the Russell 1000 Value
Index. Under the fee schedule, Equinox's basic fee may be increased or decreased
by as much as 50%.
Founded in 1980, Tukman Capital Management, Inc., 60 East Sir Francis Drake
Boulevard, Larkspur, CA 94939, is an investment advisory firm that currently
manages $5.2 billion in assets.
Tukman is paid a quarterly advisory fee based on the average month-end assets
of its portion of Windsor II:
<TABLE>
<CAPTION>
- -----------------------------------------------
AVERAGE ASSETS MANAGED BASIC FEE
- -----------------------------------------------
<S> <C>
First $25 million 0.40%
Next $125 million 0.35
Next $350 million 0.25
Next $500 million 0.20
Assets over $1 billion 0.15
- -----------------------------------------------
</TABLE>
Tukman's basic advisory fee may be adjusted based on the total return
performance of its portion of Windsor II as compared to that of the S&P 500
Index. Under the fee schedule, Tukman's basic fee may be increased or decreased
by as much as 50%.
Vanguard Core Management Group, P.O. Box 2600, Valley Forge, PA 19482,
provides investment advisory services to several Vanguard funds, managing more
than $88 billion in total assets at the end of 1997. Vanguard Core Management
Group provides advisory services to the Fund on an at-cost basis.
For fiscal year ended October 31, 1997, the net fee paid to BHM&S was
$19,420,974 after an increase of $2,495,021 based on performance. For the fiscal
year ended October 31, 1997, the net fee paid to Equinox was $3,199,637 after an
increase of
12
<PAGE> 61
$408,295 based on performance. For the fiscal year ended October 31, 1997 the
net fee paid to Tukman was $4,408,562 after an increase of $785,658 based on
performance.
The current fee agreements with the advisers authorize them to choose brokers
or dealers to handle the purchase and sale of the Fund's securities, and direct
the advisers to get the best available price and most favorable execution from
these brokers with respect to all transactions. At times, the advisers may
choose brokers who charge higher commissions in the interest of obtaining better
execution of a transaction. If more than one broker can obtain the best
available price and favorable execution of a transaction, then the advisers are
authorized to choose a broker who, in addition to executing the transaction,
will provide research services to the advisers or the Fund. However, the
advisers will not pay higher commissions specifically for the purpose of
obtaining research services. The Fund may direct the advisers to use a
particular broker for certain transactions in exchange for commission rebates or
research services provided to the Fund.
The Board of Directors may, without prior approval from shareholders, change
the terms of the advisory agreements or hire a new investment adviser as either
a replacement adviser or as an additional adviser. However, no such change would
be made before giving shareholders 30 days' notice, in writing.
GENERAL INFORMATION
Vanguard/Windsor II is one of two Funds of Vanguard/Windsor Funds, Inc., which
is organized under the laws of the state of Maryland. The other Fund is
Vanguard/Windsor Fund (which is not open to new investors). The two Funds are
combined under one corporation for administrative purposes, but for investment
management purposes operate like separate companies.
Shareholders of Vanguard/Windsor II have rights and privileges similar to
those enjoyed by other corporate shareholders. For example, shareholders will
not be responsible for any liabilities of the corporation. If any matters are to
be voted on by shareholders (such as a change in a fundamental investment
objective or the election of Directors), each share outstanding at that point
would be entitled to one vote. Annual meetings will not be held by the Fund
except as required by the Investment Company Act of 1940. A meeting will be
scheduled to vote on the removal of a Director if the holders of at least 10% of
the Fund's shares request a meeting in writing.
"Standard & Poor's," "Standard & Poor's 500," "S&P," and "500" are trademarks of
The McGraw-Hill Companies, Inc. Frank Russell Company is the owner of the
trademarks and copyrights relating to the Russell Indexes.
13
<PAGE> 62
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer you as a Vanguard/Windsor II shareholder. Booklets providing detailed
information are available on the services marked with a [BOOK GRAPHIC]. Please
call us to request copies.
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares.
<TABLE>
<S> <C>
TELEPHONE REDEMPTIONS Automatically set up for this Fund unless you notify us
(SALES AND EXCHANGES) otherwise.
VANGUARD DIRECT DEPOSIT Automatic method for depositing your paycheck or U.S.
SERVICE government payment (including Social Security and
[BOOK GRAPHIC] government pension checks) into your account.
VANGUARD AUTOMATIC EXCHANGE Automatic method for moving a fixed amount of money from
SERVICE one Vanguard fund account to another.*
[BOOK GRAPHIC]
VANGUARD FUND EXPRESS Electronic method for buying or selling shares. You can
[BOOK GRAPHIC] transfer money between your Vanguard fund account and an
account at your bank, savings and loan, or credit union
on a systematic schedule or whenever you wish.*
VANGUARD DIVIDEND EXPRESS Electronic method for transferring dividend and/or capital
[BOOK GRAPHIC] gains distributions directly from your Vanguard fund account
to your bank, savings and loan, or credit union account.
VANGUARD BROKERAGE SERVICES A cost-effective way to trade stocks, bonds, and options on
(VBS) major exchanges, Nasdaq, and other domestic over-the-counter
[BOOK GRAPHIC] markets at reduced rates, and to buy and sell shares of
non-Vanguard mutual funds. Call VBS (1-800-992-8327) for
additional information and the appropriate forms.
</TABLE>
*Can be used to "dollar-cost average" [BOOK GRAPHIC] or to contribute to an IRA
or other retirement plan.
Investor Information 1-800-662-7447 - Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
14
<PAGE> 63
TYPES OF ACCOUNTS
INDIVIDUAL OR OTHER ENTITY
Vanguard's account registration form can be used to establish a variety of
nonretirement accounts.
FOR ONE OR MORE PEOPLE To open an account in the name of one
(individual) or more (joint tenants) people.
$3,000 minimum initial investment.
FOR A MINOR CHILD To open an account as an UGMA/UTMA (Uniform
[BOOK GRAPHIC] Gifts/Transfers to Minors Act). Age of
majority and other requirements are set by
state law. $1,000 minimum initial
investment.
FOR HOLDING TRUST ASSETS To invest assets held in an existing trust.
[BOOK GRAPHIC] $3,000 minimum initial investment.
FOR THIRD-PARTY TRUSTEE To open an account as a retirement trust or
RETIREMENT INVESTMENTS plan based on an existing corporate or
(Vanguard is not the custodian institutional plan. These accounts are
or trustee.) established by the custodian or trustee of
the existing plan. $1,000 minimum initial
investment.
FOR AN ORGANIZATION To open an account as a corporation,
partnership, or other entity. These accounts
may require a corporate resolution or other
documents to name the individuals authorized
to act. $3,000 minimum initial investment.
RETIREMENT
You establish these accounts with a Vanguard adoption agreement--not a Vanguard
account registration form. To request the appropriate adoption agreement and
forms, or to ask questions about investing for retirement, call Investor
Information.
FOR AN INDIVIDUAL RETIREMENT To open a retirement account in the name of
ACCOUNT (IRA) an individual. IRAs can be established with
(Vanguard Fiduciary Trust a contribution, a direct rollover from an
Company is the custodian.) employer's plan, such as a 401(k), or an
asset transfer or rollover from another
financial institution, such as a bank or
mutual fund company. $1,000 minimum initial
investment.
FOR A SIMPLIFIED EMPLOYEE To open a retirement account in the name of
PENSION PLAN ACCOUNT (SEP-IRA) an employee. SEPs allow employers to make
(Vanguard Fiduciary Trust deductible contributions directly to IRAs
Company is the custodian.) established by their employees. A SEP can be
1-800-823-7412 established by people who are self-employed,
Individual Retirement Plans small-business owners, partnerships, or
corporations.
FOR A SAVINGS INCENTIVE MATCH To open a retirement account in the name of
PLAN FOR EMPLOYEES ACCOUNT an employee. Created as part of the Small
(SIMPLE IRA) Business Job Protection Act of 1996, SIMPLEs
(Vanguard Fiduciary Trust replace SAR-SEPs. SIMPLEs are exclusively
Company is the custodian.) for employers that had 100 or fewer
1-800-823-7412 employees in the most recent calendar year
Individual Retirement Plans and that do not maintain another
employer-sponsored retirement plan. SIMPLEs
can be established by people who are
self-employed, small-business owners,
partnerships, or corporations. Salary
reduction contributions may be made by the
employee, with matching or nonmatching
contributions from the employer.
Investor Information 1-800-662-7447 Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
15
<PAGE> 64
TYPES OF ACCOUNTS (continued)
FOR A QUALIFIED RETIREMENT To open a retirement account that allows
PROGRAM ACCOUNT small-business owners or people who are
(Vanguard Fiduciary Trust self-employed to make tax-deductible
Company can be the trustee.) retirement contributions for themselves and
1-800-823-7412 their employees into Profit-Sharing and
Individual Retirement Plans Money Purchase Pension (Keogh) plans.
FOR A 403(b)(7) CUSTODIAL ACCOUNT To open a retirement account that allows
(Vanguard Fiduciary Trust employees of tax-exempt institutions (for
Company is the custodian.) example, schools or hospitals) to make
1-800-823-7412 pretax retirement contributions.
Individual Retirement Plans
DISTRIBUTION OPTIONS
You can receive distributions of dividends and/or capital gains in a number of
ways:
REINVESTMENT Dividends and capital gains are
automatically reinvested in additional
shares of the Fund unless you request a
different distribution method.
DIVIDENDS IN CASH Dividends are paid by check and mailed to
your account's address of record, and
capital gains are reinvested in additional
shares of the Fund.
CAPITAL GAINS IN CASH Capital gains distributions are paid by
check and mailed to your account's
address of record, and dividends are re-
invested in additional shares of the fund.
DIVIDENDS AND CAPITAL GAINS Both dividends and capital gains
IN CASH distributions are paid by check and mailed
to your account's address of record.
To electronically transfer cash dividends and/or capital gains to your bank,
savings and loan, or credit union account, see Vanguard Dividend Express under
"Services and Account Features."
If you have elected to receive dividend and/or capital gains distributions in
cash, but the Postal Service is unable to make delivery to your address of
record, your distribution option will be changed to reinvestment. No interest
will accrue on amounts represented by uncashed distribution checks.
BUYING SHARES
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request, provided we receive your request before the close of
trading on the New York Stock Exchange (generally 4 p.m. Eastern time). The Fund
is offered on a no-load basis, meaning that you do not pay sales commissions or
12b-1 marketing fees.
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
MINIMUM INVESTMENT $3,000 (regular $100 by mail or exchange;
account); $1,000 (IRAs $1,000 by wire.
and custodial accounts
for minors).
16
<PAGE> 65
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
<S> <C> <C>
Complete and sign the Mail your check with an Invest-
application form. By-Mail form detached from your
BY MAIL confirmation statement to the
[ENVELOPE GRAPHIC] address listed on the form.
FIRST-CLASS mail to:
The Vanguard Group
P.O. Box 2600 Make your check payable to: Make your check payable to:
Valley Forge, PA 19482-2600 The Vanguard Group-73 The Vanguard Group-73
EXPRESS or REGISTERED mail to: All purchases must be made in All purchases must be made in
The Vanguard Group U.S. dollars, and checks must be U.S. dollars, and checks must be
455 Devon Park Drive drawn on U.S. banks. drawn on U.S. banks.
Wayne, PA 19087-1815
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made payable to third parties.
BY TELEPHONE Call Vanguard Tele-Account* 24 Call Vanguard Tele-Account* 24
[TELEPHONE RECEIVER GRAPHIC] hours a day--or Client hours a day--or Client
Services during business Services during business
1-800-662-6273 hours--to exchange from hours to exchange from
Vanguard Tele-Account(R) another Vanguard fund account another Vanguard fund account
with the same registration with the same registration
1-800-662-2739 (name, address, taxpayer I.D., (name, address, taxpayer I.D.,
Client Services and account type). and account type).
Use Vanguard Fund Express (see
"Services and Account
Features") to transfer assets
from your bank account. Call
Client Services before your
first use to verify that this
option is in place.
*You must obtain a Personal Identification Number through Tele-Account
at least seven days before you request your first
exchange.
IMPORTANT NOTE: Once a telephone transaction has been approved by you and a confirmation number assigned, it
cannot be revoked. We reserve the right to refuse any purchase.
BY WIRE Call Client Services to arrange Call Client Services to arrange
[WIRE] your wire transaction. your wire transaction.
Wire to:
CoreStates Bank, N.A. Wire transactions are not Wire transactions are not
ABA 031000011 available for retirement available for retirement
CoreStates No. 0101 9897 accounts, except for asset accounts, except for asset
[Temporary Account Number] transfers and direct rollovers. transfers and direct rollovers.
Vanguard/Windsor II
[Account Registration]
Attention: Vanguard
AUTOMATICALLY -- Vanguard offers a variety of ways
[ARROWS IN CIRCLE] that you can add to your account
automatically. See "Services and
Account Features."
<CAPTION>
INVESTOR INFORMATION 1-800-662-7447 * CLIENT SERVICES 1-800-662-2739 * TELE-ACCOUNT 1-800-662-6273
</TABLE>
17
<PAGE> 66
BUYING SHARES (continued)
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
IMPORTANT NOTE: If you buy Fund shares through a registered broker/dealer or
investment adviser, the broker/dealer or adviser may charge you a service fee.
It is important that you call Vanguard before you invest a large dollar
amount by wire or check. We must consider the interests of all Fund shareholders
and so reserve the right to delay or refuse any purchase that will disrupt the
Fund's operation or performance.
REDEEMING SHARES
IMPORTANT TAX NOTE: Any sale or exchange of shares in a nonretirement account
could result in a taxable gain or loss.
The ability to redeem (that is, sell or exchange) Fund shares by telephone is
automatically established for your nonretirement account unless you tell us in
writing that you do not want this option.
To protect your nonretirement account from unauthorized or fraudulent
telephone instructions, Vanguard follows specific security procedures. When we
receive a call requesting an account transaction, we require the caller to
provide:
[check mark] Fund name.
[check mark] 10-digit account number.
[check mark] Name and address exactly as registered on that account.
[check mark] Social Security or employer identification number as
registered on that account.
If you call to sell shares, the sale proceeds will be made payable to you, as
the registered shareholder, and mailed to your account's address of record.
If we follow reasonable security procedures, neither the Fund nor Vanguard
will be responsible for the authenticity of transaction instructions received by
telephone. We believe that these procedures are reasonable and that, if we
follow them, you bear the risk of any losses resulting from unauthorized or
fraudulent telephone transactions on your account.
HOW TO SELL SHARES
You may withdraw any part of your account, at any time, by selling shares. Sale
proceeds are normally mailed within two business days after Vanguard receives
your request. The sale price of your shares will be the Fund's next-determined
net asset value after Vanguard receives all required documents in good order.
Good order means that the request includes:
[check mark] Fund name and account number.
[check mark] Amount of the transaction (in dollars or shares).
[check mark] Signatures of all owners exactly as registered on the
account.
[check mark] Signature guarantees (if required).
[check mark] Any supporting legal documentation that may be required.
[check mark] Any certificates you are holding for the account.
Sales or exchange requests received after the close of trading on the New
York Stock Exchange (generally 4 p.m. Eastern time) are processed at the next
business day's net asset value. No interest will accrue on amounts represented
by uncashed redemption checks. The Fund will
18
Investor Information 1-800-662-7447 Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
<PAGE> 67
not cancel any trade (e.g., purchase, redemption, or exchange) believed to be
authentic once the trade request has been received in writing or by telephone.
The Fund reserves the right to close any nonretirement or UGMA/UTMA account
in which the balance falls below the minimum initial investment. The Fund will
deduct a $10 annual fee in either June or December if your nonretirement account
balance falls below $2,500 or if your UGMA/UTMA account balance falls below
$500. The fee is waived if your total Vanguard account assets are $50,000 or
more.
Some written requests require a signature guarantee from a bank, broker, or
other acceptable financial institution. A notary public cannot provide a
signature guarantee.
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one Vanguard fund to purchase shares of
another.
Although we make every effort to maintain the exchange privilege, Vanguard
reserves the right to revise or terminate the exchange privilege, limit the
amount of an exchange, or reject any exchange, at any time, without notice.
Because excessive exchanges can potentially disrupt the management of the
Fund and increase transaction costs, Vanguard limits exchange activity to TWO
SUBSTANTIVE EXCHANGE REDEMPTIONS (at least 30 days apart) from the Fund during
any 12-month period. "Substantive" means either a dollar amount or a series of
movements between Vanguard funds that Vanguard determines, in its sole
discretion, could have a negative impact on the management of the Fund.
Before you exchange into a new Vanguard fund, be sure to read its prospectus.
For a copy and for answers to questions you might have, call Investor
Information.
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
BY TELEPHONE ALL TYPES EXCEPT RETIREMENT:
[Telephone Receiver] Call Vanguard Tele-Account* 24 hours a
1-800-662-6273 day--or Client Services during business
Vanguard Tele-Account hours--to sell or exchange shares. You
can exchange shares from this Fund to
1-800-662-2739 open an account in another Vanguard fund
Client Services or to add to an existing Vanguard fund
account with an identical registration.
RETIREMENT:
You can exchange--but not sell--shares by
calling Tele-Account or Client Services.
*You must obtain a Personal Identification
Number through Tele-Account at least seven
days before you request your first
redemption.
BY MAIL ALL TYPES EXCEPT RETIREMENT:
[Envelope] Send a letter of instruction signed by all
FIRST-CLASS mail to: registered account holders. Include the fund
The Vanguard Group name and account number and (if you are
Vanguard /Windsor II selling) a dollar amount or number of shares
P.O. Box 1120 OR (if you are exchanging) the name of the
Valley Forge, PA 19482-1120 fund you want to exchange into and a dollar
amount or number of shares. In order to
exchange into an account with a different
registration (including a different name,
address, or taxpayer identification number),
you must include the guaranteed signatures of
all current account owners on your written
instructions.
19
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES 1-800-662-2739
TELE-ACCOUNT 1-800-662-6273
<PAGE> 68
REDEEMING SHARES (continued)
INVESTOR INFORMATION 1-800-662-7447 / / CLIENT SERVICES 1-800-662-2739 / /
TELE-ACCOUNT 1-800-662-6273
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
EXPRESS or REGISTERED mail to: RETIREMENT:
The Vanguard Group For information on how to request
Vanguard/Windsor II distributions from:
455 Devon Park Drive - IRAs call Client Services.
Wayne, PA 19087-1815 - SEP-IRAs, 403(b)(7) custodial accounts,
SIMPLE IRAs, and Profit-Sharing and Money
Purchase Pension (Keogh) Plans -- call
Individual Retirement Plans at
1-800-823-7412.
Depending upon your account registration
type, additional documentation may be
required.
EXCHANGING SHARES ONLINE You may use your personal computer to
[PC GRAPHIC] exchange shares of most Vanguard funds by
accessing our website (www.vanguard.com). To
establish this service for your account, you
must first register through the website. We
will then send to you, by mail, an account
access password that will enable you to make
online exchanges.
The Vanguard funds that you cannot purchase
or sell through online exchange are VANGUARD
INDEX TRUST, VANGUARD BALANCED INDEX FUND,
VANGUARD INTERNATIONAL EQUITY INDEX FUND,
VANGUARD REIT INDEX PORTFOLIO, VANGUARD TOTAL
INTERNATIONAL PORTFOLIO, and VANGUARD GROWTH
AND INCOME PORTFOLIO (formerly known as
Vanguard Quantitative Portfolios). These
funds do permit online exchanges within IRAs
and other retirement accounts.
AUTOMATICALLY ALL TYPES EXCEPT RETIREMENT:
[Arrows in Circle] Vanguard offers several ways to sell or
exchange shares automatically (see "Services
and Account Features"). Call Investor
Information for the appropriate booklet and
application if you did not elect this feature
when you opened your account.
It is important that you call Vanguard before you redeem a large dollar
amount. We must consider the interests of all Fund shareholders and so reserve
the right to delay your redemption proceeds--up to seven days--if the amount
will disrupt the Fund's operation or performance.
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the United States
Securities and Exchange Commission. If you experience difficulty making a
telephone redemption during periods of drastic economic or market change, you
can send us your request by regular or express mail. Follow the instructions on
selling or exchanging shares by mail in the "Redeeming Shares" section.
TRANSFERRING REGISTRATION
HOW TO TRANSFER SHARES
You may transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to: Vanguard Financial Center,
Attention: Transfer Department, P.O. Box 1110, Valley Forge, PA 19482-1110.
20
<PAGE> 69
Investor Information 1-800-662-7447 - Client Services 1-800-662-2739 -
Tele-Account 1-800-662-6273
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you clear, concise account and tax statements to help you keep
track of your Vanguard/Windsor II account throughout the year, as well as when
you are preparing your income tax returns.
In addition, you will receive financial reports about the Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison to its industry benchmark), an overview of the markets, a report
from the advisers, a listing of the Fund's holdings, and other financial
statements.
CONFIRMATION STATEMENT Sent each time you buy, sell, or exchange
shares; confirms the trade date and the
amount of your transaction.
PORTFOLIO SUMMARY Mailed quarterly; shows the market value of
[Book] your account at the close of the statement
period, as well as distributions, purchases,
sales, and exchanges for the current calendar
year.
FUND FINANCIAL REPORTS Mailed in June and December for this Fund.
TAX STATEMENTS Generally mailed in January; report previous
year's dividend distributions, proceeds from
the sale of shares, and distributions from
IRAs or other retirement accounts.
AVERAGE COST STATEMENT Issued quarterly for most taxable accounts
[Book] (accompanies your Portfolio Summary); shows
the average cost of shares that you redeemed
during the calendar year using the average
cost single category method.
AUTOMATED TELEPHONE ACCESS
VANGUARD TELE-ACCOUNT Toll-free access to Vanguard fund and account
1-800-662-6273 information -- as well as some transactions
Any time, seven days a week, -- through any Touch-Tone(TM) telephone.
from anywhere in the continental Tele-Account provides total return, share
United States and Canada. price, price change, and yield quotations for
[Book] all Vanguard funds; gives your account
balances and history (e.g., last transaction,
latest dividend distribution); and allows you
to sell or exchange fund shares.
COMPUTER ACCESS
VANGUARD ONLINE(R)
www.vanguard.com Use your personal computer to learn more
about Vanguard's funds and services; keep in
touch with your Vanguard accounts; map out a
long-term investment strategy; initiate
certain transactions; and ask questions, make
suggestions, and send messages to Vanguard.
Our education-oriented website provides
timely news and information about Vanguard
funds and services; an online "university"
that offers a variety of mutual fund classes;
and easy-to-use, interactive tools to help
you create your own investment and retirement
strategies.
21
<PAGE> 70
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
Reading this prospectus will help you to decide whether one or more of the
Portfolios is suitable for your investment goals. If you decide to invest, don't
throw the prospectus out; you will no doubt need it for future reference.
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you
with pertinent information about
Fund/Portfolio Name, including its investment
objective, risks, strategy, and expenses, as
well as services available to you as a
shareholder.
It is important that you understand these
facts so that you can decide whether an
investment in this Fund/Portfolio is right
for you. The following questions offer a
quick review of some of the subjects covered
by this prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN ...
- The Fund's/Portfolio's objective? (page 4)
- The Fund's/Portfolio's investment strategy? (page 5)
- Who should invest in the Fund/Portfolio? (page 4)
- The risks associated with the Fund/Portfolio?
(pages 4-8)
- Whether the Fund/Portfolio is federally insured?
(inside front cover)
- The Fund's/Portfolio's expenses? (page 2)
- The background of the Fund's/Portfolio's investment
managers? (page 12)
- How to open an account? (page 15)
- How to sell or exchange shares? (page 18)
- How often you'll receive statements and financial
reports? (page 21)
22
<PAGE> 71
A SIMPLE RISK QUIZ
A. I HAVE BEEN INVESTING IN STOCK AND BOND MUTUAL FUNDS (OR IN INDIVIDUAL
STOCKS OR BONDS) FOR . . .
1. Less than a year
2. 1-2 years
3. 3-4 years
4. 5-9 years
5. 10 years or more
B. WHEN IT COMES TO INVESTING IN STOCK OR BOND MUTUAL FUNDS (OR INDIVIDUAL
STOCKS OR BONDS), I WOULD SAY I'M . . .
1. A very inexperienced investor
2. A somewhat inexperienced investor
3. A somewhat experienced investor
4. An experienced investor
5. A very experienced investor
C. I AM COMFORTABLE WITH INVESTMENTS THAT MAY LOSE MONEY FROM TIME TO TIME IF
THEY OFFER THE POTENTIAL FOR HIGHER RETURNS.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
D. I WILL KEEP AN INVESTMENT EVEN IF IT LOSES 10% OF ITS VALUE OVER THE COURSE
OF A YEAR.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
E. IN ADDITION TO MY LONG-TERM INVESTMENTS, I HAVE EMERGENCY SAVINGS EQUAL TO
____ MONTHS OF MY TAKE-HOME PAY.
1. Zero
2. One
3. Two
4. Three
5. Four or more
F. I FIND IT EASY TO PAY MY MONTHLY BILLS FROM MY CURRENT PAY.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
G. OVERALL, MY PERSONAL FINANCIAL SITUATION IS SECURE.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
ABOUT THE QUIZ
Knowing your risk tolerance is important when you are making an investment
decision. To give you a general idea of your comfort level with investing,
circle the response that most closely matches your personal situation. Keep in
mind, though, that there is no "foolproof" way to gauge your risk tolerance.
Scoring for the quiz is below.
HOW TO SCORE THE QUIZ
Use the number of your answer as the number of points scored. For instance, if
you chose answer #3 to a question, that's worth three points. Add up your points
and check below for the type of investor you are. (Note: If you chose answer #1
or #2 to Question C, subtract five points from your total score.)
- - If you scored between 0 and 25 points, you are considered a conservative
investor.
- - If you scored between 26 and 32 points, you are considered a moderate
investor.
- - If you scored between 33 and 35 points, you are considered an aggressive
investor.
23
<PAGE> 72
AN INVESTMENT PRIMER
Whether you are investing for the short or long term, keep these three points in
mind:
1. INVEST IN ALL THREE OF THE MAJOR ASSET CLASSES.
Most people use a combination of . . .
- - Stocks, which are considered the "riskiest" of the three asset classes. Day
to day, or even year to year, stocks tend to have wide price swings. Despite
this potential for significant price fluctuation, however, stocks have
historically offered higher returns than the other major asset classes over
longer periods.
- - Bonds, which are chiefly influenced by changes in interest rates. When
interest rates climb, bond prices drop; when interest rates fall, bond prices
rise.
- - Cash reserves, which offer more share-price (or capital) stability than
stocks or bonds--but also generate lower returns. Some examples are Treasury
bills and money market funds.
2. REMEMBER THAT SAFETY HAS A PRICE.
Many people want a "no-risk" investment. Remember, though, that the more safety
you seek, the less potential reward you can expect--and the less you can expect
in returns after inflation. Inflation affects not only the price you pay for
goods and services; it also eats away at your investment returns over time. What
is left is known as your "real" return--the actual return you receive after you
factor in inflation (see the chart at left).
3. CHANCES ARE GOOD THAT YOU CAN AFFORD TO TAKE MORE RISK.
As the chart shows, inflation cuts into the returns of all three asset classes.
However, stocks and bonds have had an easier time of outpacing inflation over
time--which means that, to beat inflation, you may need to invest more
aggressively.
Don't be put off by potential downswings in the value of your investment,
especially if you are investing for long periods. Time acts as a shock absorber,
letting you ride out the short-term bumps that investments often provide. The
longer you hold an investment, the more likely it is that you will earn a
positive return.
PLAIN TALK ABOUT
INFLATION AND YOUR INVESTMENTS
No matter how you invest your money, inflation--the rising cost of living--is a
constant threat to your investment returns. The chart below shows how stocks,
bonds, and cash reserves have fared against inflation over time.
INFLATION'S EFFECT ON
INVESTMENT RETURNS
(1926-1997)
<TABLE>
<CAPTION>
CASH
RESERVES BONDS STOCKS
<S> <C> <C> <C>
REAL RETURN AFTER INFLATION....... 0.7% 2.1% 7.9%
AVERAGE ANNUAL RATE OF INFLATION.. 3.1% 3.1% 3.1%
---- ---- -----
3.8% 5.2% 11.0%
==== ==== =====
</TABLE>
Source: (C) Stocks, Bonds, Bills, and Inflation 1998 Yearbook(TM), Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved.
24
<PAGE> 73
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments,
U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements,
commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes account management fees, administrative fees, and any
12b-1 marketing fees.
GROWTH AND INCOME STOCK FUND
A mutual fund that seeks moderate capital appreciation and some dividend income
by investing primarily in stocks.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies whose strong earnings and
revenue potential indicate above-average prospects for capital growth, with less
emphasis on dividend income.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a portfolio's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an attempt to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security or industry.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
PRINCIPAL
The amount of your own money that you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that focuses on stocks of companies that, considering their
earnings and dividends, are attractively priced; these companies often pay
regular dividend income to shareholders.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low share
prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 74
[SHIP]
THE VANGUARD GROUP
Post Office Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
For information on our funds,
fund services, and retirement
accounts; requests for
literature
CLIENT SERVICES DEPARTMENT
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-662-2738
For information on your
account, account transactions,
and account statements
VANGUARD BROKERAGE
SERVICES
1-800-992-8327
For information on trading
stocks, bonds, and options
at reduced commissions
VANGUARD TELE-ACCOUNT(R)
1-800-662-6273 (ON-BOARD)
For 24-hour automated access
to price and yield, information
on your account, certain
transactions
ELECTRONIC ACCESS TO THE
VANGUARD MUTUAL FUND
EDUCATION AND INFORMATION
CENTER
World Wide Web
www.vanguard.com
E-mail
[email protected]
<PAGE> 75
VANGUARD/
WINDSOR II
Institutional Prospectus
February 20, 1998
This prospectus contains
financial data for the
Fund through the
fiscal year ended
October 31, 1997.
[SHIP GRAPHIC]
[A member of
THE VANGUARD GROUP LOGO]
<PAGE> 76
VANGUARD/WINDSOR II
CONTENTS
Fund Profile 1
Fund Expenses 2
Financial Highlights 3
A Word About Risk 4
The Fund's Objectives 4
Who Should Invest 4
Investment Strategy 5
Investment Policies 7
Investment Limitations 9
Investment
Performance 9
Share Price 10
Dividends, Capital
Gains, and Taxes 10
The Fund and
Vanguard 11
Investment Advisers 11
General Information 13
Investing
with Vanguard
- - For Plan Participants 14
- - For Other
Institutional Investors 14
Accessing Fund
Information
By Computer 15
Prospectus Postscript 16
Risk Quiz 17
Glossary Inside Back Cover
A Growth and Income Stock Mutual Fund
INVESTMENT OBJECTIVES AND POLICIES
Vanguard/Windsor II (the "Fund") is a diversified mutual fund, a part of
Vanguard/Windsor Funds, Inc., an open-end investment company.
The Fund seeks to provide long-term growth of capital by investing mainly
in the equity securities of large and medium-size companies whose stocks are
considered to be undervalued by the Fund's advisers and out of favor with
investors. The Fund's secondary objective is to provide some dividend income.
IT IS IMPORTANT TO NOTE THAT THE FUND'S SHARES ARE NOT GUARANTEED OR INSURED
BY THE FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT. AS WITH ANY INVESTMENT
IN COMMON STOCKS, WHICH ARE SUBJECT TO WIDE FLUCTUATIONS IN MARKET VALUE, YOU
COULD LOSE MONEY BY INVESTING IN THE FUND.
FEES AND EXPENSES
Vanguard/Windsor II is offered on a no-load basis, which means that you pay no
sales commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the Fund's expense ratio.
IMPORTANT NOTE
This prospectus is intended for institutional clients and for participants in
employer-sponsored retirement or savings plans. Another version--for individuals
who would like to open a personal account--can be obtained by calling Vanguard
at 1-800-662-7447.
ADDITIONAL INFORMATION ABOUT THE FUND
A Statement of Additional Information (dated February 20, 1998) containing more
information about the Fund is, by reference, part of this prospectus and may be
obtained without charge by contacting Vanguard (see back cover) or visiting the
Securities and Exchange Commission's website (www.sec.gov).
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, risks, and strategy of Vanguard/Windsor
II. To highlight terms and concepts important to mutual fund investors, we have
provided "Plain Talk" explanations along the way. Reading the prospectus will
help you to decide whether the Fund is the right investment for you. We suggest
that you keep it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE> 77
FUND PROFILE Vanguard/Windsor II
WHO SHOULD INVEST (page 4)
- - Investors seeking a growth and income stock mutual fund as part of a balanced
and diversified investment program.
- - Investors seeking growth of their capital over the long term--at least five
years.
- - Investors seeking some dividend income.
WHO SHOULD NOT INVEST
- - Investors unwilling to accept significant fluctuations in share price.
RISKS OF THE FUND (pages 4-8)
The Fund's total return will fluctuate within a wide range, so an investor could
lose money over short or even extended periods. The Fund is subject to manager
risk (the chance that poor security selection will cause it to lag the stock
market as a whole) and objective risk (the chance that returns from the type of
stocks that the Fund invests in--attractively priced or "value" stocks-- will
trail returns from the overall stock market). Because the Fund can invest a
portion of its assets in companies based outside the United States, it is
exposed to several risks unique to foreign securities; see page 8 for details.
DIVIDENDS AND CAPITAL GAINS (page 10)
Dividends are paid in June and December. Capital gains, if any, are paid in
December. In participant accounts, all distributions are automatically
reinvested.
INVESTMENT ADVISERS (page 11)
Vanguard/Windsor II follows a multi-
adviser approach:
- - Barrow, Hanley, Mewhinney & Strauss, Inc.,
Dallas, Texas.
- - Equinox Capital Management, Inc.,
New York City, N.Y.
- - Tukman Capital Management, Inc.,
Larkspur, Calif.
- - Vanguard Core Management Group,
Valley Forge, Pa.
INCEPTION DATE: June 24, 1985
NET ASSETS AS OF 10/31/1997: $22.6 billion
FUND'S EXPENSE RATIO FOR THE
YEAR ENDED 10/31/1997: 0.37%
NEWSPAPER ABBREVIATION: WndsrII
VANGUARD FUND NUMBER: 073
CUSIP NUMBER: 922018205
QUOTRON SYMBOL: VWNFX.Q
AVERAGE ANNUAL TOTAL RETURNS--
PERIODS ENDED OCTOBER 31, 1997
1 YEAR 5 YEARS 10 YEARS
--------------------------
Vanguard/Windsor II 31.3% 20.2% 17.0%
S&P 500 Index 32.1 19.9 17.2
QUARTERLY RETURNS (%) 1988-1997 (intended to show volatility of returns)
[BAR GRAPH]
Vanguard/Windsor II S&P 500 Index
1988 9.1 5.7
7.2 6.6
4.1 0.3
2.3 3
1989 9.5 7.1
7.8 8.8
4.3 10.7
0.7 2
1990 -4.4 -3
1.4 -0.2
-15.1 -13.7
9.3 8.9
1991 17.9 14.5
-1.7 -0.2
4.9 5.3
6 8.4
1992 0.1 -2.5
4 1.9
4 3.2
3.4 5
1993 6.7 4.4
0.9 0.5
5.4 2.6
0.7 2.3
1994 -4.5 -3.8
2.6 0.4
2.9 4.9
-3.2 0
1995 9.9 9.7
8.1 9.5
10.2 7.9
6.1 6
1996 6.8 5.4
3 4.5
3.4 3.1
9.19 8.34
1997 1.59 2.68
14.7 17.46
9.07 7.49
In evaluating past performance, remember that it is not indicative of future
performance and that returns from stocks were high during the periods shown
relative to longer-term historical averages. Performance figures include the
reinvestment of any dividend and capital gains distributions. The returns are
net of expenses, but they do not reflect income taxes a taxable investor would
have incurred. Note, too, that both the return and principal value of an
investment will fluctuate so that investors' shares, when redeemed, may be worth
more or less than their original cost.
1
<PAGE> 78
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time, have
a dramatic impact on a fund's performance.
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard/Windsor II's expense ratio in fiscal year 1997 was 0.37%, or
$3.70 per $1,000 of average net assets. The average growth and income equity
fund had expenses in 1997 of %, or $ per $1,000 of average net assets,
according to Lipper Analytical Services, which reports on the mutual fund
industry.
FUND EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Fund.
As noted in this table, you do not pay fees of any kind when you buy, sell,
or exchange shares of the Fund:
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
The next table illustrates the operating expenses that you would incur as a
shareholder of the Fund. These expenses are deducted from the Fund's income
before it is paid to you. Expenses include investment advisory fees as well as
the costs of administering the Fund, maintaining accounts, providing shareholder
services, and other activities. The expenses shown in the table are based upon
those incurred in the fiscal year ended October 31, 1997.
ANNUAL FUND OPERATING EXPENSES
Management and Administrative Expenses: 0.19%
Investment Advisory Expenses: 0.15%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.01%
-----
Total Other Expenses: 0.03%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.37%
=====
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds, by illustrating
the hypothetical expenses that you would incur on a $1,000 investment over
various periods. The example assumes that (1) the Fund provides a return of 5% a
year and (2) you redeem your investment at the end of each period.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
---------------------------------------------
<S> <C> <C> <C>
$4 $12 $21 $47
---------------------------------------------
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 79
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding of the Fund for each of the fiscal years in the decade ended October
31, 1997. The financial statements that include these financial highlights were
audited by Price Waterhouse LLP, independent accountants. You should read this
information in conjunction with the Fund's financial statements and accompanying
notes, which appear, along with the audit report from Price Waterhouse, in the
Fund's most recent annual report to shareholders. The annual report is
incorporated by reference in the Statement of Additional Information and in this
prospectus, and contains a more complete discussion of the Fund's performance.
You may have the report sent to you without charge by contacting Vanguard.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $24.04 $20.06 $17.33 $17.98 $15.75 $15.07 $11.91 $15.81 $13.23 $12.41
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .64 .62 .58 .55 .50 .56 .62 .67 .73 .60
Net Realized and Unrealized
Gain (Loss) on Investments 6.47 4.63 3.17 (.19) 2.47 1.17 3.55 (3.22) 2.42 1.63
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 7.11 5.25 3.75 .36 2.97 1.73 4.17 (2.55) 3.15 2.23
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.63) (.58) (.55) (.51) (.52) (.61) (.73) (.74) (.57) (.61)
Distributions from
Realized Capital Gains (1.16) (.69) (.47) (.50) (.22) (.44) (.28) (.61) -- (.80)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.79) (1.27) (1.02) (1.01) (.74) (1.05) (1.01) (1.35) (.57) (1.41)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $29.36 $24.04 $20.06 $17.33 $17.98 $15.75 $15.07 $11.91 $15.81 $13.23
===================================================================================================================================
TOTAL RETURN 31.27% 27.17% 23.08% 2.22% 19.51% 12.50% 36.61% -17.48% 24.68% 20.54%
===================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $22,568 $14,758 $10,272 $8,246 $7,486 $4,878 $3,298 $2,087 $2,162 $1,485
Ratio of Total Expenses to
Average Net Assets 0.37% 0.39% 0.40% 0.39% 0.39% 0.41% 0.48% 0.52% 0.53% 0.58%
Ratio of Net Investment Income
to Average Net Assets 2.49% 2.92% 3.27% 3.26% 3.11% 3.72% 4.51% 4.93% 5.29% 4.94%
Portfolio Turnover Rate 30% 32% 30% 24% 26% 23% 41% 20% 22% 25%
Average Commission Rate Paid $.0523 $.0483 N/A N/A N/A N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a historical measure of dividend income, and total return is a
measure of past dividend income (assuming that it has been reinvested) plus
realized and unrealized capital appreciation. Neither yield nor total return
should be used to predict the future performance of a fund.
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL
HIGHLIGHTS TABLE
The Fund began fiscal 1997 with a net asset value (price) of $24.04 per share.
During the year, the Fund earned $.64 per share from investment income (interest
and dividends) and $6.47 per share from investments that had appreciated in
value or that were sold for higher prices than the Fund paid for them. Of those
total earnings of $7.11 per share, $1.79 was returned to shareholders in the
form of distributions ($.63 in dividends, $1.16 in capital gains). The earnings
($7.11 per share) less total distributions ($1.79 per share) resulted in a share
price of $29.36 at the end of the fiscal year, an increase of $5.32 per share
(from $24.04 at the beginning of the period to $29.36 at the end of the period).
Assuming that the shareholder had reinvested the distributions in the purchase
of more shares, the total return from the Fund was 31.27% for the year.
As of October 31, 1997, the Fund had $22.6 billion in net assets; an expense
ratio of 0.37% ($3.70 per $1,000 of net assets); and net investment income
amounting to 2.49% of its average net assets. It sold and replaced securities
valued at 30% of its total net assets.
3
<PAGE> 80
PLAIN TALK ABOUT
VALUE FUNDS AND
GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize companies that, considering their
assets and earnings history, are attractively priced; these companies often pay
regular dividend income to shareholders. Growth funds focus on companies that,
due to their strong earnings and revenue potential, offer above-average
prospects for capital growth, with less emphasis on dividend income. Value and
growth stocks have, in the past, produced similar long-term returns, though each
has periods when it outperforms the other. In general, value funds are
appropriate for investors who want some dividend income and the potential for
capital gains but are less tolerant of share-price fluctuations. Growth funds,
by contrast, appeal to investors who will accept more volatility in hope of a
greater increase in share price, or who prefer a higher portion of the Fund's
returns to come as capital gains, which may be taxed at lower rates than
dividend income.
PLAIN TALK ABOUT
INVESTING FOR THE LONG TERM
Vanguard/Windsor II is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on short-term
fluctuations in the stock market.
A WORD ABOUT RISK
This prospectus discusses the risks you would face as an investor in
Vanguard/Windsor II. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. However, as you consider an investment in the Fund, you should
also take into account your own tolerance for the daily fluctuations of the
stock market.
Look for this "warning flag" symbol [flag symbol] throughout the prospectus.
It is used to mark detailed information about each type of risk that you, as a
shareholder of the Fund, would confront.
THE FUND'S OBJECTIVES
Vanguard/Windsor II seeks to provide long-term growth of capital and, as a
secondary objective, some dividend income. These objectives are fundamental,
which means that they cannot be changed unless a majority of shareholders vote
to do so.
[FLAG] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING
PAGES, YOUR INVESTMENT IN THE FUND, AS WITH ANY INVESTMENT IN
COMMON STOCKS, COULD LOSE MONEY.
WHO SHOULD INVEST
Vanguard/Windsor II may be suitable for you if:
- - You wish to add a growth and income stock mutual fund to your existing
holdings, which could include other stock--as well as bond, money market, and
tax-exempt--investments.
- - You want a value-oriented investment that seeks to provide long-term growth
as well as some dividend income.
This Fund is not an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all the Fund's shareholders. To minimize such
costs, which reduce the ultimate returns achieved by you and other shareholders,
the Fund has adopted the following policies:
- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of the
investment or because of a history of excessive trading by the investor.
- - There is a limit on the number of times you can exchange into or out of the
Fund. If you own Fund shares as an investment
4
<PAGE> 81
option in an employer-sponsored retirement or savings plan, your plan
dictates the rules governing exchanges. Contact your plan administrator for
details.
- - The Fund reserves the right to stop offering shares at any time.
INVESTMENT STRATEGY
This section explains how the investment advisers pursue the Fund's objectives
of long-term capital growth and some dividend income. It also explains three
important risks--market risk, objective risk, and manager risk--faced by
investors in the Fund. Unlike the Fund's investment objectives, the advisers'
investment strategy is not fundamental and can be changed by the Fund's Board of
Directors without shareholder approval. However, before making any important
change in its strategy, the Fund will give shareholders 30 days' notice, in
writing.
MARKET EXPOSURE
The Fund is a value-oriented growth and income fund that invests mainly in
large- and mid-capitalization common stocks that offer favorable prospects for
capital growth and dividend income. At times, the Fund may also invest in
preferred stocks.
[FLAG] THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN EXTENDED PERIODS. STOCK
MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING STOCK PRICES AND
PERIODS OF FALLING STOCK PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns (dividend income plus change in market
value) for the U.S. stock market over various periods as measured by the
Standard & Poor's 500 Composite Stock Price Index, a widely used barometer of
stock market activity. Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, how the gap between the best and worst
returns tends to lessen over the long term.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
U.S. Stock Market Returns (1926-1997)
- -----------------------------------------------------------------
1 Year 5 Years 10 Years 20 Years
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Best 53.9% 23.9% 20.1% 16.9%
Worst -43.3 -12.5 -0.9 3.1
Average 13.0 10.5 10.9 10.9
- -----------------------------------------------------------------
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1997. For example, while the average return on stocks for all of the
5-year periods was 10.5%, returns for these 5-year periods
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from "market-timing"--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who did not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
closely monitoring daily transactions.
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP,
AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Vanguard defines large-capitalization, or large-cap, funds as those holding
stocks of companies with a median market value exceeding $7.5 billion. Mid-cap
funds hold stocks of companies with a median market value between $1 billion and
$7.5 billion. Small-cap funds hold stocks of companies with a median market
value of up to $1 billion. Historically, large-cap funds have exhibited lower
volatility than mid-cap and small-cap funds.
5
<PAGE> 82
PLAIN TALK ABOUT
PRICE/EARNINGS RATIOS
A widely used measure of common-stock valuation is the price/earnings (P/E)
ratio. The P/E ratio is simply a stock's current price divided by its earnings
per share from the past year (or sometimes its projected earnings for the coming
year). In general, a lower P/E ratio indicates that a stock is out of favor with
investors and is expected to have slow future growth in profits. A higher P/E
ratio indicates that investors expect rapid growth in a company's profits. Keep
in mind, however, that these expectations sometimes prove incorrect, and that
there is no "ideal" P/E ratio.
ranged from a -12.5% average (from 1928 through 1932), to 23.9% (from 1950
through 1954). These average returns reflect past performance of common stocks
and should not be regarded as an indication of future returns from either the
stock market as a whole or this Fund in particular.
Finally, because Vanguard/Windsor II Fund does not hold the same securities
held in the S&P 500 Index or any other market index, the performance of the Fund
will not mirror the returns of any particular index.
[FLAG] THE FUND IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE POSSIBILITY THAT THE
RETURNS FROM THE TYPES OF STOCKS IN WHICH THE FUND INVESTS--ATTRACTIVELY
PRICED OR "VALUE" STOCKS--WILL TRAIL RETURNS FROM THE OVERALL STOCK
MARKET. DIFFERENT TYPES OF STOCKS TEND TO GO THROUGH CYCLES OF
OUTPERFORMANCE AND UNDERPERFORMANCE IN COMPARISON TO COMMON STOCKS IN
GENERAL. THESE CYCLES HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL
YEARS.
SECURITY SELECTION
Vanguard/Windsor II employs four investment advisers, each of whom independently
chooses and maintains a portfolio of common stocks for the Fund.
Each adviser is responsible for a specific percentage of the Fund's assets.
Before the Fund makes a significant change in an adviser's percentage,
shareholders will receive 30 days' notice, in writing.
The four investment advisers employ active investment management methods,
which means securities are bought and sold according to the advisers' judgments
about companies and their financial prospects, and about the stock market and
the economy in general.
While the advisers use different processes to select securities for their
portfolios, all four are committed to investing in large- and mid-cap stocks
that, in their opinion, are undervalued. Undervalued stocks are generally those
that are out of favor with investors and currently trading at prices that, the
adviser feels, are below what the stocks are worth in relation to their
earnings. These stocks typically--but not always--have lower-than-average
price/earnings (P/E) ratios and higher-than-average dividend yields.
Barrow, Hanley, Mewhinney & Strauss, Inc. (BHM&S), which is responsible for
about 73% of the Fund's assets, uses traditional methods of stock
selection--research and analysis--to identify undervalued securities. A security
will be sold when, in BHM&S's opinion, its share price accurately reflects the
security's overall worth. At that point, another undervalued security will be
chosen. No more than 15% of BHM&S's portfolio is devoted to a single industry.
Like BHM&S, Tukman Capital Management, Inc. (Tukman), which manages about 10%
of the Fund's assets, uses traditional research methods to select undervalued
securities. Tukman typically buys stocks of financially sound companies in
growing business sectors only and holds them for three to five years.
6
<PAGE> 83
Equinox Capital Management, Inc. (Equinox), which manages about 10% of the
Fund's assets, uses its own fundamental research and proprietary software to
identify undervalued securities with attractive growth and dividend prospects.
Like BHM&S, it avoids large concentrations in a single industry.
Vanguard Core Management Group, which is responsible for about 7% of the
Fund's assets, selects stocks from a "universe" of about 550 companies. Vanguard
Core Management Group evaluates the stocks using several fundamental factors,
such as a stock's price in relation to its projected growth rate. All of the
stocks selected are expected, as a group, to outperform the Russell 1000 Value
Index, a benchmark of undervalued large- and mid-cap stocks.
The balance of Vanguard/Windsor II Fund's assets (about 5%) is held in cash
reserves, also managed by Vanguard. Vanguard may invest the Fund's cash reserves
in stock futures. This strategy is intened to keep the Fund more fully invested
in common stocks while retaining cash on hand to meed liquidity needs. See page
8 for more details on the Fund's policy on futures.
The top ten holdings (which amounted to 25% of the Fund's total net assets)
as of October 31, 1997, follow:
1. Chase Manhattan Corp.
2. International Business Machines Corp.
3. Ford Motor Co.
4. Exxon Corp.
5. GTE Corp.
6. Schlumberger Ltd.
7. Sears, Roebuck & Co.
8. SBC Communications Inc.
9. Allstate Corp.
10. Travelers Group Inc.
Keep in mind that, because the makeup of the Fund may change, this listing is
only a "snapshot" at one point in time.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY
THAT ONE OR MORE OF THE FUND'S ADVISERS MAY DO A POOR JOB OF
SELECTING STOCKS.
PORTFOLIO TURNOVER
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long they have been held. The Fund's
average turnover rate for the past ten years has been about 27%. (A turnover
rate of 100% would occur, for example, if the Fund sold and replaced securities
valued at 100% of its total net assets within a one-year period.)
INVESTMENT POLICIES
Besides investing in undervalued common stocks, the Fund may follow a number of
investment policies to achieve its objectives.
PLAIN TALK ABOUT
PORTFOLIO DIVERSIFICATION
In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average U.S. equity mutual fund has
about 30% of its assets invested in its ten largest holdings, while some less
diversified mutual funds have 50% or more of their assets invested in the stocks
of just ten companies.
PLAIN TALK ABOUT
PORTFOLIO TURNOVER
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. The average turnover rate for all domestic stock
funds is approximately 80%.
7
<PAGE> 84
The Fund may invest as much as 20% of its assets in securities of companies
based outside the United States and may engage in currency transactions. These
securities can be traded in either U.S. or foreign markets.
[FLAG] THE FUND IS SUBJECT TO COUNTRY RISK AND CURRENCY RISK. COUNTRY
RISK IS THE POSSIBILITY THAT POLITICAL EVENTS (SUCH AS A WAR),
FINANCIAL PROBLEMS (SUCH AS GOVERNMENT DEFAULT), OR NATURAL
DISASTERS (SUCH AS AN EARTHQUAKE) WILL WEAKEN A COUNTRY'S ECONOMY
AND CAUSE INVESTMENTS IN THAT COUNTRY TO LOSE MONEY. CURRENCY
RISK IS THE POSSIBILITY THAT A "STRONGER" U.S. DOLLAR WILL REDUCE
RETURNS FOR AMERICANS INVESTING OVERSEAS. GENERALLY, WHEN THE
DOLLAR RISES IN VALUE AGAINST A FOREIGN CURRENCY, YOUR INVESTMENT
IN THAT COUNTRY LOSES VALUE BECAUSE ITS CURRENCY IS WORTH FEWER
U.S. DOLLARS. ON THE OTHER HAND, A "WEAKER" DOLLAR GENERALLY
LEADS TO HIGHER RETURNS FOR AMERICANS HOLDING FOREIGN
INVESTMENTS.
The Fund may invest in money market instruments, fixed-income securities,
convertible securities, and other equity securities such as preferred stock. The
Fund may invest up to 15% of its assets in restricted securities with limited
marketability or other illiquid securities.
[FLAG] THE FUND RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN
STOCK FUTURES AND OPTIONS CONTRACTS, WHICH ARE TRADITIONAL TYPES
OF DERIVATIVES.
Losses (or gains) involving futures can sometimes be substantial--in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a portfolio. The Fund will not use
futures and options for speculative purposes or as leveraged investments that
magnify the gains or losses of an investment. Rather, the Fund will keep
separate cash reserves or other liquid portfolio securities in the amount of the
obligation underlying the futures or options contract. Only a limited percentage
of the Fund's assets--5%--may be applied toward the deposits required on futures
contracts, and the value of all futures contracts in which the Fund acquires an
interest cannot exceed 20% of the Fund's total assets.
The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs by buying futures instead of actual
stocks.
- - To add value to the Fund by buying futures instead of actual stocks when
futures are cheaper.
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new, exotic types of derivatives--some of which can
carry considerable risks.
PLAIN TALK ABOUT
CASH RESERVES
With mutual funds, holding cash reserves--or "cash"--does not mean literally
that the fund holds a stack of currency. Rather, cash reserves refer to
short-term, interest-bearing securities that can easily and quickly be converted
to cash. (Most mutual funds keep at least a small percentage of assets in cash
to accommodate shareholder redemptions.) While some funds strive to keep cash
levels at a minimum and to always remain fully invested in stocks, other funds
allow investment advisers to hold up to 20% of a fund's assets in cash reserves.
8
<PAGE> 85
The Fund will usually hold only a small percentage of its assets in cash
reserves, although if an investment adviser believes that market conditions
warrant a temporary defensive measure, the Fund may hold cash reserves without
limit.
INVESTMENT LIMITATIONS
The Fund has adopted limitations on some of its investment policies. Some of
these limitations are that the Fund will not:
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for temporary or emergency purposes in an amount not
exceeding 10% of its net assets. Whenever the Fund's outstanding borrowing is
more than 5% of its assets, it will stop making investments.
With respect to 75% of its assets, the Fund will not:
- - Invest more than 5% in the securities of any one company.
- - Buy more than 10% of the outstanding voting shares of any company.
A complete list of the Fund's investment limitations can be found in the
Statement of Additional Information. These limitations are fundamental and may
be changed only by approval of a majority of the Fund's shareholders.
INVESTMENT PERFORMANCE
Vanguard/Windsor II invests primarily in common stocks, so its performance is
closely correlated to the performance of the overall stock market. Historically,
stock market performance has been characterized by sharp up-and-down swings in
the short term and by more stable growth over the long term.
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED OCTOBER 31, 1997
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Vanguard/Windsor II 31.3% 27.1% 20.2% 17.0%
S&P 500 Index 32.1% 27.5% 19.9% 17.2%
</TABLE>
The results shown above represent the Fund's "average annual total return"
performance, which assumes that any distributions of capital gains and dividends
were reinvested for the indicated periods. Also included is comparative
information on the unmanaged Standard & Poor's 500 Composite Stock Price Index.
The chart
PLAIN TALK ABOUT
PAST PERFORMANCE
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
9
<PAGE> 86
does not make any allowances for federal, state, or local income taxes
that shareholders must pay on a current basis.
In weighing these performance figures, note that the Fund has been in
operation since June 24, 1985. BHM&S has been adviser for the majority of Fund
assets from the Fund's inception. Equinox, Tukman, and Vanguard Core Management
Group were added as advisers on November 1, 1991.
SHARE PRICE
The Fund's share price, also called its net asset value, or NAV, is calculated
each business day after the close of trading (generally 4 p.m. Eastern time) on
the New York Stock Exchange. The net asset value per share is calculated by
adding up the total assets of the Fund, subtracting all its liabilities, or
debts, and then dividing by the total number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
------------------------------------------
NET ASSET VALUE =
NUMBER OF SHARES OUTSTANDING
The daily net asset value is useful to you as a shareholder because the NAV,
multiplied by the number of Fund shares you own, gives you the dollar amount you
would have received had you sold all of your shares back to the Fund that day.
The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Funds." Different newspapers use
different abbreviations of the Fund's name, but the most common is WNDSRII.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each June and December, the Fund distributes to its shareholders virtually all
of its income from interest and dividends. Any capital gains realized from the
sale of securities are distributed in December. In addition, the Fund may
occasionally be required to make supplemental dividend or capital gains
distributions at other times during the year.
If you own shares of the Fund as an investment option in an
employer-sponsored retirement or savings plan, these dividend and capital gains
distributions will be reinvested in additional Fund shares and accumulate on a
tax-deferred basis. You will not owe taxes on these distributions until you
begin withdrawals. You should consult your plan administrator, your plan's
Summary Plan Document, or your tax adviser about the tax consequences of an
investment in the Fund and of any plan withdrawals.
If your Vanguard/Windsor II investment is not part of an employer-sponsored
plan, you can receive distributions of income or capital gains in cash, or you
may have them automatically re-invested in more shares of the Fund. Both
dividend and capital
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from the dividends that a fund earns from its holdings as well as
interest it receives from its money market and bond investments. Capital gains
are realized whenever the fund sells securities for higher prices than it paid
for them. These capital gains are either short-term or long-term depending on
whether the fund held the securities for less than or more than one year.
10
<PAGE> 87
gains distributions--whether received in cash or reinvested in additional
shares--are subject to federal (and possibly state and local) income taxes, no
matter how long you have held the shares in the Fund. You should consult your
tax adviser about other tax consequences of an investment in the Fund.
THE FUND AND VANGUARD
Vanguard/Windsor II is a member of The Vanguard Group, a family of more than 30
investment companies with more than 95 distinct investment portfolios and total
net assets of more than $320 billion. All of the Vanguard funds share in the
expenses associated with business operations, such as personnel, office space,
equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each fund pays its
allocated share of The Vanguard Group's costs.
A list of the Fund's Directors and officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.
INVESTMENT ADVISERS
The Fund employs four investment advisers. Each manages its portion of the
Fund's assets subject to the control of the Directors and officers of the Fund.
Barrow, Hanley, Mewhinney & Strauss, Inc. (BHM&S), One McKinney Plaza, 3232
McKinney Avenue, 15th Floor, Dallas, TX 75204, is an investment advisory firm
founded in 1979. BHM&S is owned by United Asset Management, 1 International
Place, Boston, MA 02110. BHM&S currently manages approximately $27 billion in
stock and bond portfolios.
BHM&S is paid a quarterly advisory fee that is based on the average month-end
Fund assets it manages:
<TABLE>
<CAPTION>
AVERAGE ASSETS MANAGED BASIC FEE
<S> <C>
First $200 million 0.300%
Next $300 million 0.200
Next $500 million 0.150
Assets over $1 billion 0.125
</TABLE>
BHM&S's advisory fee may be adjusted based on the total return performance of
its portion of the Fund as compared to that of the Standard & Poor's/BARRA Value
Index, a benchmark of stocks from the S&P 500 Index with lower than average
price/book ratios. Under the fee schedule, BHM&S's basic fee may be increased or
decreased by as much as 25%.
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group, Inc., is the only MUTUAL mutual fund company. It is owned
jointly by the funds it oversees and by the shareholders in those funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to fund shareholders in
the form of lower operating expenses.
11
<PAGE> 88
PLAIN TALK ABOUT
THE FUND'S ADVISERS
The manager responsible for BHM&S's portion of Vanguard/Windsor II since 1985 is
JAMES P. BARROW, Partner and Vice President of BHM&S; has worked in investment
management since 1965; with BHM&S since 1980; B.S., University of South
Carolina.
The manager responsible for Equinox's portion of the Fund since 1991 is
RONALD J. ULRICH, President, Director, and founder of Equinox Capital
Management; has worked in investment management since 1973; B.S., Lehigh
University, M.B.A., New York University.
The manager responsible for Tukman's portion of the Fund since 1991 is MELVIN
T. TUKMAN, President, Director, and founder of Tukman; has worked in investment
management since 1971; A.B., Hunter College, M.B.A., Harvard Business School.
The manager responsible for Vanguard Core Management Group's portion of the
Fund since 1991 is GEORGE U. SAUTER, a Managing Director of Vanguard; has worked
in investment management since 1985; A.B., Dartmouth College, M.B.A., University
of Chicago.
Equinox Capital Management, Inc., 590 Madison Avenue, 41st Floor, New York
City, NY 10022, is a professional investment advisory firm founded in 1989. It
currently manages approximately $9.3 billion in assets.
Equinox is paid a quarterly advisory fee based on the average month-end assets
of its portion of Windsor II:
<TABLE>
<CAPTION>
AVERAGE ASSETS MANAGED BASIC FEE
<S> <C>
First $400 million 0.200%
Next $600 million 0.150
Next $1 billion 0.125
Assets over $2 billion 0.100
</TABLE>
Equinox's advisory fee may be adjusted based on the total return performance
of its portion of Windsor II as compared to that of the Russell 1000 Value
Index. Under the fee schedule, Equinox's basic fee may be increased or decreased
by as much as 50%.
Founded in 1980, Tukman Capital Management, Inc., 60 East Sir Francis Drake
Boulevard, Larkspur, CA 94939, is an investment advisory firm that currently
manages $5.2 billion in assets.
Tukman is paid a quarterly advisory fee based on the average month-end assets
of its portion of Windsor II:
<TABLE>
<CAPTION>
AVERAGE ASSETS MANAGED BASIC FEE
<S> <C>
First $25 million 0.40%
Next $125 million 0.35
Next $350 million 0.25
Next $500 million 0.20
Assets over $1 billion 0.15
</TABLE>
Tukman's advisory fee may be adjusted based on the total return performance
of its portion of Windsor II as compared to that of the S&P 500 Index. Under the
fee schedule, Tukman's basic fee may be increased or decreased by as much as
50%.
Vanguard Core Management Group, P.O. Box 2600, Valley Forge, PA 19482,
provides investment advisory services to several Vanguard funds, managing more
than $88 billion in total assets at the end of 1997. Vanguard Core Management
Group provides advisory services to the Fund on an at-cost basis.
For the fiscal year ended October 31, 1997, the net fee paid to BHM&S was
$19,420,974 after an increase of $2,495,021 based on performance. For the fiscal
year ended October 31, 1997, the net fee paid to Equinox was $3,199,637, after
an increase of $408,295 based on performance. For the fiscal year ended October
31, 1997 the net fee paid to Tukman was $4,408,562 after an increase of $785,658
based on performance.
The current fee agreements with the advisers authorize them to choose brokers
or dealers to handle the purchase and sale of the Fund's securities, and directs
the advisers to get the best available
12
<PAGE> 89
price and most favorable execution from these brokers with respect to all
transactions. At times, the advisers may choose brokers who charge higher
commissions in the interest of obtaining better execution of a transaction. If
more than one broker can obtain the best available price and favorable execution
of a transaction, then the advisers are authorized to choose a broker who, in
addition to executing the transaction, will provide research services to the
advisers or the Fund. However, the advisers will not pay higher commissions
specifically for the purpose of obtaining research services. The Fund may direct
the advisers to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund.
The Board of Directors may, without prior approval from shareholders, change
the terms of the advisory agreements or hire a new investment adviser as either
a replacement adviser or as an additional adviser. However, no such change would
be made before giving shareholders 30 days' notice, in writing.
GENERAL INFORMATION
Vanguard/Windsor II is one of two Funds of Vanguard/Windsor Funds, Inc., which
is organized under the laws of the state of Maryland. The other Fund is
Vanguard/Windsor Fund (which is not open to new investors). The two Funds are
combined under one corporation for administrative purposes, but for investment
management purposes operate like separate companies.
Shareholders of Vanguard/Windsor II have rights and privileges similar to
those enjoyed by other corporate shareholders. For example, shareholders will
not be responsible for any liabilities of the corporation. If any matters are to
be voted on by shareholders (such as a change in a fundamental investment
objective or the election of Directors), each share outstanding at that point
would be entitled to one vote. Annual meetings will not be held by the Fund
except as required by the Investment Company Act of 1940. A meeting will be
scheduled to vote on the removal of a Director if the holders of at least 10% of
the Fund's shares request a meeting in writing.
"Standard & Poor's," "Standard & Poor's 500," "S&P," and "500" are trademarks of
The McGraw-Hill Companies, Inc. Frank Russell Company is the owner of the
trademarks and copyrights relating to the Russell Indexes.
13
<PAGE> 90
INVESTING WITH VANGUARD
FOR PLAN PARTICIPANTS
Vanguard/Windsor II is an investment option in your retirement or savings plan.
Your plan administrator or your employee benefits office can provide you with
detailed information on how to participate in your plan and how to elect the
Fund as an investment option.
- - If you have any questions about the Fund or Vanguard, including the
Fund's investment objectives, strategy, or risks, contact Vanguard's
Participant Services Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan
administrator or the organization that provides recordkeeping services
for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate the exchange privilege, limit the amount of an
exchange, or reject any exchange, at any time, without notice. Because excessive
exchanges can potentially disrupt the management of a Fund and increase its
transaction costs, Vanguard limits exchange activity to TWO SUBSTANTIVE EXCHANGE
REDEMPTIONS (at least 30 days apart) from any Fund during any 12-month period.
"Substantive" means either a dollar amount or a series of movements between
Vanguard funds that Vanguard determines, in its sole discretion, could have a
negative impact on the management of the Fund. In addition, certain investment
options, particularly funds made up of company stock or investment contracts,
may be subject to unique restrictions. Contact your plan administrator for
details on the exchange policies that apply to your plan.
Before making an exchange, you should consider the following:
- - Before you exchange to another Vanguard fund available in your plan,
you should read that fund's prospectus. Contact Vanguard's Participant
Services Center, toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Your plan
administrator can explain how frequently exchanges are allowed.
FOR OTHER INSTITUTIONAL INVESTORS
If you have questions about Vanguard/Windsor II, including how to establish an
account, call Vanguard, toll-free, at 1-800-523-1036.
If you have questions about an existing account, contact your Vanguard account
administrator.
14
<PAGE> 91
TRANSACTIONS
Purchases, exchanges, or redemptions of the Fund's shares are processed as soon
as they have been received by Vanguard in good order. Good order means that your
request includes complete information on your purchase, exchange, or redemption,
and that Vanguard has received the appropriate assets. The price of shares
bought, exchanged, or sold will be the Fund's next-determined net asset value
after Vanguard has processed your request, provided your request has been
received before the close of trading on the New York Stock Exchange (generally 4
p.m. Eastern time).
Vanguard must consider the interests of all Fund shareholders and so
reserves the right to:
- - Delay or reject any purchase or exchange request that may disrupt the
Fund's operation or performance.
- - Revise or terminate the exchange privilege or limit the amount of an
exchange, at any time, without notice.
- - Take up to seven days to deliver your redemption proceeds.
- - Pay redemption proceeds--in whole or in part--through a distribution in
kind of readily marketable securities.
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ONLINE(R) Use your personal computer to learn more about
www.vanguard.com Vanguard's funds and services; keep in touch
with your Vanguard accounts; map out a long-term
investment strategy; initiate certain transactions;
and ask questions, make suggestions, and send
messages to Vanguard.
Our education-oriented website provides timely news
and information about Vanguard funds and services;
an online "university" that offers a variety of
mutual fund classes; and easy-to-use, interactive
tools to help you create your own investment and
retirement strategies.
15
<PAGE> 92
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
Reading this prospectus will help you to decide whether Vanguard/Windsor II is
suitable for your investment goals. If you decide to invest, don't throw the
prospectus out; you will no doubt need it for future reference.
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about
Vanguard/Windsor II, including its investment objectives, risks, strategy, and
expenses, as well as services available to you as a shareholder.
It is important that you understand these facts so that you can decide whether
an investment in this Fund is right for you. The following questions offer a
quick review of some of the subjects covered by this prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN:
/ / The Fund's objectives? (page 4)
/ / The Fund's investment strategy? (page 5)
/ / Who should invest in the Fund? (page 4)
/ / The risks associated with the Fund? (pages 4-8)
/ / Whether the Fund is federally insured?
(inside front cover)
/ / The Fund's expenses? (page 2)
/ / The background of the Fund's investment managers?
(page 12)
16
<PAGE> 93
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments,
U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements,
commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes account management fees, administrative fees, and any
12b-1 marketing fees.
GROWTH AND INCOME STOCK FUND
A mutual fund that seeks moderate capital appreciation and some dividend income
by investing primarily in stocks.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies whose strong earnings and
revenue potential indicate above-average prospects for capital growth, with less
emphasis on dividend income.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a portfolio's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an attempt to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security or industry.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
PRINCIPAL
The amount of your own money that you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that focuses on stocks of companies that, considering their
earnings and dividends, are attractively priced; these companies often pay
regular dividend income to shareholders.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low share
prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 94
[THE VANGUARD GROUP SHIP LOGO]
THE VANGUARD GROUP(R)
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482
<TABLE>
<S> <C> <C>
FOR PARTICIPANTS IN FOR OTHER INSTITUTIONAL ELECTRONIC ACCESS TO THE
EMPLOYER-SPONSORED PLANS INVESTORS VANGUARD MUTUAL FUND
1-800-523-1036 EDUCATION AND INFORMATION
PARTICIPANT SERVICES For information on Vanguard CENTER
CENTER funds and services World Wide Web
1-800-523-1188 www.vanguard.com
TEXT TELEPHONE:
1-800-523-8004 E-mail
For information on the [email protected]
Vanguard funds in your plan,
Monday through Friday
8:30 a.m. to 9 p.m.,
Eastern time
</TABLE>
(C) 1998 Vanguard Marketing
Corporation, Distributor
I073N
<PAGE> 95
PART B
VANGUARD/WINDSOR FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 20, 1998
This Statement is not a prospectus, but should be read in conjunction with
the current Prospectus (dated February 20, 1998) relating to the Windsor Fund
series or the Windsor II series, as appropriate. To obtain either Prospectus
please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
The Company............................................................................. B-1
Investment Objectives and Policies...................................................... B-1
Share Price............................................................................. B-5
Purchase of Shares...................................................................... B-6
Redemption of Shares.................................................................... B-6
Yield and Total Return.................................................................. B-7
Investment Limitations.................................................................. B-7
Management of the Company............................................................... B-9
Investment Advisory Services............................................................ B-12
Portfolio Transactions.................................................................. B-20
Performance Measures.................................................................... B-21
Description of Shares and Voting Rights................................................. B-23
Financial Statements.................................................................... B-23
</TABLE>
THE COMPANY
Vanguard/Windsor Funds, Inc. (the "Company") is an open-end, diversified,
investment management company whose shares are currently offered in two separate
series -- the Vanguard/Windsor Fund series and the Vanguard/Windsor II series.
Each series in effect represents a separate mutual fund. Vanguard/Windsor Fund
series has been offered under the name "Windsor Fund" since 1958. Shares of
Vanguard/Windsor II were initially offered on June 24, 1985. Wellington
Management Company, LLP ("WMC") has served as investment adviser to the
Vanguard/Windsor Fund series since its inception. Barrow, Hanley, Mewhinney &
Strauss, Inc. ("BHM&S"), Equinox Capital Management, Inc. ("Equinox") and Tukman
Capital Management, Inc. ("Tukman"), three separate and distinct investment
counseling firms that have no affiliation with WMC, nor with each other, serve
as investment advisers to the Vanguard/Windsor II series. Additionally, Vanguard
Core Management Group provides investment advisory services on an at-cost basis
with respect to a portion of Vanguard/Windsor II's assets.
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the investment objectives and policies
set forth in each of the Company's Prospectuses.
REPURCHASE AGREEMENTS. Each series may invest in repurchase agreements
with domestic banks, or brokers or dealers, either for temporary defensive
purposes due to market conditions, or to generate income from its excess cash
balances. A repurchase agreement is an agreement under which the series acquires
a money market instrument (generally a security issued by the U.S. Government or
an agency thereof, a banker's acceptance or a certificate of deposit) from a
domestic bank, broker or dealer, subject to resale to the seller at an agreed
upon price and date (normally the next business day). A repurchase agreement may
be considered a loan collateralized by securities. The resale price reflects an
agreed upon interest rate effective for the period the instrument is held by the
series and is unrelated to the interest rate on the underlying
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instrument. In these transactions, the securities acquired by the series
(including accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by a custodian bank until
repurchased. In addition, the Board of Directors will monitor the repurchase
agreement transactions for each series generally and will establish guidelines
and standards for review by the investment adviser of the creditworthiness of
any bank, broker or dealer party to a repurchase agreement with the Company. No
more than an aggregate of 15% of a series' assets, at the time of investment,
will be invested in repurchase agreements having maturities longer than seven
days and in securities subject to legal or contractual restrictions on resale
for which there are no readily available market quotations. See "Illiquid
Securities" on page B-3.
The use of repurchase agreements involves certain risks. For example, if
the seller of the securities under an agreement defaults on its obligation to
repurchase the underlying securities at a time when the value of these
securities has declined, the series may incur a loss upon disposition of them.
If the seller becomes insolvent and subject to liquidation or reorganization
under bankruptcy or other laws, a bankruptcy court may determine that the
underlying securities are collateral for a loan by the series not within the
control of the series and therefore subject to sale by the trustee in
bankruptcy. Finally, it is possible that the series may not be able to
substantiate its interest in the underlying securities. While the Company's
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
LENDING OF SECURITIES. Each series may lend its portfolio securities for
either short or long-term periods to qualified institutional investors who need
to borrow securities in order to complete certain transactions, such as covering
short sales, avoiding failures to deliver securities or completing arbitrage
operations. By lending its portfolio securities, each series attempts to
increase its income through the receipt of interest on the loan. Any gain or
loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the series. Each series may lend
its portfolio securities to qualified brokers, dealers, domestic banks or other
domestic financial institutions, so long as the terms, and the structure of such
loans are not inconsistent with the Investment Company Act of 1940, or the Rules
and Regulations or interpretations of the Securities and Exchange Commission
(the "Commission") thereunder, which currently require that (a) the borrower
pledge and maintain with the series collateral consisting of cash, an
irrevocable letter of credit or securities issued or guaranteed by a domestic
bank or the United States Government having a value at all times not less than
100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the series at any time, and (d) the series receive reasonable
interest on the loan (which may include the series investing any cash collateral
in interest bearing short-term investments), any distributions on the loaned
securities and any increase in their market value. A series will not lend
portfolio securities if, as a result, the aggregate of such loans exceeds
33 1/3% of the value of the series' net assets. Loan arrangements made will
comply with all other applicable regulatory requirements, including the rules of
the New York Stock Exchange, which rules require the borrower, after notice, to
redeliver the securities within the normal settlement time of three business
days. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Board of
Directors.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Directors (Trustees). In addition, voting
rights pass with the loaned securities, but if a material event occurs affecting
an investment on loan, the loan must be called and the securities voted.
FOREIGN INVESTMENTS. As indicated in the Prospectus, Vanguard/Windsor Fund
may include foreign securities to a certain extent. Investors should recognize
that investing in foreign companies involves certain special considerations
which are not typically associated with investing in U.S. companies.
Country Risk. As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
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Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in companies in those countries.
Although Vanguard/Windsor Fund will endeavor to achieve the most favorable
execution costs in its portfolio transactions in foreign securities, fixed
commissions on many foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. In addition, it is expected that the expenses for
custodial arrangements of the Series foreign securities will be somewhat greater
than the expenses for the custodial arrangement for handling U.S. securities of
equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income Vanguard/Windsor Fund receives from its foreign investments.
Currency Risk. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since Vanguard/Windsor Fund may
temporarily hold uninvested reserves in bank deposits in foreign currencies, the
Fund will be affected favorably or unfavorably by changes in currency rates and
in exchange control regulations, and may incur costs in connection with
conversions between various currencies. The investment policies of
Vanguard/Windsor Fund permit it to enter into forward foreign currency exchange
contracts in order to hedge holdings and commitments against changes in the
level of future currency rates. Such contracts involve an obligation to purchase
or sell a specific currency at a future date at a price set at the time of the
contract.
ILLIQUID SECURITIES. Illiquid securities are securities that may not be
sold or disposed of in the ordinary course of business within seven business
days at approximately the value at which they are being carried on a fund's
books. An illiquid security includes repurchase agreements which have a maturity
of longer than seven days, securities which are illiquid by virtue of the
absence of a readily available market, and demand instruments with a demand
notice exceeding seven days. Illiquid securities may include securities that are
not registered under the Securities Act of 1933 (the "1933 Act"); however,
unregistered securities that can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act will not be considered illiquid so
long as it is determined by the fund's advisor that an adequate trading market
exists for the security.
FUTURES CONTRACTS. Each series may enter into stock futures contracts,
options, and options on futures contracts only for the purpose of remaining
fully invested and reducing transactions costs. Futures contracts provide for
the future sale by one party and purchase by another party of a specified amount
of a specific security at a specified future time and at a specified price.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission ("CFTC"), a U.S. Government agency. Assets committed
to futures contracts will be segregated at the Fund's custodian bank to the
extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the
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exchange minimums. Futures contracts are customarily purchased and sold on
margin that may range upward from less than 5% of the value of the contract
being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. Each series
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
interest rates. Each series intends to use futures contracts only for bona fide
hedging purposes.
Regulations of the CFTC applicable to the Company require that all of each
of the series' futures transactions constitute bona fide hedging transactions
except to the extent that the aggregate initial margins and premiums required to
establish any non-hedging positions do not exceed five percent of the value of
the Fund's portfolio. Each series will only sell futures contracts to protect
securities it owns against price declines or purchase contracts to protect
against an increase in the price of securities it intends to purchase. As
evidence of this hedging interest, each series expects that approximately 75% of
its futures contract purchases will be "completed;" that is, equivalent amounts
of related securities will have been purchased or are being purchased by the
series upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the exposure of the series' income to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While each series will incur commission expenses in both
opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of portfolio securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. A series will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of the series' total assets. In addition, a series will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the series' total assets.
Assets committed to futures contracts or options will be held in a segregated
account at the Company's custodian bank.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may
be closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a series would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if a series has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a series may be
required to make delivery of the instruments underlying interest rate futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the ability to effectively hedge its portfolio.
A series will minimize the risk that it will be unable to close out a futures
contract by only entering into futures contracts which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due to the extremely high degree of leverage involved in futures
pricing. As a result, a relatively small price movement in a futures contract
may result in immediate and substantial loss (as well as gain) to the investor.
For example, if at the time of purchase, 10% of the value of the futures
contract is deposited as margin, a subsequent 10% decrease in the value of the
futures contract would result in a total loss of the margin deposit, before any
deduction for
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the transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
futures strategies of the series are engaged in only for hedging purposes, the
advisers do not believe that the series are subject to the risks of loss
frequently associated with futures transactions. Either series would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying security and sold it after the decline.
There is the risk of loss by a series of margin deposits in the event of
bankruptcy of a broker with whom the series has an open position in a futures
contract or related option. Additionally, investments in futures and options
involve the risk that the investment adviser will incorrectly predict stock
market and interest rate trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. Each series is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on futures contracts as of the end of the year as
well as those actually realized during the year. In most cases, any gain or loss
recognized with respect to a futures contract is considered to be 60% long-term
capital gain or loss and 40% short-term capital gain or loss, without regard to
the holding period of the contract. Furthermore, sales of futures contracts
which are intended to hedge against a change in the value of securities held by
a series may affect the holding period of such securities and, consequently, the
nature of the gain or loss on such securities upon disposition. The series may
be required to defer the recognition of losses on futures contracts to the
extent of any unrecognized gains on related positions held by the series.
In order for a series to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or foreign currencies, or other income derived from the series'
business of investing in securities or currencies. It is anticipated that any
net gain realized from the closing of futures contracts will be considered gain
from the sale of securities and therefore be qualifying income for purposes of
the 90% requirement.
Each series will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes, including unrealized
gains at the end of the series' fiscal year on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the series' other investments and shareholders will be advised on the nature of
the payments.
SHARE PRICE
Each Series' share price, or "net asset value" per share, is calculated by
dividing the total assets of the series, less all liabilities, by the total
number of shares outstanding. The net asset value is determined as of the close
of the New York Stock Exchange (generally 4:00 p.m. Eastern time) on each day
that the exchange is open for trading.
Series securities for which market quotations are readily available
(includes those securities listed on national securities exchanges, as well as
those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales
price on the day the valuation is made. Such securities which are not traded on
the valuation date are valued at the mean of the bid and ask prices. Price
information on exchange-listed securities is taken
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from the exchange where the security is primarily traded. Securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.
Short-term instruments (those with remaining maturities of 60 days or less)
may be valued at cost, plus or minus any amortized discount or premium, which
approximates market value.
Bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Foreign securities are valued at the last quoted sales price, according to
the broadest and most representative market, available at the time the series is
valued. If events which materially affect the value of a series' investments
occur after the close of the securities markets on which such securities are
primarily traded, those investments may be valued by such methods as the Board
of Directors deems in good faith to reflect fair value.
In determining the series' net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars using the officially quoted daily exchange rates used by Morgan
Stanley Capital International in the calculating of their various benchmarking
indices. This officially quoted exchange rate may be determined prior to or
after the close of a particular securities market. If such quotations are not
available, the rate of exchange will be determined in accordance with policies
established in good faith by the Board of Directors.
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
Board of Directors deems in good faith to reflect fair value.
The share price for the series can be found daily in the mutual fund
listings of most major newspapers under the heading of Vanguard Funds.
PURCHASE OF SHARES
The purchase price of shares of each series of the Company is the net asset
value next determined after the order is received in Good Order, as defined in
the Prospectus. The net asset value is calculated as of the close of the New
York Stock Exchange on each day the Exchange is open for business. An order
received prior to the close of the Exchange will be executed at the price
computed on the date of receipt; and an order received after the close of the
Exchange will be executed at the price computed on the next day the Exchange is
open.
Each series reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the series, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts such as employee
benefit plans or under circumstances where certain economies can be achieved in
sales of the series' shares. Vanguard/Windsor Fund is currently closed to new
investors. Existing shareholders may purchase additional shares, but may not
invest more than $25,000 each year.
REDEMPTION OF SHARES
Each series may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Commission; (ii)
during any period when an emergency exists, as defined by the rules of the
Commission, as a result of which it is not reasonably practicable for the series
to dispose of securities owned by it, or to determine fairly the value of its
assets; and (iii) for such other periods as the Commission may permit.
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The Company has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of a series at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in readily marketable investment securities or in
cash, as the Directors may deem advisable; however, payment will be made wholly
in cash unless the Directors believe that economic or market conditions exist
which would make such a practice detrimental to the best interests of the
Company. If redemptions are paid in investment securities, such securities will
be valued as set forth in the Prospectus for the appropriate series, and a
redeeming shareholder would normally incur brokerage expenses if he converted
these securities to cash.
No charge is made by the Company for redemptions. Any redemption may be
more or less than the shareholder's cost, depending on the market value of the
series' portfolio securities.
SIGNATURE GUARANTEES. To protect your account, the Company and Vanguard
from fraud, signature guarantees are required for certain redemptions. A
signature guarantee verifies the authenticity of your signature. Examples of
situations in which signature guarantees are required are: (1) ALL REDEMPTIONS,
REGARDLESS OF THE AMOUNT INVOLVED, WHEN THE PROCEEDS ARE TO BE PAID TO SOMEONE
OTHER THAN THE REGISTERED ACCOUNT OWNER(S) AND/OR TO AN ADDRESS OTHER THAN THE
ADDRESS OF RECORD; AND (2) SHARE TRANSFER REQUESTS. These requirements are not
applicable to redemptions in Vanguard's prototype retirement plans, except in
connection with: (1) distributions made when the proceeds are to be paid to
someone other than the plan participant; (2) certain authorizations to effect
exchanges by telephone; and (3) when proceeds are to be wired. These
requirements may be waived by the Company in certain instances.
Signature guarantees can be obtained from a bank, broker or any other
guarantor that Vanguard deems acceptable. NOTARIES PUBLIC ARE NOT ACCEPTABLE
GUARANTORS.
YIELD AND TOTAL RETURN
The yield of Vanguard/Windsor Fund for the thirty-day period ended October
31, 1997 was +1.59%, and the yield for Vanguard/Windsor II for the same period
was +2.38%.
The average annual total returns for Vanguard/Windsor Fund for the one-,
five- and ten-year periods ending October 31, 1997 were +27.04%, +20.25% and
+15.60%, respectively. The average annual total returns for the one-, five- and
ten-year periods for Vanguard/Windsor II were +31.27%, +20.21% and +16.95%,
respectively. Total return is computed by determining the average compounded
rates of return over the one-, five- and ten-year periods set forth above that
would equate an initial amount invested at the beginning of the periods to the
ending redeemable value of the investment.
INVESTMENT LIMITATIONS
Each series of the Company is subject to the following restrictions which
may not be changed without the approval of at least a majority of the
outstanding voting securities of that series. A series will not:
1) with respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the series would
hold more than 10% of the outstanding voting securities of the issuer,
or more than 5% of the value of the total assets of the series would be
invested in the securities of such issuer;
2) invest in securities of other investment companies, except as may be
acquired as a part of a merger, consolidation or acquisition of assets
approved by the shareholders of the series or otherwise to the extent
permitted by Section 12 of the Investment Company Act of 1940. A series
will invest only in investment companies which have investment
objectives and investment policies consistent with those of that series;
3) borrow money, except that a series may borrow from banks (or through
reverse repurchase agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of redemption
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requests which might otherwise require the untimely disposition of
securities, in an amount not exceeding 10% of the value of the net
assets of the series (including the amount borrowed and the value of any
outstanding reverse repurchase agreements) at the time the borrowing is
made. Whenever borrowings exceed 5% of the value of the net assets of
the series, the series will not make any additional investments;
4) purchase securities on margin, or sell securities short, except that
each series may invest in stock futures contracts, stock options and
options on stock futures contracts to the extent that not more than 5%
of a series' assets are required as deposit on a futures contract and
not more than 20% of a series' assets are invested in futures contracts
and options transactions at any time;
5) purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(including any investment in The Vanguard Group, Inc.);
6) invest for the purpose of exercising control over management of any
company;
7) purchase or retain securities of any company in which those Officers and
Directors of the Company and/or its investment advisers owning more than
1/2 of 1% of such securities, own in the aggregate more than 5% of such
securities;
8) make loans, except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements) which are either publicly
distributed or customarily purchased by institutional investors, and
(ii) as provided under "Lending of Securities" (See page B-2);
9) purchase assessable securities;
10) engage in the business of underwriting securities issued by other
persons, except to the extent that the series may technically be deemed
to be an underwriter under the Securities Act of 1933, as amended, in
disposing of investment securities;
11) purchase real estate, commodities or commodity contracts except as
described above in "(4)"; or
12) invest more than 25% of the value of its total assets in any one
industry.
Notwithstanding these limitations, each series of the Company may own all
or any portion of the securities of, or make loans to, or contribute to the
costs or other financial requirements of any company which will be wholly owned
by the Company and one or more other investment companies and is primarily
engaged in the business of providing, at-cost, management, administrative or
related services to the Company and other investment companies. See "Management
of the Company".
These investment limitations are considered at the time investment
securities are purchased.
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MANAGEMENT OF THE COMPANY
OFFICERS AND DIRECTORS
The Officers of the Company manage its day-to-day operations and are
responsible to the Company's Board of Directors. The Directors set broad
policies for each Series and choose its Officers. The following is a list of the
Directors and Officers of the Series and a statement of their present positions
and principal occupations during the past five years. The mailing address of the
Directors and Officers of the Series is Post Office Box 876, Valley Forge, PA
19482.
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JOHN C. BOGLE, (DOB: 5/8/1929) Senior Chairman ALFRED M. RANKIN, JR., (DOB: 10/3/1941) Director
and Director* Chairman, President, Chief Executive Officer, and
Senior Chairman and Director of The Vanguard Director of NACCO Industries, Inc.; Director
Group, Inc., and each of the investment of The BFGoodrich Company, and The Standard
companies in The Vanguard Group; Director of Products Company.
The Mead Corporation, General Accident
Insurance, and Chris-Craft Industries, Inc. JOHN C. SAWHILL, (DOB: 6/12/1936) Director
President and Chief Executive Officer of The
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Nature Conservancy; formerly, Director and
Chief Executive Officer & Director* Senior Partner of McKinsey & Co., and
Chairman, Chief Executive Officer and Director President of New York University; Director of
of The Vanguard Group, Inc. and each of the Pacific Gas and Electric Company, Proctor &
investment companies in The Vanguard Group. Gamble Company, and NACCO Industries.
BARBARA BARNES HAUPTFUHRER, (DOB: 10/11/1928) JAMES O. WELCH, JR., (DOB: 5/13/1931) Director
Director Retired Chairman of Nabisco Brands, Inc.; retired
Director of The Great Atlantic and Pacific Tea Vice Chairman and Director of RJR Nabisco;
Company, IKON Office Solutions, Inc., Raytheon Director of TECO Energy, Inc., and Kmart
Company, Knight-Ridder, Inc., Massachusetts Corporation.
Mutual Life Insurance Co., and Ladies
Professional Golf Association; Trustee Emerita J. LAWRENCE WILSON, (DOB: 3/2/1936) Director
of Wellesley College. Chairman and Chief Executive Officer of Rohm &
Haas Company; Director of Cummins Engine
ROBERT E. CAWTHORN, (DOB: 9/28/1935) Director Company, and The Mead Corporation; and Trustee
Chairman Emeritus and Director of of Vanderbilt University.
Rhone-Poulenc Rorer, Inc; Managing Director of
Global Health Care Partners/DLJ Merchant RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Banking Partners; Director of Sun Company, Managing Director and Secretary of The Vanguard
Inc., and Westinghouse Electric Corporation. Group, Inc.; Secretary of each of the
BRUCE K. MACLAURY, (DOB: 5/7/1931) Director investment companies in The Vanguard Group.
President Emeritus of The Brookings RICHARD F. HYLAND, (DOB: 3/22/1937) Treasurer*
Institution; Director of American Express Treasurer of The Vanguard Group, Inc. and of each
Bank, Ltd., The St. Paul Companies, Inc. and of the investment companies in The Vanguard
National Steel Corporation. Group.
BURTON G. MALKIEL, (DOB: 8/28/1932) Director KAREN E. WEST, (DOB: 9/13/1946) Controller*
Chemical Bank Chairman's Professor of Principal of The Vanguard Group, Inc.; Controller
Economics, Princeton University; Director of of each of the investment companies in The
Prudential Insurance Co. of America, Amdahl Vanguard Group.
Corporation, Baker Fentress & Co., The Jeffrey --------------------------------------------------
Co., and Southern New England
Telecommunications Company. *Officers of the Funds are "interested persons" as
defined in the Investment Company Act of 1940.
</TABLE>
B-9
<PAGE> 104
THE VANGUARD GROUP
The Company is a member of The Vanguard Group of Investment Companies.
Through their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"),
the Company and the other Funds in the Group obtain at cost virtually all of
their corporate management, administrative and distribution services. Vanguard
also provides investment advisory services on an at-cost basis to certain of the
Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's total expenses which are allocated among the
Funds under methods approved by the Board of Directors (Trustees) of each Fund.
In addition, each Fund bears its own direct expenses, such as legal, auditing
and custodian fees.
The Funds' Officers are also Officers and employees of Vanguard. No Officer
or employee owns, or is permitted to own, any securities of any external adviser
for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17 j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds has invested in Vanguard are adjusted from time
to time in order to maintain the proportionate relationship between each Fund's
relative net assets and its contribution to Vanguard's capital. At October 31,
1997, Vanguard/Windsor Fund had contributed capital of $1,480,000 to Vanguard,
representing 7.4% of Vanguard's capitalization and, at that time,
Vanguard/Windsor II had contributed capital of $1,534,000 to Vanguard,
representing 7.7% of Vanguard's capitalization. The Funds' Service Agreement
provides for the following arrangement: (a) each Vanguard Fund may invest up to
0.40% of its current net assets in Vanguard and (b) there is no other limitation
on the amount that each Vanguard Fund may contribute to Vanguard's
capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended October 31, 1997, Vanguard/Windsor Fund's share of Vanguard's
actual net costs of operation relating to management and administrative services
(including transfer agency) totaled approximately $34,169,000 and Vanguard/
Windsor II's share of such costs of operation totaled approximately $36,562,000.
DISTRIBUTION. Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of Vanguard, acts as Sales Agent for shares of the Funds in
connection with any sales made directly to investors in the states of Florida,
Missouri, New York, Ohio, Texas and such other states as may be required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon their relative net assets. The remaining
one half of these expenses is allocated among the Funds based upon each Fund's
sales for the preceding 24 months relative to the total sales of the Funds as a
Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of
B-10
<PAGE> 105
a marketing and promotional nature shall exceed 125% of the average distribution
expense rate for the Group, and no Fund shall incur annual distribution expenses
in excess of .02 of 1% of its average month-end net assets. During the fiscal
year ended October 31, 1997, Vanguard/Windsor Fund paid approximately $3,358,000
of the Group's distribution and marketing expenses, which represented an
effective annual rate of .02 of 1% of Vanguard/Windsor Fund's average net assets
and Vanguard/Windsor II paid approximately $3,669,000 of such expenses which
represented an effective annual rate of .02 of 1% of Vanguard/Windsor II's net
assets.
INVESTMENT ADVISORY SERVICES. Vanguard also provides investment advisory
services to Vanguard Windsor II, Vanguard Money Market Reserves, Vanguard
Municipal Bond Fund, several Portfolios of Vanguard Fixed Income Securities
Fund, Vanguard Pennsylvania Tax-Free Fund, Vanguard California Tax-Free Fund,
Vanguard New York Tax-Free Fund, Vanguard New Jersey Tax-Free Fund, Vanguard
Ohio Tax-Free Fund, Vanguard Florida Insured Tax-Free Fund, Vanguard Index
Trust, Vanguard Bond Index Fund, Vanguard International Equity Index Fund,
Vanguard Balanced Index Fund, Vanguard Admiral Funds, the Total International
Portfolio of Vanguard STAR Fund, Vanguard Tax-Managed Fund, Aggressive Growth
Portfolio of Vanguard Horizon Fund, Vanguard Institutional Index Fund, several
Portfolios of Vanguard Variable Insurance Fund, a portion of Vanguard/Morgan
Growth Fund as well as several indexed separate accounts. These services are
provided on an at-cost basis by an investment management staff employed directly
by Vanguard. The compensation and other expenses of this staff are paid by the
Funds utilizing these services.
REMUNERATION OF DIRECTORS AND OFFICERS
The Company pays each Director who is not also an Officer an annual fee
plus travel and other expenses incurred in attending Board meetings. The
Company's Officers and employees are paid by Vanguard which, in turn, is
reimbursed by the Company, and each other Fund in the Group, for its
proportionate share of Officers' and employees' salaries and retirement
benefits. For the fiscal year ended October 31, 1997, the Company's
proportionate share of remuneration for all Officers as a group was
approximately $884,756 and its proportionate share of the amounts contributed to
the retirement plans of all Officers as a group was approximately $22,650.
Under its Retirement Plan, Vanguard contributes annually an amount equal to
10% of each Officer's annual compensation plus 5.7% of that part of the
Officer's compensation during the year, if any, that exceeds the Social Security
Taxable Wage Base then in effect. Under the Thrift Plan, all Officers are
permitted to make pre-tax basic contributions in a maximum amount equal to 4% of
total compensation. Vanguard matches the basic contributions on a 100% basis.
Upon retirement, Directors who are not Officers are paid an annual fee based on
the number of years of service on the Board, up to fifteen years of service. The
fee is equal to $1,000 for each year of service and each investment company
member of The Vanguard Group contributes a proportionate amount of this fee
based on its relative net assets. This fee is paid, subsequent to a Director's
retirement, for a period of ten years or until the death of a retired Director.
B-11
<PAGE> 106
The following table provides detailed information with respect to the
amounts paid or accrued for the Directors and the Officers of the Company for
whom the Company's proportionate share of remuneration exceeded $60,000, for the
fiscal year ended October 31, 1997 and for all Directors and Officers as a
group:
VANGUARD/WINDSOR FUNDS
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR RETIREMENT
AGGREGATE BENEFITS ACCRUED ESTIMATED TOTAL COMPENSATION
COMPENSATION AS PART OF ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF DIRECTORS FROM THE COMPANY COMPANY EXPENSES UPON RETIREMENT PAID TO DIRECTORS(2)
- --------------------------- ---------------- --------------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) $451,030 $ 4,530 -- --
John J. Brennan(1) $282,064 $ 4,530 -- --
Barbara Barnes Hauptfuhrer $ 9,790 $ 1,412 $ 15,000 $70,000
Robert E. Cawthorn $ 9,790 $ 1,177 $ 13,000 $70,000
Bruce K. MacClaury $ 10,420 $ 1,348 $ 12,000 $65,000
Burton G. Malkiel $ 9,852 $ 947 $ 15,000 $70,000
Alfred M. Rankin, Jr. $ 9,790 $ 743 $ 15,000 $70,000
John C. Sawhill $ 9,790 $ 883 $ 15,000 $70,000
James O. Welch, Jr $ 9,790 $ 1,086 $ 15,000 $70,000
J. Lawrence Wilson $ 9,790 $ 785 $ 15,000 $70,000
</TABLE>
<TABLE>
<CAPTION>
NAMES OF OTHER OFFICERS
- ---------------------------
<S> <C> <C> <C> <C>
Raymond J. Klapinsky,
Secretary $ 75,874 $ 4,530 -- --
</TABLE>
(1) As "Interested Directors", Messrs. Bogle and Brennan receive no compensation
for their service as Directors.
(2) The amounts reported in this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 35 Vanguard funds
(34 in the case of Mr. Malkiel; 28 in the case of Mr. MacLaury).
INVESTMENT ADVISORY SERVICES
VANGUARD/WINDSOR FUND
The Company employs Wellington Management Company, LLP ("WMC") under an
investment advisory agreement dated August 1, 1996 to manage the investment and
reinvestment of the assets of Vanguard/Windsor Fund and to continuously review,
supervise and administer Vanguard/Windsor Fund's investment program. WMC
discharges its responsibilities subject to the control of the Officers and
Directors of the Company. WMC is a Massachusetts limited liability partnership
controlled by the following general partners: Robert W. Doran, Duncan M.
McFarland and John R. Ryan. WMC and its predecessor organizations have provided
investment advisory services to investment companies since 1928 and to
investment counseling clients since 1960. Charles T. Freeman, Senior Vice
President of WMC, has served as portfolio manager of the series since January,
1996.
Vanguard/Windsor Fund pays WMC a basic fee at the end of each fiscal
quarter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to Vanguard/Windsor Fund's average month-end net assets for
the quarter.
<TABLE>
<CAPTION>
NET ASSETS ANNUAL RATE
---------------------------------------------------- -----------
<S> <C>
First $17.5 billion................................. 0.125%
Assets in excess of $17.5 billion................... 0.100%
</TABLE>
The basic fee paid to WMC may be increased or decreased by applying an
adjustment formula based on Vanguard/Windsor Fund's investment performance. Such
formula provides for an increase or decrease in the basic fee paid to WMC each
quarter, depending upon Vanguard/Windsor Fund's investment performance for the
thirty-six months preceding the end of the quarter relative to the investment
record of the Standard and Poor's 500 Composite Stock Price Index (the "Index")
for the same period.
B-12
<PAGE> 107
The Basic Fee, as provided above, shall be increased or decreased by
applying an incentive/penalty fee adjustment based on the investment performance
of Vanguard/Windsor Fund relative to the investment performance of the Index.
The following table sets forth the adjustment factors to the base advisory
fee payable by the Company to WMC under this investment advisory agreement:
For the first $17.5 billion of assets;
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VERSUS THE INDEX ADJUSTMENT*
------------------------------------------------- ------------------
<S> <C>
Less than -12%................................... -0.67 X Basic Fee
Between -12% and -6%............................. -0.33 X Basic Fee
Between -6% and 6%............................... 0.00 X Basic Fee
Between 6% and 12%............................... +0.33 X Basic Fee
More than 12%.................................... +0.67 X Basic Fee
</TABLE>
For assets over $17.5 billion;
<TABLE>
<S> <C>
Less than -12%................................... -0.90 X Basic Fee
Between -12% and -6%............................. -0.45 X Basic Fee
Between -6% and 6%............................... 0.00 X Basic Fee
Between 6% and 12%............................... +0.45 X Basic Fee
More than 12%.................................... +0.90 X Basic Fee
</TABLE>
- ---------------
*For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period.
The above incentive/penalty fee will not be fully operable until the
quarter ending July 31, 1999. Until that date, a "blended" fee rate consisting
of varying percentages of (i) the performance adjustment based on the schedule
set forth above (the "new rate"), and (ii) the performance adjustment based on
the schedule set forth in Vanguard/Windsor Fund's previous investment advisory
agreement with WMC((1)) (the "previous rate") shall be used as follows:
1) QUARTER ENDING JANUARY 31, 1997. The incentive/penalty fee was
calculated as the sum of 16.7% of the fee payable under the new rate
plus 83.3% of the fee payable under the previous rate.
2) QUARTER ENDING APRIL 30, 1997. The incentive/penalty fee was calculated
as the sum of 25% of the fee payable under the new rate plus 75% of the
fee payable under the previous rate.
3) QUARTER ENDING JULY 31, 1997. The incentive/penalty fee was calculated
as the sum of 33% of the fee payable under the new rate plus 67% of the
fee payable under the previous rate.
4) QUARTER ENDING OCTOBER 31, 1997. The incentive/penalty fee was
calculated as the sum of 41.6% of the fee payable under the new rate
plus 58.4% of the fee payable under the previous rate.
5) QUARTER ENDING JANUARY 31, 1998. The incentive/penalty fee was
calculated as the sum of 50% of the fee payable under the new rate plus
50% of the fee payable under the previous rate.
6) QUARTER ENDING APRIL 30, 1998. The incentive/penalty fee shall be
calculated as the sum of 58.4% of the fee payable under the new rate
plus 41.6% of the fee payable under the previous rate.
7) QUARTER ENDING JULY 31, 1998. The incentive/penalty fee shall be
calculated as the sum of 67% of the fee payable under the new rate plus
33% of the fee payable under the previous rate.
- ---------------
(1) The previous incentive/penalty fee structure provided that the Basic Fee be
increased or decreased by an amount equal to .05% per annum (.0125 per
quarter) of the average month-end assets if the Fund's investment
performance for the 36 months preceding the end of the quarter was between 6
and 12 percentage points above or below, respectively, the investment record
of the Standard & Poor's 500 Composite Stock Index (the "Index") and .10%
per annum (.025 per quarter) of the average month-end assets of the Fund if
the Fund's investment performance for the 36 months preceding the end of the
quarter was twelve percentage points or more above or below, respectively,
the investment record of the Index.
B-13
<PAGE> 108
8) QUARTER ENDING OCTOBER 31, 1998. The incentive/penalty fee shall be
calculated as the sum of 75% of the fee payable under the new rate and
25% of the fee payable under the previous rate.
9) QUARTER ENDING JANUARY 31, 1999. The incentive/penalty fee shall be
calculated as the sum of 83.3% of the fee payable under the new rate
plus 16.7% of the fee payable under the previous rate.
10) QUARTER ENDING APRIL 30, 1999. The incentive/penalty fee shall be
calculated as the sum of 91.7% of the fee payable under the new rate
plus 8.3% of the fee payable under the previous rate.
11) QUARTER ENDING JULY 31, 1999. New rate fully operable.
For purposes of incentive/penalty adjustments, the investment performance
of Vanguard/Windsor Fund for any period is expressed as a percentage of
Vanguard/Windsor Fund's net asset value per share at the beginning of the
period. This percentage is equal to the sum of: (i) the change in
Vanguard/Windsor Fund's net asset value per share during the period; (ii) the
value of Vanguard/Windsor Fund's cash distributions per share having an
ex-dividend date occurring within the period; and (iii) the per share amount of
capital gains taxes paid or accrued during the period by Vanguard/Windsor Fund
for undistributed realized long-term capital gains. The investment record of the
S&P Index for any period is expressed as a percentage of the S&P Index level at
the beginning of the period. This percentage is equal to the sum of (i) the
change in the level of the S&P Index, during the period and (ii) the value,
computed consistently with the S&P Index, of cash distributions having an
ex-dividend date occurring within the period made by companies whose securities
comprise the S&P Index.
During the fiscal years ended October 31, 1995, 1996 and 1997
Vanguard/Windsor Fund paid the following advisory fees:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Basic Fee........................................ $19,022,000 $18,816,000 $ 23,502,000
Increase or Decrease for Performance
Adjustment..................................... 7,752,000 (4,417,000) (11,821,000)
----------- ----------- ------------
Total....................................... $26,774,000 $14,399,000 $ 11,681,000
=========== =========== ============
</TABLE>
These fees were paid under a previous fee schedule that provides for a
higher rate of fees.
VANGUARD/WINDSOR II
Vanguard/Windsor II employs a "multi-manager" approach utilizing four
investment advisors.
BARROW, HANLEY, MEWHINNEY & STRAUSS
Vanguard/Windsor II has entered into an investment advisory agreement dated
May 1, 1993 with Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHM&S") to manage a
portion of the equity allocation of Vanguard/Windsor II (currently approximately
73%). Under this agreement, BHM&S manages the investment and reinvestment of the
designated assets and continuously reviews, supervises and administers the
investment program of Vanguard/Windsor II with respect to those assets. BHM&S
discharges its responsibilities subject to the control of the Officers and
Directors of the Company.
BHM&S is a Texas corporation controlled by the following officers of BHM&S:
James Purdy Barrow, Principal; Bryant Miller Hanley, Jr., President, Secretary
and Treasurer; Michael Christopher Mewhinney, Principal; and John Luke Strauss,
Principal.
B-14
<PAGE> 109
Vanguard/Windsor II pays BHM&S a basic fee at the end of each fiscal
quarter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to the average month-end net assets of Vanguard/Windsor II
managed by BHM&S for the quarter:
<TABLE>
<CAPTION>
NET ASSETS ANNUAL RATE
---------------------------------------------------- -----------
<S> <C>
First $200 million.................................. 0.300%
Next $300 million................................... 0.200%
Next $500 million................................... 0.150%
Over $1 billion..................................... 0.125%
</TABLE>
The Fund's payments to BHM&S under the above schedule are subject to an
incentive/penalty fee arrangement which compares the performance of the Fund's
assets managed by BHM&S with the performance of the Standard & Poor's/BARRA
Value Index. This arrangement provides for the following adjustments to BHM&S's
basic fee:
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VERSUS THE INDEX ADJUSTMENT
--------------------------------------------- -----------------
<S> <C>
Less than or equal to -9%.................... -0.25 X Basic Fee
Between -9% and -6%.......................... -0.15 X Basic Fee
Between -6% and 6%........................... 0 X Basic Fee
Between 6% and 9%............................ +0.15 X Basic Fee
More than 9%................................. +0.25 X Basic Fee
</TABLE>
- ---------------
* For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period.
The BARRA Value Index includes stocks in the Standard and Poor's 500
Composite Stock Price Index with lower than average ratios of market price to
book value. These types of stocks are often referred to as "value" stocks.
The investment performance of the portion of Vanguard/Windsor II's assets
managed by BHM&S (the "BHM&S Portfolio") for any period is expressed as a
percentage of the "BHM&S Portfolio Unit Value" at the beginning of such period.
This percentage is equal to the sum of: (i) the change in the BHM&S Portfolio
Unit Value during such period; (ii) the unit value of the Series' cash
distributions from the BHM&S Portfolio's net investment income and realized net
capital gains (whether long-term or short-term) having an ex-dividend date
occurring within such period; and (iii) the unit value of capital gains taxes
paid or accrued during such period by Vanguard/Windsor II for undistributed
realized long-term capital gains realized from the BHM&S Portfolio.
The "BHM&S Portfolio Unit Value" will be determined by dividing the total
net assets of the BHM&S Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the BHM&S Portfolio was equal to
the total shares outstanding of Vanguard/Windsor II. After such initial date, as
assets are added to or withdrawn from the BHM&S Portfolio, the number of units
of the BHM&S Portfolio will be adjusted based on the unit value of the BHM&S
Portfolio on the day such changes are executed.
The investment record of the BARRA Value Index is calculated quarterly by
(i) multiplying the total return for the quarter (change in market price plus
dividends) of each stock included in the BARRA Value Index by its weighting in
the BARRA Value Index at the beginning of the quarter, and (ii) adding the
values discussed in (i). For any period, therefore, the investment record of the
BARRA Value Index will be the compounded quarterly returns of the BARRA Value
Index.
During the fiscal years ended October 31, 1995, 1996 and 1997,
Vanguard/Windsor II paid advisory fees to BHM&S of approximately $8,514,842,
$11,475,528, and $16,925,953 before a performance adjustment of $2,495,021,
respectively.
B-15
<PAGE> 110
OTHER ADVISERS
On November 1, 1991, Vanguard/Windsor II added Equinox Capital Management
("Equinox") and Tukman Capital Management ("Tukman") to manage the investment
and reinvestment of a portion of its equity allocation (approximately 10% each).
Additionally, Vanguard's Core Management Group was added to manage approximately
7% of the Vanguard/Windsor II's equity allocation. Equinox, Tukman and
Vanguard's Core Management Group discharge their respective responsibilities
subject to the control of the Directors and Officers of the Company.
EQUINOX
Equinox is a Delaware corporation controlled by the following officers of
Equinox: Ronald J. Ulrich, President and Director; Wendy D. Lee, Managing
Director; David E. Walker, Principal; Laura Starr, Vice President; Jacqueline A.
Williams, Vice President; Mark W. Watson, Vice President; and Kenneth J. Doerr,
Vice President.
Under the terms of an investment advisory agreement dated August 1, 1996,
Vanguard/Windsor II pays Equinox a basic fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the portion of Vanguard/Windsor II's average month-end net
assets managed by Equinox for the quarter.
<TABLE>
<CAPTION>
NET ASSETS ANNUAL RATE
---------------------------------------------------- -----------
<S> <C>
First $400 million.................................. .200%
Next $600 million................................... .150%
Next $1 billion..................................... .125%
Assets in excess of $2 billion...................... .100%
</TABLE>
The basic fee paid to Equinox may be increased or decreased by applying an
adjustment formula based on the investment performance of the portion of
Vanguard/Windsor II's assets managed by Equinox (the "Equinox Portfolio")
relative to the investment of the Russell 1000 Value Index. Such formula
provides for an increase or decrease in the basic fee paid to Equinox each
quarter, depending upon the Equinox Portfolio's investment performance for the
thirty-six months preceding the end of the quarter.
The following table sets forth the adjustment factors to the base advisory
fee payable by the Equinox Portfolio to Equinox under this investment advisory
agreement:
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE FEE
VERSUS THE INDEX ADJUSTMENT*
------------------------------------------------- ------------------
<S> <C>
Less than -9%.................................... -0.50 X Basic Fee
Between -9% and -4.5%............................ -0.25 X Basic Fee
Between -4.5% and 4.5%........................... 0 X Basic Fee
Between 4.5% and 9%.............................. +0.25 X Basic Fee
More than 9%..................................... +0.50 X Basic Fee
</TABLE>
- ---------------
* For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period.
The above incentive/penalty fee will not be fully operable until the
quarter ending July 31, 1999. Until that date, a "blended fee rate" consisting
of varying percentages of (i) the performance adjustment based on the schedule
set forth above (the "new rate"), and (ii) the performance adjustment based on
the schedule set forth in Vanguard/Windsor II's previous investment advisory
agreement with Equinox (the "previous rate") shall be used as follows:
1) QUARTER ENDING OCTOBER 31, 1996. The incentive/penalty fee was
calculated as the sum of 8.3% of the fee payable under the new rate plus 91.7%
of the fee payable under the previous rate.
2) QUARTER ENDING JANUARY 31, 1997. The incentive/penalty fee was
calculated as the sum of 16.7% of the fee payable under the new rate plus 83.3%
of the fee payable under the previous rate.
B-16
<PAGE> 111
3) QUARTER ENDING APRIL 30, 1997. The incentive/penalty fee was
calculated as the sum of 25% of the fee payable under the new rate plus 75% of
the fee payable under the previous rate.
4) QUARTER ENDING JULY 31, 1997. The incentive/penalty fee was calculated
as the sum of 33% of the fee payable under the new rate plus 67% of the fee
payable under the previous rate.
5) QUARTER ENDING OCTOBER 31, 1997. The incentive/penalty fee was
calculated as the sum of 41.6% of the fee payable under the new rate plus 58.4%
of the fee payable under the previous rate.
6) QUARTER ENDING JANUARY 31, 1998. The incentive/penalty fee was
calculated as the sum of 50% of the fee payable under the new rate plus 50% of
the fee payable under the previous rate.
7) QUARTER ENDING APRIL 30, 1998. The incentive/penalty fee shall be
calculated as the sum of 58.4% of the fee payable under the new rate plus 41.6%
of the fee payable under the previous rate.
8) QUARTER ENDING JULY 31, 1998. The incentive/penalty fee shall be
calculated as the sum of 67% of the fee payable under the new rate plus 33% of
the fee payable under the previous rate.
9) QUARTER ENDING OCTOBER 31, 1998. The incentive/penalty fee shall be
calculated as the sum of 75% of the fee payable under the new rate plus 25% of
the fee payable under the previous rate.
10) QUARTER ENDING JANUARY 31, 1999. The incentive/penalty fee shall be
calculated as the sum of 83.3% of the fee payable under the new rate plus 16.7%
of the fee payable under the previous rate.
11) QUARTER ENDING APRIL 30, 1999. The incentive/penalty fee shall be
calculated as the sum of 91.7% of the fee payable under the new rate plus 8.3%
of the fee payable under the previous rate.
12) QUARTER ENDING JULY 31, 1999. New rate fully operable.
- ---------------
The previous incentive/penalty fee structure provided that the Basic Fee be
increased or decreased by an amount equal to .05% per annum (.0125 per quarter)
of the average month-end assets if the Fund's investment performance for the 36
months preceding the end of the quarter was between 6 and 12 percentage points
above or below, respectively, the investment record of the Standard & Poor's 500
Composite Stock Index (the "Index") and .10% per annum (.025 per quarter) of the
average month-end assets of the Fund if the Fund's investment performance for
the 36 months preceding the end of the quarter was twelve percentage points or
more above or below, respectively, the investment record of the Index.
The investment performance of the Equinox Portfolio for any period is
expressed as a percentage of the "Equinox Portfolio Unit Value" at the beginning
of such period. This percentage is equal to the sum of: (i) the change in the
Equinox Portfolio Unit Value during such period; (ii) the unit value of
Vanguard/Windsor II's cash distributions from the Equinox Portfolio net
investment income and realized net capital gains (whether long-term or
short-term) having an ex-dividend date occurring within such period; and (iii)
the unit value of capital gains taxes paid or accrued during such period by
Vanguard/Windsor II for undistributed realized long-term capital gains realized
from the Equinox Portfolio.
The "Equinox Portfolio Unit Value" will be determined by dividing the total
net assets of the Equinox Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the Equinox Portfolio was equal to
the total shares outstanding of Vanguard/Windsor II. After such initial date, as
assets are added to or withdrawn from the Equinox Portfolio, the number of units
of the Equinox Portfolio will be adjusted based on the unit value of the Equinox
Portfolio on the day such changes are executed.
The investment record of the Russell 1000 Value Index will be calculated
quarterly by (i) multiplying the total return for the quarter (change in the
market price plus dividends) of each stock included in the Russell 1000 Value
Index by its weighting in the Russell 1000 Value Index at the beginning of the
quarter, and (ii) adding the values discussed in (i). For any period, therefore,
the investment record of the Russell 1000 Value Index will be the compounded
quarterly returns of the Russell 1000 Value Index.
During the fiscal years ended October 31, 1995, 1996 and 1997,
Vanguard/Windsor II paid advisory fees to Equinox of approximately $1,681,435,
$1,980,458 before a performance adjustment of $4,747, and $2,791,342 before a
performance adjustment of $408,295, respectively. These fees were paid under a
previous fee schedule that provided for a higher rate of fees.
B-17
<PAGE> 112
TUKMAN
Tukman is a Delaware corporation controlled by the following officers of
Tukman: Melvin T. Tukman, President and Director, and Daniel L. Grossman, Vice
President.
Under the terms of an investment advisory agreement dated November 1, 1991,
the Fund pays Tukman a basic fee at the end of each fiscal quarter, calculated
by applying a quarterly rate, based on the following annual percentage rates, to
the average month-end assets of the portion of Vanguard/Windsor II's assets
managed by Tukman:
<TABLE>
<CAPTION>
NET ASSETS ANNUAL RATE
---------------------------------------------------- -----------
<S> <C>
First $25 million................................... 0.400%
Next $125 million................................... 0.350%
Next $350 million................................... 0.250%
Next $500 million................................... 0.200%
Over $1 billion..................................... 0.150%
</TABLE>
The Fund's payments to Tukman under the above schedule are subject to an
incentive/penalty fee arrangement which compares the performance of the Fund's
assets managed by Tukman with the performance of the Standard & Poor's 500
Composite Stock Price Index. This arrangement provides for the following
adjustments to Tukman's basic fee:
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VERSUS THE INDEX ADJUSTMENT
--------------------------------------------- -----------------
<S> <C>
Less than or equal to -12%................... -0.50 x Basic Fee
Between -12% and -6%......................... -0.25 x Basic Fee
Between -6% and 6%........................... 0 x Basic Fee
Between 6% and 12%........................... +0.25 x Basic Fee
More than 12%................................ +0.50 x Basic Fee
</TABLE>
- ---------------
* For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period.
The investment performance of the portion of Vanguard/Windsor II's assets
managed by Tukman (the "Tukman Portfolio") for any period is expressed as a
percentage of the "Tukman Portfolio Unit Value" at the beginning of such period.
The percentage is equal to the sum of: (i) the change in the Tukman Portfolio
Unit Value during such period; (ii) the unit value of Vanguard/Windsor II's cash
distributions from the Tukman Portfolio net investment income and realized net
capital gains (whether long-term or short-term) having an ex-dividend date
occurring within such period; and (iii) the unit value of capital gains taxes
paid or accrued during such period by Vanguard/Windsor II for undistributed
realized long-term capital gains realized from the Tukman Portfolio.
The "Tukman Portfolio Unit Value" will be determined by dividing the total
net assets of the Tukman Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the Tukman Portfolio was equal to
the total shares outstanding of Vanguard/Windsor II. After such initial date, as
assets are added to or withdrawn from the Tukman Portfolio, the number of units
of the Tukman Portfolio will be adjusted based on the unit value of the Tukman
Portfolio on the day such changes are executed.
The investment record of the S&P 500 will be calculated quarterly by (i)
multiplying the total return for the quarter (change in market price plus
dividends) of each stock included in the S&P 500 by its weighting in the S&P 500
at the beginning of the quarter, and (ii) adding the values discussed in (i).
For any period, therefore, the investment record of the S&P 500 will be the
compounded quarterly returns of the S&P 500.
During the fiscal years ended October 31, 1995, 1996 and 1997,
Vanguard/Windsor II paid advisory fees to Tukman of approximately $2,184,838,
$2,699,458, before a performance adjustment of $930,724, and $3,622,904 before a
performance adjustment of $785,658, respectively.
B-18
<PAGE> 113
VANGUARD'S CORE MANAGEMENT GROUP
Since November 1, 1991, Vanguard's Core Management Group has provided
investment advisory services on an at-cost basis with respect to a portion of
Vanguard/Windsor II's equity allocation (currently approximately 7%). The Core
Management Group also provides investment advisory services to several Vanguard
Funds, including Vanguard Index Trust, Vanguard Balanced Index Fund, Vanguard
Horizon Fund, Vanguard International Equity Index Fund, Vanguard REIT Index
Portfolio, Vanguard Institutional Index Fund, Total International Portfolio of
Vanguard STAR Fund, several indexed separate accounts as well as a portion of
Vanguard/Morgan Growth Fund, and Vanguard Explorer Fund's assets. The
quantitative approach used by Vanguard's Core Management Department is designed
to generate highly predictable results relative to a benchmark of large and
medium capitalization "value" stocks. A portfolio is constructed from
attractively priced "value" stocks using an optimizer to assure that the
characteristics of the portfolio are similar to that of the benchmark. The Core
Management Group is supervised by the Officers of the Company.
DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS
Vanguard/Windsor Fund's present agreement with WMC continues in effect
until July 31, 1998. Vanguard/ Windsor II's present agreements with BHM&S,
Equinox and Tukman continue in effect until April 30, 1998, July 31, 1998 and
October 31, 1998, respectively. Each agreement is renewable for successive
one-year periods if specifically approved by a vote of the Company's Board of
Directors at a meeting called for the purpose of considering such approval. The
Board's approval must include the affirmative votes of a majority of the
Directors who are neither parties to the contract or "interested persons" of
such parties (as defined in the Investment Company Act of 1940). In addition,
the question of continuing an investment advisory agreement may be presented to
shareholders. In such an event, the agreement would be continued only if
approved by the affirmative vote of a majority of the outstanding shares of the
Series to which the agreement related.
Each investment advisory agreement is automatically terminated if assigned,
and may be terminated without penalty at any time (1) by majority vote of either
the Board of Directors or the Company's outstanding shares upon 60 days' written
notice to the adviser, or (2) by the adviser upon 90 days' written notice to the
Company.
The Company's Board of Directors may, without the approval of shareholders,
provide for:
(A) The employment of a new investment adviser pursuant to the terms of a
new advisory agreement, either as a replacement for an existing adviser
or as an additional adviser;
(B) A change in the terms of an advisory agreement; or
(C) The continued employment of an existing adviser, on the same advisory
contract terms, where a contract has been assigned because of a change
in control of the adviser.
Any such change will be made upon not less than 30 days' prior written
notice to shareholders, which shall include the information concerning the
adviser that would have normally been included in a proxy statement.
MORE INFORMATION ON ADVISERS' INCENTIVE/PENALTY FEES
In April 1972, the Commission issued Release No. 7113 (the "Release") under
the Investment Company Act of 1940 to call the attention of directors and
investment advisers to certain factors which must be considered in connection
with investment company incentive fee arrangements. One of these factors is to
"avoid basing significant fee adjustments upon random or insignificant
differences" between the investment performance of a fund and that of the
particular index with which it is being compared. The Release provides that
"preliminary studies (of the SEC staff) indicate that as a 'rule of thumb' the
performance difference should be at least P10 percentage points" annually before
the maximum performance adjustment may be made. However, the Release also states
that "because of the preliminary nature of these studies, the Commission is not
recommending, at this time, that any particular performance difference exist
before the maximum fee adjustment may be made." The Release concludes that the
directors of a fund "should satisfy
B-19
<PAGE> 114
themselves that the maximum performance adjustment will be made only for
performance differences that can reasonably be considered significant." The
Board of Directors has fully considered the Release and believes that the
performance adjustments as included in the agreements with WMC, BHM&S, Equinox
and Tukman are entirely appropriate, although not within the P10 percentage
points per year range suggested in the Release. Under the Company's investment
advisory agreements, the maximum performance adjustments are made at a
difference of P12 and P9 percentage points from the performance of the
respective index over a thirty-six month period, which would effectively be the
equivalent of approximately P4 and P3 percentage points difference per year.
PORTFOLIO TRANSACTIONS
WMC, BHM&S, Equinox, Tukman and Vanguard are authorized to (with the
approval of the Board of Directors) select the brokers or dealers that will
execute the purchases and sales of portfolio securities for the respective
series of the Company. The investment advisory agreements direct the advisers to
use their best efforts to obtain the best available price and most favorable
execution as to all transactions. Each investment adviser has undertaken to
execute each investment transaction at a price and commission which provides the
most favorable total cost or proceeds reasonably obtainable under the
circumstances.
In placing portfolio transactions, each investment adviser will use its
best judgment to choose the broker most capable of providing the brokerage
services necessary to obtain best available price and most favorable execution.
The full range and quality of brokerage services available will be considered in
making these determinations. In those instances where it is reasonably
determined that more than one broker can offer the brokerage services needed to
obtain the best available price and most favorable execution, consideration may
be given to those brokers which supply investment research and statistical
information and provide other services in addition to execution services to the
series and/or the investment adviser. Each investment adviser considers such
information useful in the performance of its obligations under the agreement,
but is unable to determine the amount by which such services may reduce its
expenses.
The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Board of Directors, each investment adviser may cause the series
to pay a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the adviser to the Company and the other Funds in the Group.
Currently, it is the Company's policy that each investment adviser may at
times pay higher commissions in recognition of brokerage services felt necessary
for the achievement of better execution of certain securities transactions that
otherwise might not be available. An investment adviser will only pay such
higher commissions if it believes this to be in the best interest of the series.
Some brokers or dealers who may receive such higher commissions in recognition
of brokerage services related to execution of securities transactions are also
providers of research information to an investment adviser and/or the Company.
However, the investment advisers have informed the Company that they will not
pay higher commission rates specifically for the purpose of obtaining research
services.
Since the Company does not market its shares through intermediary brokers
or dealers, it is not the Company's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be through such firms.
However, the Company may place portfolio orders with qualified broker-dealers
who recommend shares of the Company to other clients, or who act as agent in the
purchase of the Company's shares for their clients, and may, when a number of
brokers and dealers can provide comparable best price and execution on a
particular transaction, consider the sale of the Company's shares by a broker or
dealer in selecting among qualified broker-dealers.
During the fiscal years ended October 31, 1995, 1996 and 1997 the Company
paid $17,775,409, $25,321,530, and $45,284,493 in brokerage commissions,
respectively.
B-20
<PAGE> 115
Some securities considered for investment by a series of the Company may
also be appropriate for the other series and for other Funds and/or clients
served by the investment adviser. If purchase or sale of securities consistent
with the investment policies of the series and one or more of these other Funds
or clients served by the investment adviser are considered at or about the same
time, transactions in such securities will be allocated among the several Funds
and clients in a manner deemed equitable by the investment adviser.
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of the Vanguard Group, including
Vanguard/Windsor Fund and Vanguard/Windsor II, may from time to time use one or
more of the following unmanaged indices for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
STANDARD AND POOR'S/BARRA VALUE INDEX -- consists of the stocks in the Standard
and Poor's 500 Composite Stock Price Index ("S&P 500") with the lowest
price-to-book ratios, comprising 50% of the market capitalization of the S&P
500.
STANDARD & POOR'S MIDCAP 400 INDEX -- is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S/BARRA 600 VALUE INDEX -- contains stocks of the S&P SmallCap
600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S/BARRA 600 GROWTH INDEX -- contains stocks of the S&P SmallCap
600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX -- consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 EQUITY INDEX -- consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, Asia, and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN LONG-TERM TREASURY BOND INDEX -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX -- consists of over 4,500 U.S.
Treasury Agency and investment grade corporate bonds.
B-21
<PAGE> 116
LEHMAN CORPORATE (Baa) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
BOND BUYER MUNICIPAL BOND INDEX -- is a yield index on current coupon high-grade
general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield for four high-grade, noncallable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB or better with maturities between
1 and 5 years. The index has a market value of over $1.6 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $700 billion.
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market weighted
index that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB- or better with maturities greater than 10 years. The index
has a market value of over $900 billion.
LIPPER BALANCED FUND AVERAGE -- an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
LIPPER GENERAL EQUITY FUND AVERAGE -- an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
LIPPER FIXED INCOME FUND AVERAGE -- an industry benchmark of average fixed
income funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
B-22
<PAGE> 117
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Company was originally organized as a corporation in 1959. On January
2, 1985, the Company was reorganized into a Pennsylvania business trust. The
Company was reorganized as a Maryland corporation on December 30, 1985. The
Amended and Restated Articles of Incorporation permit the Directors to issue
2,700,000,000 shares of common stock, with one cent par value. The Board of
Directors has the power to designate one or more classes ("series") of shares of
common stock and to classify or reclassify any unissued shares with respect to
such series. Currently the Company is offering shares of two series.
The shares of each series are fully paid and non-assessable, and have no
preference as to conversion, exchange, dividends, retirement or other features.
The shares of each series have no pre-emptive rights. Such shares have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. A shareholder is entitled to one vote for each full
share held (and a fractional vote for each fractional share held), then standing
in his name on the books of the Company. On any matter submitted to a vote of
shareholders, all shares of the Company then issued and outstanding and entitled
to vote, irrespective of the series, shall be voted in the aggregate and not by
series except (i) when required by the Investment Company Act of 1940, shares
shall be voted by individual series; and (ii) when the matter does not affect
any interest of a particular series, then only shareholders of the affected
series shall be entitled to vote thereon.
FINANCIAL STATEMENTS
The Series' Financial Statements for the year ended October 31, 1997,
including the financial highlights for each of the five fiscal years in the
period ended October 31, 1997, appearing in the Vanguard/Windsor Fund and
Vanguard/Windsor II 1997 Annual Reports to Shareholders, and the reports thereon
of Price Waterhouse LLP, independent accountants, also appearing therein, are
incorporated by reference in this Statement of Additional Information. The
Series' 1997 Annual Reports to Shareholders are enclosed with this Statement of
Additional Information. For a more complete discussion of a Series' performance,
please see the Series' 1997 Annual Report to Shareholders, which may be obtained
without charge.
B-23
<PAGE> 118
PART C
VANGUARD/WINDSOR FUNDS, INC.
(FORMERLY THE WINDSOR FUNDS, INC.)
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
The Registrant's audited financial statements for the year ended October
31, 1997, including Price Waterhouse LLP's reports thereon, are incorporated by
reference, in the Statement of Additional Information, from the Registrant's
1997 Annual Reports which have been filed with the Commission as Exhibits to
this Registration Statement. The financial statements included in each of the
Annual Reports are:
1. Statement of Net Assets as of October 31, 1997.
2. Statement of Operations for the year ended October 31, 1997.
3. Statement of Changes in Net Assets for the years ended October 31, 1996
and October 31, 1997.
4. Financial Highlights for each of the five years in the period ended
October 31, 1997.
5. Notes to Financial Statements.
6. Report of Independent Accountants.
(B) EXHIBITS
1. Articles of Incorporation
2. By-Laws of Registrant
3. Not Applicable
4. Not Applicable
5. Not Applicable
6. Not Applicable
7. Reference is made to the section entitled "Management of the Fund" in
the Registrant's Statement of Additional Information
8. Form of Custody Agreement
9. Form of Vanguard Service Agreement
10. Opinion of Counsel
11. Consent of Independent Accountants*
12. Financial Statements -- reference is made to (a) above
13. Not Applicable
14. Not Applicable
15. Not Applicable
16. Schedule for Computation of Performance Quotations*
27. Financial Data Schedule*
- ---------------
* Filed herewith
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
The officers of the Registrant and the other investment companies in The
Vanguard Group of Investment Companies are identical. In addition, the officers
of the Registrant are also officers of The Vanguard Group, Inc. Reference is
made to the captions "The Fund and Vanguard" and "Investment Adviser" in the
Prospectus constituting Part A and "Management of the Company" in the Statement
of Additional Information constituting Part B of this Registration Statement.
C-1
<PAGE> 119
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of October 31, 1997 the number of shareholders of each Series of Common
Stock ($.01 par value) was as follows:
<TABLE>
<S> <C>
Vanguard/Windsor Fund Series........................................................... 467,162
Vanguard/Windsor II Series............................................................. 731,940
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is made to Article XI of Registrant's Articles of Incorporation.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Wellington Management Company, LLP ("Wellington Management") is an
investment adviser registered under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"). The list required by this Item 28 of officers and
partners of Wellington Management, together with any information as to any
business profession, vocation or employment of a substantial nature engaged in
by such officers and partners during the past two years, is incorporated herein
by reference to Schedules A and D of Form ADV filed by Wellington Management
pursuant to the Advisers Act (SEC File No. 801-159089).
Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHM&S") is an investment
adviser registered under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"). The list required by this Item 28 of officers and partners of
BHM&S, together with any information as to any business profession, vocation or
employment of a substantial nature engaged in by such officers and partners
during the past two years, is incorporated herein by reference to Schedules A
and D of Form ADV filed by BHM&S pursuant to the Advisers Act (SEC File No.
801-14861).
Tukman Capital Management ("Tukman"), is an investment adviser registered
under the Investment Advisers Act of 1940, as amended (the "Advisers Act"). The
list required by this Item 28 of officers and partners of Tukman, together with
any information as to any business profession, vocation or employment of a
substantial nature engaged in by such officers and partners during the past two
years, is incorporated herein by reference to Schedules A and D of form ADV
filed by Levin pursuant to the Advisers Act (SEC File No. 801-15279).
Equinox Capital Management ("Equinox") is an investment adviser registered
under the Investment Advisers Act of 1940, as amended (the "Advisers Act"). The
list required by this Item 28 of officers and partners of Equinox, together with
any information as to any business profession, vocation or employment of a
substantial nature engaged in by such officers and partners during the past two
years, is incorporated herein by reference to Schedules A and D of form ADV
filed by Levin pursuant to the Advisers Act (SEC File No. 801-34524).
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None
(b) Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley Forge,
Pennsylvania 19482; and Registrant's Custodian, State Street Bank & Trust
Company, Boston, Mass.
C-2
<PAGE> 120
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which was previously filed as Exhibit 9(c) and described in
Part B hereof under "Management of the Company," the Registrant is not a party
to any management-related service contract.
ITEM 32. UNDERTAKINGS
Registrant hereby undertakes to provide an Annual Report to Shareholders or
prospective investors, free of charge, upon request.
C-3
<PAGE> 121
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Valley Forge and the
Commonwealth of Pennsylvania, on the 9th day of February, 1998.
VANGUARD/WINDSOR FUNDS, INC.
BY: RAYMOND J. KLAPINSKY
(Raymond J. Klapinsky)
John J. Brennan*,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------------------- ------------------------- -----------------
<C> <S> <C>
BY: RAYMOND J. KLAPINSKY Senior Chairman of the February 9, 1998
Board and Director
(Raymond J. Klapinsky)
John C. Bogle*
BY: RAYMOND J. KLAPINSKY Chairman, Chief Executive February 9, 1998
Officer and Director
(Raymond J. Klapinsky)
John J. Brennan*
BY: RAYMOND J. KLAPINSKY Director February 9, 1998
(Raymond J. Klapinsky)
Robert E. Cawthorn*
BY: RAYMOND J. KLAPINSKY Director February 9, 1998
(Raymond J. Klapinsky)
Barbara B. Hauptfuhrer*
BY: RAYMOND J. KLAPINSKY Director February 9, 1998
(Raymond J. Klapinsky)
Burton G. Malkiel*
BY: RAYMOND J. KLAPINSKY Director February 9, 1998
(Raymond J. Klapinsky)
Alfred M. Rankin, Jr.*
BY: RAYMOND J. KLAPINSKY Director February 9, 1998
(Raymond J. Klapinsky)
John C. Sawhill*
BY: RAYMOND J. KLAPINSKY Director February 9, 1998
(Raymond J. Klapinsky)
Bruce K. MacLaury*
BY: RAYMOND J. KLAPINSKY Director February 9, 1998
(Raymond J. Klapinsky)
James O. Welch, Jr.*
BY: RAYMOND J. KLAPINSKY Director February 9, 1998
(Raymond J. Klapinsky)
J. Lawrence Wilson*
BY: RAYMOND J. KLAPINSKY Treasurer and Principal February 9, 1998
Financial Officer and
Accounting Officer
(Raymond J. Klapinsky)
Richard F. Hyland*
</TABLE>
* By Power of Attorney. See 1933 Act File No. 2-14336, January 23, 1990.
Incorporated by Reference.
<PAGE> 122
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Consent of Independent Accountants................................................... EX-99-B11
Schedule for Computation of Performance Quotations................................... EX-99-B16
Financial Data Schedule.............................................................. EX-27
</TABLE>
<PAGE> 1
EX-99-B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 89 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated December 3, 1997, relating to the financial
statements and financial highlights appearing in the October 31, 1997 Annual
Reports to Shareholders of Vanguard/Windsor Fund and Vanguard/Windsor II, which
are also incorporated by reference into the Registration Statement. We also
consent to the references to us under the heading "Financial Highlights" in the
Prospectuses and under the heading "Financial Statements" in the Statement of
Additional Information.
PRICE WATERHOUSE LLP
Philadelphia, PA
February 5, 1998
<PAGE> 1
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS*
VANGUARD/WINDSOR FUND
(FORMERLY WINDSOR FUND)
1. Average Annual Total Return
<TABLE>
<C> <S>
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = 27.04%
N = 1
ERV = $1,270.35
Five Year
P = $1,000
T = 20.25%
N = 5
ERV = $2,514.52
Ten Year
P = $1,000
T = 15.60%
N = 10
ERV = $4,260.83
</TABLE>
2. YIELD
<TABLE>
<C> <S> <C>
a - b
Yield = 2[( ----- +1)(6) -1]
c X d
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $30,781,193.41
b = $3,471,415.92
c = 1,055,845,083.45
d = $19.55
Yield = 1.59%
</TABLE>
*Figures presented are as of the year ended October 31, 1997.
<PAGE> 2
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS*
VANGUARD/WINDSOR II
(FORMERLY WINDSOR II)
1. Average Annual Total Return
<TABLE>
<C> <S>
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = 31.27%
N = 1
ERV = $1,312.74
Five Year
P = $1,000
T = 20.21%
N = 5
ERV = $2,510.11
Ten Year
P = $1,000
T = 16.95%
N = 10
ERV = $4,784.68
</TABLE>
2. YIELD
<TABLE>
<C> <S> <C>
a - b
Yield = 2[( ----- +1)(6) - 1]
c X d
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $50,103,952.55
b = $6,075,508.34
c = 759,438,986.97
d = $29.36
Yield = 2.38%
</TABLE>
*Figures presented are as of the year ended October 31, 1997.
<TABLE> <S> <C>
<ARTICLE> 6
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<NAME> VANGUARD/WINDSOR FUNDS, INC.
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<S> <C>
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<INVESTMENTS-AT-COST> 16768698
<INVESTMENTS-AT-VALUE> 20496208
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<NET-CHANGE-FROM-OPS> 4297805
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 402197
<DISTRIBUTIONS-OF-GAINS> 1237831
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 136775
<NUMBER-OF-SHARES-REDEEMED> 103790
<SHARES-REINVESTED> 92396
<NET-CHANGE-IN-ASSETS> 4837019
<ACCUMULATED-NII-PRIOR> 114649
<ACCUMULATED-GAINS-PRIOR> 1236654
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11681
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 51197
<AVERAGE-NET-ASSETS> 18912168
<PER-SHARE-NAV-BEGIN> 16.99
<PER-SHARE-NII> 0.36
<PER-SHARE-GAIN-APPREC> 3.94
<PER-SHARE-DIVIDEND> 0.41
<PER-SHARE-DISTRIBUTIONS> 1.33
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.55
<EXPENSE-RATIO> 0.27
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<CIK> 0000107606
<NAME> VANGUARD/WINDSOR FUNDS, INC.
<SERIES>
<NUMBER> 02
<NAME> VANGUARD/WINDSOR II
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 16063267
<INVESTMENTS-AT-VALUE> 22728314
<RECEIVABLES> 223039
<ASSETS-OTHER> 1866
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 22953219
<PAYABLE-FOR-SECURITIES> 348245
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 37114
<TOTAL-LIABILITIES> 385359
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13961326
<SHARES-COMMON-STOCK> 768686
<SHARES-COMMON-PRIOR> 613765
<ACCUMULATED-NII-CURRENT> 247438
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1695234
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6663862
<NET-ASSETS> 22567860
<DIVIDEND-INCOME> 451761
<INTEREST-INCOME> 81624
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<EXPENSES-NET> 67686
<NET-INVESTMENT-INCOME> 465699
<REALIZED-GAINS-CURRENT> 1698039
<APPREC-INCREASE-CURRENT> 2753749
<NET-CHANGE-FROM-OPS> 4917487
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 410609
<DISTRIBUTIONS-OF-GAINS> 716881
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 205712
<NUMBER-OF-SHARES-REDEEMED> 95875
<SHARES-REINVESTED> 45084
<NET-CHANGE-IN-ASSETS> 7809974
<ACCUMULATED-NII-PRIOR> 192348
<ACCUMULATED-GAINS-PRIOR> 714076
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 27225
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 69454
<AVERAGE-NET-ASSETS> 18684813
<PER-SHARE-NAV-BEGIN> 24.04
<PER-SHARE-NII> 0.64
<PER-SHARE-GAIN-APPREC> 6.47
<PER-SHARE-DIVIDEND> 0.63
<PER-SHARE-DISTRIBUTIONS> 1.16
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 29.36
<EXPENSE-RATIO> 0.37
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
