<PAGE> 1
VANGUARD/
WINDSOR FUND
Semiannual Report - April 30, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
<PAGE> 2
OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 7,000 highly
motivated men and women--who form the cornerstone of our operations. We could
not survive long--let alone prosper--without them. That's why we chose this
fiscal year's fund reports to celebrate the spirit, enthusiasm, and achievements
of our crew. (We call those who work at Vanguard crew members, not employees,
because they operate as a team to accomplish our mission of serving you, our
clients.)
But while we prize the collective contributions of our crew, we also
take time to recognize the importance of the individual. Each calendar quarter,
we present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more than
300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving
you in the years ahead.
[PHOTO] [PHOTO]
John C. Bogle John J. Brennan
Senior Chairman Chairman & CEO
CONTENTS
<TABLE>
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS ............ 1
THE MARKETS IN PERSPECTIVE ............... 5
REPORT FROM THE ADVISER .................. 7
PERFORMANCE SUMMARY ...................... 9
PORTFOLIO PROFILE ........................ 10
FINANCIAL STATEMENTS ..................... 12
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
The U.S. stock market's record-shattering rise continued during the six months
ended April 30, 1998, the first half of Vanguard/Windsor Fund's 1998 fiscal
year. Your Fund earned +17.6% in the period, a return that, while superb on an
absolute basis and fully competitive with our peers, fell short of the
remarkable gain in the overall market.
The adjacent table compares Windsor's total return (capital change plus
reinvested dividends) for the six-month period with those of the average value
(growth and income) mutual fund and the unmanaged Standard & Poor's 500
Composite Stock Price Index, which is dominated by large-capitalization stocks.
<TABLE>
<CAPTION>
- - ----------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 1998
- - ----------------------------------------------
<S> <C>
Vanguard/Windsor Fund +17.6%
- - ----------------------------------------------
Average Value Fund +17.9%
- - ----------------------------------------------
S&P 500 Index +22.5%
- - ----------------------------------------------
</TABLE>
The Fund's return is based on a decrease in net asset value from $19.55
per share on October 31, 1997, to $19.50 per share on April 30, 1998, with the
latter figure adjusted for a dividend of $0.12 per share paid from net
investment income and a distribution of $2.88 per share paid from net realized
capital gains. Both payments were made on December 17, 1997.
THE PERIOD IN REVIEW
The U.S. economy's performance during the six months ended April 30 was, quite
simply, astounding. After growing by nearly 4% in 1997, the economy expanded at
a 4.8% annual pace in the January-March period, even though a stronger U.S.
dollar and economic turmoil in Asia began to crimp U.S. exports and to boost
sales of imported goods. The nation's unemployment rate fell to 4.3% in April,
its lowest level in more than 28 years. Remarkably, the strong job market and
robust economic growth did not push up prices; key inflation measures actually
showed a slowing in price increases.
Financial markets flourished in this ideal environment. Interest rates
declined by roughly 20 basis points (0.20 percentage point) on balance during
the six months, engendering modest price increases in bonds. The Lehman Brothers
Aggregate Bond Index, a good measure of the overall taxable bond market,
returned +3.6%. The yield on 3-month U.S. Treasury bills was 4.97% on April 30,
nearly one-quarter percentage point below the 5.20% level at which it began the
half-year.
In the stock market, investor confidence--some would say
overconfidence--was evident, as prices surged despite lackluster growth in
corporate profits and uncertainty about how Asia's financial and economic woes
would affect the U.S. economy. The S&P 500 Index rose every month of the period,
and its six-month total return of +22.5% was equal to approximately two years'
worth of returns at the stock market's long-term annual average of about +11%.
In such gaudy company, Windsor Fund's +17.6% return admittedly appears
somewhat pale, although it was in line with the +17.9% earned by the average
value fund. The main reason that Windsor--and its value peers, for that
matter--trailed the Index was that large-cap growth stocks dominated the S&P
500's performance during the period. The Index's growth component earned +25.1%,
fully one-quarter more than the +19.8% return on its value component. Although
growth stocks--those selling at relatively high
1
<PAGE> 4
prices in relation to such measures as book value, dividends, and past
earnings--have held sway for most of the past three years, we note that over
very long periods, returns on value and growth stocks have been remarkably
similar. Though we have no idea when the tide will turn, we fully expect that
value stocks will "return to fight again."
During the period, we were hurt in comparison with the S&P 500 Index by
our relatively large stakes in cyclical stocks--those whose earnings are
considered to be especially vulnerable to an economic slowdown, which some
investors are anticipating. We were overweighted versus the Index in three
cyclical sectors whose returns lagged the overall market: materials & processing
(23% of the Fund on average versus 6% of the Index), auto & transportation (10%
versus 4%), and producer durables (13% versus 4%). Also, returns on our stock
selections lagged the market return within the materials & processing and
health-care sectors, which more than offset our good stock selection in the auto
and utilities groups.
The long-standing investment strategy followed by the Fund's adviser,
Wellington Management Company, is to take relatively large positions in stocks
and industry sectors that are currently out of favor with most investors. This
strategy has often resulted in returns that diverge significantly from the
returns of the overall market over periods of a year or even longer. In
addition, the general level of stock prices can move substantially over short
periods--and not always on the upside. Given these wide interim variations in
market leadership, to say nothing of wide variations in market levels, Windsor
Fund shareholders--and investors in stock funds generally--should maintain a
long-term horizon.
IN SUMMARY
Stock investors have enjoyed truly historic gains in recent years. The S&P 500
Index produced a cumulative return just shy of +130% in the three years ended
April 30, 1998, an annualized return of +32%--nearly three times the long-term
annual return on U.S. stocks. Such outsized returns cannot be expected to
continue indefinitely. Indeed, investors in stocks are sure to encounter
downturns--possibly severe ones--from time to time.
Because the risks of stocks--like their returns--can be sizable, we
recommend that investors hold balanced portfolios of stock funds, bond funds,
and money market funds in proportions suitable to each person's financial
situation, investment goals, and attitude toward risk. Such a balanced portfolio
should help investors to "stay the course" toward their investment objectives,
whether the financial markets provide smooth or stormy sailing.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
May 12, 1998
2
<PAGE> 5
Notice To Shareholders
At a special meeting on May 1, 1998, shareholders of Vanguard/Windsor Fund
overwhelmingly approved five proposals. The proposals and voting results were:
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. This change will reduce the
amount of state taxes the Fund pays annually by more than $1.6 million. Approved
by 97.84% of the shares voted, as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------
FOR AGAINST ABSTAIN
-----------------------------------------------------------
<S> <C> <C>
764,637,561 8,316,973 8,557,149
-----------------------------------------------------------
</TABLE>
2a. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. Permits Windsor
Fund to participate in Vanguard's interfund lending program, which allows funds
to loan money to each other if--and only if--it makes good financial sense to do
so on both sides of the transaction. The interfund lending program won't be an
integral part of your Fund's investment program; it is a contingency arrangement
for managing unusual cash flows. Approved by 95.84% of the shares voted, as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------
FOR AGAINST ABSTAIN
-----------------------------------------------------------
<S> <C> <C>
748,974,361 19,625,341 12,911,981
-----------------------------------------------------------
</TABLE>
2b. INVESTMENT LIMITATION CHANGES--BORROWING MONEY AND PLEDGING ASSETS. This
change sets standard limits of 15% of net assets on the amount of money Vanguard
funds can borrow from all sources and on the amount of assets that can be
pledged to secure any loans. Approved by 93.96% of the shares voted, as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------
FOR AGAINST ABSTAIN
-----------------------------------------------------------
<S> <C> <C>
734,337,719 32,561,305 14,612,660
-----------------------------------------------------------
</TABLE>
2c. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN SECURITIES OWNED BY
AFFILIATES. This change eliminated a Fund policy of avoiding investments in
securities that are owned in certain amounts by Directors, officers, and key
advisory personnel. This policy was well-intentioned but wrongly focused and
unnecessary in light of the Fund's Code of Ethics and other regulatory
protections against conflicts of interest on the part of Fund management.
Approved by 95.19% of the shares voted, as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------
FOR AGAINST ABSTAIN
-----------------------------------------------------------
<S> <C> <C>
743,939,195 24,139,563 13,432,926
-----------------------------------------------------------
</TABLE>
(continued on next page)
3
<PAGE> 6
2d. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN ASSESSABLE SECURITIES. This
change eliminated a long-standing, arcane Fund policy of not purchasing
assessable securities. Such securities are not a factor in today's world of
publicly traded securities, where the Fund's investments are focused. Approved
by 95.50% of the shares voted, as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------
FOR AGAINST ABSTAIN
-----------------------------------------------------------
<S> <C> <C>
746,377,274 21,770,503 13,363,906
-----------------------------------------------------------
</TABLE>
4
<PAGE> 7
THE MARKETS IN PERSPECTIVE
Six Months Ended April 30, 1998
Financial markets, it is said, don't like surprises. But when the surprises are
positive--remarkably strong economic growth coupled with conspicuously tame
inflation--the markets seem to cope quite nicely. So it was during the half-year
ended April 30, when the good times kept rolling for U.S. stock and bond
markets. The stock market produced half-year returns that would have been
excellent even for a full year. The bond market, helped by lower interest rates,
generated solid returns.
Plentiful jobs--the nation's unemployment rate fell in April to a
28-year low of 4.3%--and rising wages clearly put American households in a
buying mood. (The stock market's big gains, by pumping up millions of families'
investment accounts, certainly didn't dampen spirits either.) With strong
spending by consumers leading the way, the U.S. economy grew at an annual rate
of about 4%, even after adjusting for inflation.
Although most economists believe that sustained growth in excess of 3%
is bound to be inflationary, evidence to support the theory has been scarce of
late. Consumer prices rose just 0.6% during the six months, and the Consumer
Price Index was up a relatively benign 1.4% for the 12 months ended April 30,
1998. Wholesale prices declined 1.2% during the past year. Stiff competitive
pressure, including an increasing flow of imported products and materials,
appears to be keeping the lid on prices, despite the bubbling economy.
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED APRIL 30, 1998
------------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 22.5% 41.1% 23.2%
Russell 2000 Index 11.9 42.4 18.5
MSCI EAFE Index 15.6 19.2 10.4
- - ---------------------------------------------------------------------------------------------
FIXED INCOME
Lehman Aggregate Bond Index 3.6% 10.9% 6.9%
Lehman 10-Year Municipal Bond Index 2.5 9.0 6.6
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.6 5.3 4.9
- - ---------------------------------------------------------------------------------------------
OTHER
Consumer Price Index 0.6% 1.4% 2.4%
- - ---------------------------------------------------------------------------------------------
*Annualized.
</TABLE>
Economic troubles in Asia--where currency and banking crises are
afflicting several nations--have resulted in lower prices for many imported
goods and are being blamed by some U.S. companies for cutting into profits. But
Asia's problems haven't spooked U.S. consumers and investors, and have only
slightly slowed the domestic economy's powerful momentum.
U.S. EQUITY MARKETS
Wall Street sprinted to record heights during the half-year. The gains were
broad-based, although the big blue chip stocks again led the way.
Large-capitalization stocks, as represented by the S&P 500 Index, returned
22.5%, nearly double the 11.9% return on the small-cap Russell 2000 Index.
Lower interest rates supported stock prices by making interest-bearing
investments relatively less attractive to investors looking for a place to put
new cash. The good inflation news helped, too. Even so, the size of the market's
gains was surprising in light of an evident slowing in the growth rate for
corporate profits. Since November, analysts have been reducing their estimates
of future corporate earnings, and actual profits reported
5
<PAGE> 8
for the January-March quarter were only modestly above those of first-quarter
1997. If corporate earnings growth does not accelerate, stocks may lose some of
their allure.
Health-care stocks were the market's best-performing sector during the
period, as a number of hot-selling new drugs and exciting potential therapies
heightened interest in pharmaceutical companies. Also, some health-maintenance
organization stocks rebounded from depressed levels. The only sectors that
didn't post double-digit gains during the half-year were integrated oil
companies (up 9.5%) and the "other energy" group, which includes oil-services
and exploration firms (down 3.5%). Lower energy prices--a key factor in
inflation's good behavior--explained the weakness in energy stocks.
U.S. FIXED-INCOME MARKETS
Fixed-income investors earned the coupon rates on their bonds during the
half-year, and saw a modest rise in the prices of their holdings, thanks to
declining interest rates. The Lehman Aggregate Bond Index, a good measure of the
overall market for taxable bonds, provided a 3.6% return for the six months,
bringing its total return over the past 12 months to 10.9%, a superb
inflation-adjusted return of 9.5%. The yield on the benchmark 30-year U.S.
Treasury bond decreased from 6.15% on October 31, 1997, to 5.95% on April 30. A
rate decline of 20 basis points in the face of such strong economic growth was
possible because inflation--the enemy of the fixed-income investor--was so weak
during the six months.
Short-term interest rates also declined, although the Federal Reserve
Board made no policy changes. The yield on 3-month U.S. Treasury bills fell from
5.20% on October 31 to 4.97% on April 30, at least partly because it became
clear that the federal government would run a sizable budget surplus, which will
reduce the Treasury's need to borrow and, therefore, reduce the supply of new
Treasury securities.
INTERNATIONAL EQUITY MARKETS
Europe's stock markets were even hotter than Wall Street during the first half
of fiscal 1998, while most Asian markets declined in U.S. dollar terms. Overall,
the Morgan Stanley Capital International Europe, Australasia, Far East Index
gained 15.6% in U.S. dollar terms. The Index returned 21.3% in local currency
terms, but a generally stronger U.S. dollar cut the result for U.S. investors.
European markets were buoyed by a variety of factors and rose 33.6% in
local-currency terms. The dollar's gains against European currencies diminished
the return for U.S. investors only slightly to a still-exceptional 29.2%. The
markets benefited from signs that the economic slump on the continent is ending,
from evidence that corporate managements are adopting a U.S.-style emphasis on
adding shareholder value, and from increasing confidence that the planned
adoption of the euro--a single European currency--would begin as planned in
January 1999.
The Pacific region's experience was very different. Although some
emerging markets (Malaysia, Thailand, South Korea) rebounded from their lows,
stock returns for the region on balance fell 8.8% in U.S.-dollar terms. Japan,
by far the Pacific Rim's largest market, was beset by economic recession and
dropped 10.0%, while Hong Kong fell 9.6%. Investors in Tokyo were decidedly
unimpressed with the Japanese government's program for reviving the economy and
dealing with the problems of the nation's banking system.
Emerging markets, as a group, returned 5.6% in dollar terms. Gains in
Greece (50.0%), Hungary (30.1%), Brazil (16.6%), and Argentina (13.7%) more than
offset weakness in Asian emerging markets, most notably Indonesia (down a
stunning 61.4%).
6
<PAGE> 9
REPORT FROM THE ADVISER
Vanguard/Windsor Fund's return during the first half of the fiscal year trailed
the S&P 500 Index's return, 17.6% to 22.5%, and essentially matched the 17.4%
return of the average growth and income fund (not including S&P 500 Index
funds). When the period is broken into fiscal quarters, the results are what you
see at right.
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------
TOTAL RETURNS
THREE MONTHS ENDED
--------------------------------------
JANUARY 31, 1998 APRIL 30, 1998
- - -----------------------------------------------------------------------------
<S> <C> <C>
Vanguard/Windsor Fund 2.4% 14.9%
- - -----------------------------------------------------------------------------
S&P 500 Index 7.6% 13.8%
- - -----------------------------------------------------------------------------
Average Growth and
Income Fund* 4.5% 12.4%
- - -----------------------------------------------------------------------------
*Excludes S&P 500 Index Funds.
</TABLE>
Our relatively poor first quarter reflects the impact of the Asian
financial and economic crisis on the Fund, particularly our overweighted
position in cyclical stocks, which underperformed in this period. In the second
quarter, the market became more comfortable with cyclicals, and we had a chance
to recoup some of the first-quarter shortfall. Our noncyclical concentrations
were, for the most part, good relative performers for the six-month period,
e.g., financials, telephone, and cable stocks.
For the 28 months since we took the reins of the Fund at the beginning
of 1996, we rank third of the sixteen largest actively managed growth,
growth-and-income, and capital appreciation mutual funds, while trailing the
S&P, +77.0% versus +88.7%.
The S&P 500's price/earnings ratio--now at 24.4 times estimated 1998
earnings--continues to be surprisingly high. The long-term average P/E ratio for
the Index is about 15. Even when adjusted for the relatively low level of
interest rates, the current P/E is about 15%-20% higher than the level that the
historical relationship with long-term interest rates would indicate. There are
many who argue that interest rates are headed lower, which would better justify
current stock prices. But we doubt rates are going lower. The domestic economy
is too strong for that, even when the full impact of the Asian crisis is felt
later this year. We expect the economy to continue to grow at an annual pace of
3%-plus, even after subtracting 1 percentage point for Asia. Our forecast
assumes that consumer spending, which accounts for two-thirds of our economy,
will grow in line with increases in disposable income, which is expanding at a
4% rate, after adjusting for inflation.
Growth could be faster than we expect if there is also a "wealth effect"
on consumer spending from the booming stock market and lofty mortgage
refinancing activity. If the economy continues to grow at 3% or better, wage
inflation will pick up, unless labor productivity accelerates. But figures for
the January-March quarter show that productivity is improving at only a 0.2%
pace and that unit-labor costs rose at a 3.8% annual rate for the second quarter
in a row. This is clearly problematic and
7
<PAGE> 10
will show up in higher inflation at the consumer level, in the form of downward
pressure on corporate profits, or both. We think these concerns have to get to
the stock market at some point, especially with the P/E ratio so high.
So, if the market is headed lower, what is our strategy? In a broad way,
we are counting on the relative cheapness of our stocks to cushion the downside
if and when the market finally corrects. Our holdings are trading at prices
equal to about 16 times our estimates of 1998 earnings, a 35% discount to the
market's P/E. Our P/E is an even-lower 13--and the discount an even-greater
45%--when based on the earnings that we actually use for our price targets (the
difference in earnings calculations is mostly based on the adding back of
goodwill amortization, a phony charge against earnings).
Also, while we are still fully invested, as is our commitment--with 96%
of our assets in equities, to be precise--we have, at the margin, been buying
more defensive merchandise, as the market has moved further away from fair value
as we see it. In the past two or three months, this defensive posture has been
manifested by a new 2% position in real estate investment trusts (REITs) and a
3% addition to our energy position. Importantly, though, while we are looking
for defensive names, we insist that they have an "offensive" aspect. We will
continue to pass on consumer nondurables, local telephone companies, electric
utilities, and other overpriced "sleep well" stocks, where the
total-return-to-P/E relationship doesn't make sense to us. Thus, while the REITs
we've bought yield 5.5%-7%, they are also growing 10% annually. And the energy
addition is mostly in domestic companies whose production is tilted toward
natural gas, which our analysis pegs as the most dynamic part of the oil patch.
Our goal remains to deliver to you a full plate of equities that can
generate unusual returns, and whose return prospects outweigh the underlying
investment risks.
Charles T. Freeman, Portfolio Manager
Wellington Management Company, LLP
May 13, 1998
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by emphasizing common stocks that are generally misunderstood, out of favor, or
undervalued by fundamental measures such as price/earnings ratio or dividend
yield. The adviser will concentrate a large portion of the Fund's assets in
those securities it believes offer the best return potential.
8
<PAGE> 11
PERFORMANCE SUMMARY
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Fund. Note, too, that both
share price and return can fluctuate widely, so an investment in the Fund could
lose money.
<TABLE>
<CAPTION>
WINDSOR FUND
TOTAL INVESTMENT RETURNS: OCTOBER 31, 1977-APRIL 30, 1998
- - ---------------------------------------------------------------------
WINDSOR FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- - ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
1978 6.2% 5.0% 11.2% 6.3%
1979 13.5 6.0 19.5 15.3
1980 17.2 7.0 24.2 32.1
1981 11.1 6.9 18.0 0.6
1982 14.2 7.0 21.2 16.3
1983 25.3 7.3 32.6 27.8
1984 9.6 6.9 16.5 6.3
1985 16.6 6.7 23.3 19.4
1986 22.8 6.5 29.3 33.2
1987 2.7 1.9 4.6 6.4
1988 18.9 8.1 27.0 14.8
1989 11.9 5.2 17.1 26.4
1990 -31.8 3.9 -27.9 -7.5
1991 35.7 9.0 44.7 33.5
1992 4.3 5.0 9.3 10.0
1993 24.6 3.7 28.3 14.9
1994 3.7 2.6 6.3 3.9
1995 14.2 3.6 17.8 26.4
1996 19.6 3.6 23.2 24.1
1997 24.3 2.7 27.0 32.1
1998* 16.9 0.7 17.6 22.5
- - ---------------------------------------------------------------------
</TABLE>
*Six months ended April 30, 1998.
See Financial Highlights table on page 17 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1998*
- - -----------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION --------------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Windsor Fund 10/23/1958 33.05% 19.91% 12.12% 4.34% 16.46%
- - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
9
<PAGE> 12
PORTFOLIO PROFILE
Windsor Fund
This Profile provides a snapshot of the Fund's characteristics as of April 30,
1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 11.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- - -----------------------------------------------------------------------
WINDSOR S&P 500
- - -----------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 125 500
Median Market Cap $8.7B $44.0B
Price/Earnings Ratio 16.7x 24.4x
Price/Book Ratio 2.5x 4.4x
Yield 1.3% 1.5%
Return on Equity 13.9% 21.3%
Earnings Growth Rate 13.3% 16.2%
Foreign Holdings 8.2% 1.9%
Turnover Rate 44%* --
Expense Ratio 0.28%* --
Cash Reserves 3.7% --
</TABLE>
*Annualized.
INVESTMENT FOCUS
- - -----------------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- - -----------------------------------------------------------------------
WINDSOR S&P 500
- - -----------------------------------------------------------------------
<S> <C> <C>
R-Squared 0.67 1.00
Beta 0.78 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- - ------------------------------------------------------------------
<S> <C>
Citicorp 5.9%
First Union Corp. 4.1
Rhone-Poulenc SA 3.7
Columbia/HCA Healthcare Corp. 3.5
Aluminum Co. of America 3.2
AT&T Corp. 2.8
The Boeing Co. 2.8
Delta Air Lines, Inc. 2.7
Caterpillar, Inc. 2.7
Burlington Resources, Inc. 2.5
- - ------------------------------------------------------------------
Top Ten 33.9%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- - -----------------------------------------------------------------------------------------------------------------
APRIL 30, 1997 APRIL 30, 1998
------------------------------------------------------------------------
WINDSOR WINDSOR S&P 500
------------------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 12.4% 8.0% 3.2%
Consumer Discretionary 1.5 0.4 9.9
Consumer Staples 0.0 0.0 10.4
Financial Services 20.5 21.7 18.4
Health Care 1.9 12.7 11.8
Integrated Oils 6.8 4.0 6.8
Other Energy 3.3 6.4 1.2
Materials & Processing 25.1 19.5 5.8
Producer Durables 7.4 12.0 4.0
Technology 12.3 4.4 12.6
Utilities 7.8 7.0 10.2
Other 1.0 3.9 5.7
- - -----------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a portfolio with a
beta of 1.20 would have seen its share price rise or fall by 12% when the
overall market rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a portfolio.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a portfolio's net assets represented by
stocks or American Depositary Receipts of companies based outside the United
States.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. An indicator of the size of companies in which a portfolio
invests; the midpoint of market capitalization (market price x shares
outstanding) of a portfolio's stocks, weighted by the proportion of the
portfolio's assets invested in each stock. Stocks representing half of the
portfolio's assets have market capitalization above the median, and the rest are
below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a portfolio, the weighted average P/E of the
stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's
future growth.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a portfolio, the weighted average return
on equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a portfolio's common stocks that come
from each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a portfolio has invested
in its ten largest holdings. (The average for stock mutual funds is about 30%.)
As this percentage rises, a portfolio's returns are likely to be more volatile,
because they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Portfolios
with high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based on
income earned over the past 30 days and is annualized, or projected forward for
the coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
11
<PAGE> 14
FINANCIAL STATEMENTS
April 30, 1998 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, preferred stocks, bonds,
etc.) and by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the Fund's Net
Assets. Finally, Net Assets are divided by the outstanding shares of the Fund to
arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the Fund's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the Fund had available to distribute to shareholders as income dividends or
capital gains as of the statement date. Any Accumulated Net Realized Losses, and
any cumulative excess of distributions over net income or net realized gains,
will appear as negative balances. Unrealized Appreciation (Depreciation) is the
difference between the market value of the Fund's investments and their cost,
and reflects the gains (losses) that would be realized if the Fund were to sell
all of its investments at their statement-date values.
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------
MARKET
VALUE*
WINDSOR FUND SHARES (000)
- - ---------------------------------------------------------------------
COMMON STOCKS (94.8%)
- - ---------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (7.5%)
- - -(1) America West Holdings Corp.
Class B 2,692,300 $ 81,442
Chrysler Corp. 3,836,922 154,196
Compagnie Generale des
Establissements Michelin
B Shares 7,474,400 470,615
- - - Continental Airlines, Inc.
Class B 550,600 32,417
(1) Delta Air Lines, Inc. 5,374,861 624,828
Ford Motor Co. 4,932,653 225,977
The Goodyear Tire &
Rubber Co. 180,400 12,628
- - - Northwest Airlines Corp.
Class A 2,898,700 152,182
-----------
1,754,285
-----------
CONSUMER DISCRETIONARY (0.4%)
- - - BJ's Wholesale Club, Inc. 372,000 14,903
- - -(1) HomeBase, Inc. 2,487,900 20,836
(1) Unisource Worldwide, Inc. 4,920,200 62,425
-----------
98,164
-----------
FINANCIAL SERVICES (20.6%)
Allstate Corp. 544,500 52,408
CIGNA Corp. 2,321,700 480,447
(1) Camden Property Trust REIT 2,450,100 71,819
Canadian Imperial Bank
of Commerce 4,665,700 165,341
Citicorp 9,133,500 1,374,592
Equity Residential Properties
Trust REIT 3,124,900 153,511
First Union Corp. 15,916,498 960,959
(1) Golden West Financial Corp. 5,221,100 549,847
(1) IPC Holdings Ltd. 1,689,700 54,704
Liberty Property Trust REIT 3,747,200 95,788
NationsBank Corp. 4,997,218 378,539
(1) The PMI Group Inc. 2,092,600 170,024
PartnerRe Ltd. 2,116,200 105,942
Washington Federal Inc. 143,220 4,028
Washington Mutual, Inc. 2,279,043 159,675
-----------
4,777,624
-----------
HEALTH CARE (12.0%)
Aetna Inc. 4,789,500 387,051
Columbia/HCA
Healthcare Corp. 24,726,000 814,413
- - -(1) Foundation Health Systems
Class A 7,267,660 210,308
- - -(1) Pacificare Health Systems Inc.
Class A 1,126,300 79,123
- - - Pacificare Health Systems Inc.
Class B 1,957,500 140,206
Pharmacia & Upjohn, Inc. 6,762,200 284,435
Rhone-Poulenc SA ADR 17,480,152 865,268
Rhone-Poulenc SA Class A 102,071 4,988
-----------
2,785,792
-----------
INTEGRATED OILS (3.8%)
(1) Cabot Oil & Gas Corp. Class A 2,255,200 52,856
(1) Lyondell Petrochemical Co. 9,188,803 302,082
Murphy Oil Corp. 1,573,200 80,921
USX-Marathon Group 12,684,100 454,249
-----------
890,108
-----------
OTHER ENERGY (6.0%)
Apache Corp. 5,154,700 182,348
(1) Burlington Resources, Inc. 12,150,200 571,059
Diamond Offshore Drilling, Inc. 1,004,000 50,828
- - -(1) EEX Corp. 7,445,497 72,128
Pioneer Natural Resources Co. 2,536,000 60,706
Transocean Offshore, Inc. 3,497,000 195,395
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- - ---------------------------------------------------------------------
<S> <C> <C>
(1) Ultramar Diamond
Shamrock Corp. 5,555,100 $ 179,499
Valero Energy Corp. 2,832,600 91,705
-----------
1,403,668
-----------
MATERIALS & PROCESSING (18.5%)
(1) AK Steel Corp. 6,199,352 130,186
Abitibi-Consolidated, Inc. 10,000,000 148,750
(1) Albany International Corp. 2,400,000 68,400
Alcan Aluminium Ltd. 3,891,900 126,487
Alumax, Inc. 2,384,600 117,740
(1) Aluminum Co. of America 9,553,300 740,381
(1) Bowater Inc. 2,897,780 162,095
- - -(1) Burlington Industries, Inc. 3,986,700 69,767
Centex Construction
Products, Inc. 335,900 12,344
(1) Century Aluminum Co. 2,000,000 33,875
(1) Champion International Corp. 6,494,000 349,458
Deltic Timber Corp. 538,171 15,372
(1) Geon Co. 2,480,000 59,210
(1) Georgia Gulf Corp. 3,705,300 95,180
(1) Georgia Pacific Group 5,858,800 452,226
(1) IMC Global Inc. 11,042,280 397,522
- - - IMC Global Warrants
Exp. 12/22/2000 644,066 2,979
Jefferson Smurfit Group
PLC ADR 2,349,460 86,343
- - -(1) Kaiser Aluminum &
Chemical Corp. 5,929,334 61,887
Lafarge Corp. 2,045,800 81,832
(1) Mississippi Chemical Corp. 1,934,800 35,068
Owens Corning 663,000 27,556
Pechiney SA ADR A 2,831,628 62,473
(1) Phosphate Resources
Partners Ltd. 8,973,200 59,447
(1) Reynolds Metals Co. 6,702,548 442,368
- - - Ryerson Tull, Inc. Class A 1,411,100 28,751
- - -(1) Stone Container Corp. 9,470,000 155,071
Terra Industries, Inc. 3,165,700 34,031
(1) The Timber Company 9,139,900 234,210
-----------
4,291,009
-----------
PRODUCER DURABLES (11.4%)
- - - Beazer Homes USA, Inc. 171,900 4,190
The Boeing Co. 13,057,500 653,691
(1) Case Corp. 7,242,500 460,351
Caterpillar, Inc. 10,881,700 619,577
- - - CommScope, Inc. 1,782,500 28,966
Deere & Co. 3,527,900 206,162
- - -(1) General Semiconductor, Inc. 2,912,500 39,865
(1) Kaufman & Broad
Home Corp. 1,977,500 57,471
Lincoln Electric Co. 139,200 6,577
Lincoln Electric Co. Class A 342,100 16,036
(1) MDC Holdings, Inc. 1,156,300 19,874
New Holland NV 5,193,400 127,238
Northrop Grumman Corp. 2,123,700 224,449
Tektronix, Inc. 1,672,200 71,905
- - -(1) Toll Brothers, Inc. 2,175,066 60,630
- - -(1) U.S. Home Corp. 1,149,296 47,696
-----------
2,644,678
-----------
TECHNOLOGY (4.1%)
- - -(1) Advanced Micro Devices, Inc. 9,135,200 253,502
Avnet, Inc. 632,000 38,987
- - -(1) General Instrument Corp. 14,570,000 326,914
(1) Scientific-Atlanta, Inc. 7,716,400 184,229
- - - Seagate Technology 5,858,216 156,341
-----------
959,973
-----------
UTILITIES (6.7%)
AT&T Corp. 10,935,000 656,783
(1) Comcast Corp. Class A 2,884,900 100,791
Comcast Corp. Class A Special 5,921,200 212,053
- - - Cox Communications Class A 2,787,100 124,374
MCI Communications Corp. 6,250,000 314,453
Sprint Corp. 2,061,500 140,826
-----------
1,549,280
-----------
OTHER (3.8%)
Kemira Oy ADR 3,982,500 85,624
Miscellaneous (3.4%) 778,954
-----------
864,578
-----------
- - ---------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $16,486,433) 22,019,159
- - ---------------------------------------------------------------------
PREFERRED STOCKS (1.3%)
- - ---------------------------------------------------------------------
News Corp. Ltd. ADR 6,666,700 155,417
- - - Petroleo Brasileiro SA ADR 5,593,000 140,524
- - ---------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(COST $243,555) 295,941
- - ---------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (0.2%)
- - ---------------------------------------------------------------------
Beazer Homes USA, Inc.
8.00% Cvt. Pfd. 370,000 12,303
Continental Airlines, Inc.
Finance Trust 8.50% Cvt. Pfd. 175,000 21,678
Owens Corning Capital LLC
6.50% Cvt. Pfd. 200,000 10,713
- - ---------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $30,877) 44,694
- - ---------------------------------------------------------------------
FACE
AMOUNT
(000)
- - ---------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (4.5%)
- - ---------------------------------------------------------------------
COMMERCIAL PAPER
American Express
Credit Corp.
5.50%, 5/29/1998 $100,000 99,572
Associates Corp. NA
5.51%, 5/12/1998 75,000 74,874
Chevron USA
5.50%, 5/14/1998 35,000 34,930
Ford Motor Credit Co.
5.50%, 5/22/1998 50,000 49,840
General Electric Co.
5.51%, 5/22/1998 100,000 99,679
General Motors
Acceptance Corp.
5.51%, 5/19/1998 100,000 99,724
International Business Machines
Credit Corp.
5.50%, 5/27/1998 40,000 39,841
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
WINDSOR FUND (000) (000)
- - ---------------------------------------------------------------------
<S> <C> <C>
Merrill Lynch & Co.
5.51%, 5/29/1998 $100,000 $ 99,571
MetLife Funding Inc.
5.538%, 5/20/1998 25,000 24,927
Motorola Inc.
5.50%, 5/14/1998 27,989 27,933
5.51%, 5/18/1998 20,000 19,948
Procter & Gamble Co.
5.50%, 5/27/1998 50,000 49,801
5.50%, 5/29/1998 10,000 9,957
Prudential Funding Corp.
5.50%, 5/15/1998 100,000 99,786
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.52%, 5/1/1998--Note F 118,521 118,521
The First Boston Corporation
(Dated 4/30/1998,
Repurchase Value $105,972,000,
Collateralized by U. S. Treasury
Bond 11.875%, 11/15/2003)
5.48%, 5/1/1998 105,956 105,956
- - ---------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $1,054,862) 1,054,860
- - ---------------------------------------------------------------------
TOTAL INVESTMENTS (100.8%)
(COST $17,815,727) 23,414,654
- - ---------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.8%)
- - ---------------------------------------------------------------------
Other Assets--Note C 90,873
Liabilities--Note F (284,628)
-----------
(193,755)
- - ---------------------------------------------------------------------
NET ASSETS (100%)
- - ---------------------------------------------------------------------
Applicable to 1,190,972,416 outstanding
$.01 par value shares
(authorized 1,550,000,000 shares) $23,220,899
=====================================================================
NET ASSET VALUE PER SHARE $19.50
=====================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- Non-Income-Producing Security.
(1)Considered an affiliated company as the Fund owns more than 5% of the
outstanding voting securities of such company. The total market value of
investments in affiliated companies was $8,200,654,000.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- - ---------------------------------------------------------------------
AT APRIL 30, 1998, NET ASSETS CONSISTED OF:
- - ---------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $16,003,449 $13.44
Undistributed Net
Investment Income 66,128 .06
Accumulated Net
Realized Gains 1,552,395 1.30
Unrealized Appreciation--
Note E 5,598,927 4.70
- - ---------------------------------------------------------------------
NET ASSETS $23,220,899 $19.50
=====================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------
WINDSOR FUND
SIX MONTHS ENDED APRIL 30, 1998
(000)
- - --------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 129,471
Interest 20,676
------------
Total Income 150,147
------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 13,138
Performance Adjustment (7,553)
The Vanguard Group--Note C
Management and Administrative 20,626
Marketing and Distribution 2,255
Taxes (other than income taxes) 801
Custodian Fees 84
Auditing Fees 5
Shareholders' Reports 160
Annual Meeting and Proxy Costs 153
Directors' Fees and Expenses 21
------------
Total Expenses 29,690
Expenses Paid Indirectly--Note C (2,582)
------------
Net Expenses 27,108
- - --------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 123,039
- - --------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD* 1,551,224
- - --------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 1,871,417
- - --------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,545,680
========================================================================================================
</TABLE>
*Dividend income and realized net gain from affiliated companies were
$33,951,000 and $156,333,000, respectively.
15
<PAGE> 18
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information that is
detailed in the Statement of Operations. The amounts shown as Distributions to
shareholders from the Fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
Fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------
WINDSOR FUND
-------------------------------
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 1998 OCT. 31, 1997
(000) (000)
- - --------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
<S> <C> <C>
OPERATIONS
Net Investment Income $ 123,039 $ 357,653
Realized Net Gain 1,551,224 3,052,726
Change in Unrealized Appreciation (Depreciation) 1,871,417 887,426
--------------------------------
Net Increase in Net Assets Resulting from Operations 3,545,680 4,297,805
--------------------------------
DISTRIBUTIONS
Net Investment Income (126,869) (402,197)
Realized Capital Gain (3,044,991) (1,237,831)
--------------------------------
Total Distributions (3,171,860) (1,640,028)
--------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 819,446 2,267,286
Issued in Lieu of Cash Distributions 3,015,358 1,562,364
Issued in Exchange for Net Assets of Gemini II--Note G -- 263,239
Redeemed (1,665,794) (1,913,647)
--------------------------------
Net Increase from Capital Share Transactions 2,169,010 2,179,242
- - --------------------------------------------------------------------------------------------------------
Total Increase 2,542,830 4,837,019
- - --------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 20,678,069 15,841,050
--------------------------------
End of Period $23,220,899 $20,678,069
========================================================================================================
1Shares Issued (Redeemed)
Issued 44,774 123,045
Issued in Lieu of Cash Distributions 180,344 92,396
Issued in Exchange for Net Assets of Gemini II--Note G -- 13,730
Redeemed (92,001) (103,790)
--------------------------------
Net Increase in Shares Outstanding 133,117 125,381
========================================================================================================
</TABLE>
16
<PAGE> 19
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the Fund;
and the extent to which the Fund tends to distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Fund for one year. Finally, the table lists the Fund's Average Commission
Rate Paid, a disclosure required by the Securities and Exchange Commission
beginning in 1996. This rate is calculated by dividing total commissions paid
on portfolio securities by the total number of shares purchased and sold on
which commissions were charged.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------
WINDSOR FUND
YEAR ENDED OCTOBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -----------------------------------------------------------
THROUGHOUT EACH PERIOD APRIL 30, 1998 1997 1996 1995 1994 1993
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $19.55 $16.99 $15.55 $14.55 $14.95 $12.37
- - -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .11 .36 .43 .44 .44 .37
Net Realized and Unrealized Gain
on Investments 2.84 3.94 2.85 1.86 .42 2.98
----------------------------------------------------------------------
Total from Investment Operations 2.95 4.30 3.28 2.30 .86 3.35
----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.12) (.41) (.46) (.44) (.37) (.39)
Distributions from Realized Capital Gains (2.88) (1.33) (1.38) (.86) (.89) (.38)
----------------------------------------------------------------------
Total Distributions (3.00) (1.74) (1.84) (1.30) (1.26) (.77)
- - -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $19.50 $19.55 $16.99 $15.55 $14.55 $14.95
=========================================================================================================================
TOTAL RETURN 17.64% 27.04% 23.16% 17.80% 6.35% 28.29%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $23,221 $20,678 $15,841 $13,008 $11,406 $10,537
Ratio of Total Expenses to
Average Net Assets 0.28%* 0.27% 0.31% 0.45% 0.45% 0.40%
Ratio of Net Investment Income to
Average Net Assets 1.14%* 1.89% 2.75% 3.01% 3.11% 2.68%
Portfolio Turnover Rate 44%* 61% 34% 32% 34% 25%
Average Commission Rate Paid $.0572 $.0576 $.0579 N/A N/A N/A
- - -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
Vanguard/Windsor Fund is registered under the Investment Company Act of 1940 as
a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally
accepted accounting principles for mutual funds. The Fund consistently follows
such policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The Fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Wellington Management Company, LLP provides investment advisory services
to the Fund for a fee calculated at an annual percentage rate of average net
assets. The basic fee is subject to quarterly adjustments based on performance
relative to the S&P 500 Index. For the six months ended April 30, 1998, the
advisory fee represented an effective annual basic rate of 0.12% of the Fund's
average net assets before a decrease of $7,553,000 (0.07%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Fund under methods approved by the Board of Directors. At April 30, 1998,
the Fund had contributed capital of $1,324,000 to Vanguard (included in Other
Assets), representing 6.6% of Vanguard's capitalization. The Fund's Directors
and officers are also Directors and officers of Vanguard.
Vanguard has asked the Fund's investment adviser to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate to the Fund part of the commissions generated. Such
rebates are used solely to reduce the Fund's administrative expenses. For the
six months ended April 30, 1998, these arrangements reduced the Fund's expenses
by $2,582,000 (an annual rate of 0.02% of average net assets).
D. During the six months ended April 30, 1998, the Fund purchased
$4,660,834,000 of investment securities and sold $5,837,762,000 of investment
securities, other than temporary cash investments.
18
<PAGE> 21
E. At April 30, 1998, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $5,598,927,000,
consisting of unrealized gains of $5,915,632,000 on securities that had risen in
value since their purchase and $316,705,000 in unrealized losses on securities
that had fallen in value since their purchase.
F. The market value of securities on loan to brokers/dealers at April 30,
1998, was $112,328,000, for which the Fund held cash collateral of $118,521,000.
Cash collateral received is invested in repurchase agreements.
G. On June 19, 1997, the Fund acquired Gemini II Fund's net assets pursuant
to an agreement approved by Gemini II Fund's shareholders on June 18, 1997. The
acquisition was accomplished by a tax-free exchange of 13,730,319 of the Fund's
capital shares for the 9,232,207 outstanding Gemini II Fund shares on June 19,
1997. Gemini II Fund's net assets of $263,239,000, including $57,791,000 of
unrealized appreciation, were combined with Windsor Fund's net assets of
$19,820,772,000, resulting in combined net assets of $20,084,011,000 on the
merger date.
19
<PAGE> 22
DIRECTORS AND OFFICERS
JOHN C. BOGLE
Senior Chairman of the Board and Director of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc., and
of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Managing Director
of Global Health Care Partners/DLJ Merchant Banking Partners; Director of Sun
Company, Inc., and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; Trustee Emerita of Wellesley College.
BRUCE K. MacLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Amdahl Corp., Baker Fentress & Co., The
Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co., and
NACCO Industries.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DiSTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MacKINNON
Managing Director, Fixed Income Group.
F. WILLIAM McNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's
500," and "500" are trademarks of
The McGraw-Hill Companies, Inc. Frank Russell Company is the owner of
trademarks and copyrights relating
to the Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are
trademarks of Wilshire Associates.
<PAGE> 23
VANGUARD FAMILY OF FUNDS
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Stock Portfolio
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Specialized Portfolios
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Portfolio
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BALANCED FUNDS
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Portfolio
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Portfolio
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Moderate Growth Portfolio
STAR Portfolio
Tax-Managed Fund
Balanced Portfolio
Wellesley Income Fund
Wellington Fund
Q222-4/1998
(C) 1998 Vanguard Marketing
Corporation, Distributor.
All rights reserved.
[THE VANGUARD GROUP LOGO]
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Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
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1-800-523-1036
www.vanguard.com
[email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
<PAGE> 24
VANGUARD/
WINDSOR II
Semiannual Report - April 30, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
<PAGE> 25
OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 7,000 highly motivated
men and women--who form the cornerstone of our operations. We could not survive
long--let alone prosper--without them. That's why we chose this fiscal year's
fund reports to celebrate the spirit, enthusiasm, and achievements of our crew.
(We call those who work at Vanguard crew members, not employees, because they
operate as a team to accomplish our mission of serving you, our clients.)
But while we prize the collective contributions of our crew, we also take
time to recognize the importance of the individual. Each calendar quarter, we
present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more than
300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving you
in the years ahead.
[PHOTO] [PHOTO]
John C. Bogle John J. Brennan
Senior Chairman Chairman & CEO
CONTENTS
<TABLE>
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS . . . . . . . . . . . . . . 1
THE MARKETS IN PERSPECTIVE . . . . . . . . . . . . . . . 5
REPORT FROM THE ADVISER . . . . . . . . . . . . . . . . . 7
PERFORMANCE SUMMARY . . . . . . . . . . . . . . . . . . . 9
PORTFOLIO PROFILE . . . . . . . . . . . . . . . . . . . . 10
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . 12
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
<PAGE> 26
FELLOW SHAREHOLDER,
The U.S. stock market's record-shattering rise continued during the six
months ended April 30, 1998, the first half of Vanguard/Windsor II's fiscal
year. Your Fund's record was superb, as we earned a total return of +21.8% for
the six months, far ahead of our average competitor and just a bit behind the
Standard & Poor's 500 Composite Stock Price Index.
The adjacent table compares the Fund's total return (capital change plus
reinvested dividends) for the six months with those of the average value (growth
and income) mutual fund and the unmanaged S&P 500 Index, which is dominated by
large-capitalization stocks.
<TABLE>
<CAPTION>
- - --------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 1998
- - --------------------------------------------------
<S> <C>
Vanguard/Windsor II +21.8%
- - --------------------------------------------------
Average Value Fund +17.9%
- - --------------------------------------------------
S&P 500 Index +22.5%
- - --------------------------------------------------
</TABLE>
The Fund's return is based on an increase in its net asset value from
$29.36 per share on October 31, 1997, to $32.69 per share on April 30, 1998,
with the latter figure adjusted for the reinvestment of a dividend of $0.46 per
share paid from net investment income and a distribution of $2.19 per share paid
from net capital gains realized in 1997.
THE PERIOD IN REVIEW
The U.S. economy's performance during the six months ended April 30 was, quite
simply, astounding. After growing by nearly 4% in 1997, the economy expanded at
a 4.8% annual pace in the January-March period, even though a stronger U.S.
dollar and economic turmoil in Asia began to crimp U.S. exports and to boost
sales of imported goods. The nation's unemployment rate fell to 4.3% in April,
its lowest level in more than 28 years. Yet a strong job market and robust
economic growth did not push up prices; key inflation measures actually showed a
slowing in price increases.
Financial markets flourished in this ideal environment. Interest rates
declined by roughly 20 basis points (0.20%) on balance during the six months,
engendering modest price increases in bonds. The Lehman Brothers Aggregate Bond
Index, a good measure of the overall taxable bond market, returned +3.6%. The
yield on 3-month U.S. Treasury bills was 4.97% on April 30, nearly one-quarter
percentage point below the 5.20% level at which it began the half-year.
In the stock market, investor confidence--some would say
overconfidence--was evident, as prices surged despite lackluster growth in
corporate profits and uncertainty about how Asia's financial and economic woes
would affect the U.S. economy. The S&P 500 Index rose in every month of the
period, and its six-month total return of +22.5% was equal to approximately two
years' worth of returns at the stock market's long-term annual average of about
+11%.
Windsor II did nearly as well, earning +21.8%, a return that was nearly 4
percentage points higher than the +17.9% earned by the average value fund. Our
performance was particularly gratifying in light of the market's strong bias
toward large growth stocks during the period. The growth component of the S&P
500 Index earned +25.1%, fully
1
<PAGE> 27
one-quarter more than the +19.8% return on the Index's value stocks, which
resemble Windsor II's holdings far more closely.
Although growth stocks--those selling at relatively high prices in
relation to such measures as book value, dividends, and past earnings--have held
sway for most of the past three years, we note that, over very long periods,
returns on value and growth stocks have been remarkably similar. Though we have
no idea when the tide will turn, we fully expect that value stocks will "return
to fight again."
Our tiny shortfall in relation to the S&P 500 Index was due primarily to
our heavier stake in energy stocks, which accounted during the period for about
12% of the Fund's assets, versus an 8% weighting in the Index. Weak oil prices
hurt the performance of integrated oil companies and other energy stocks during
the six months. Our advisers' excellent stock selection was a factor in our
margin of superiority over competing value funds. Another factor was the stock
market's pronounced bias toward big stocks. Large-cap issues, as represented by
the S&P 500 Index, returned +22.5% during the period, some 40% above the +15.8%
return earned by the rest of the stock market, as measured by the Wilshire 4500
Equity Index. The average value fund had a considerably larger commitment to
mid- and small-cap stocks than Windsor II.
<TABLE>
<CAPTION>
- - -----------------------------------------------------------
TOTAL ASSETS MANAGED
AS OF APRIL 30, 1998
--------------------
$ MILLION PERCENT
- - -----------------------------------------------------------
<S> <C> <C>
Barrow, Hanley, Mewhinney
& Strauss, Inc. $20,397 68%
Equinox Capital Management, Inc. 2,966 10
Tukman Capital Management, Inc. 2,925 10
Vanguard Core Management Group 1,696 6
Cash Reserves* 1,771 6
- - -----------------------------------------------------------
Total $29,755 100%
- - -----------------------------------------------------------
</TABLE>
*Index futures are used so that the performance of cash reserves mimics that of
common stocks. Each adviser also may maintain a modest cash reserve.
The Fund's philosophy is to invest in a diversified group of stocks that
on balance have below-average prices in relation to earnings and dividends. Four
advisers, each of whom has full discretion in investing a portion of the Fund's
assets, select our holdings. The adjacent table shows the allocation of assets
to each adviser as of April 30, 1998.
Like most equity mutual funds, Windsor II maintains a modest cash reserve,
in part to accommodate redemptions of shares. Because stocks generally provide
higher returns than cash investments over long periods, such cash holdings can
serve as a drag on long-term returns. To avoid this drag, your Fund began in
December to use equity index futures contracts to give its cash pool the
performance of common stocks. This practice enables Windsor II to simulate full
investment in stocks while keeping cash on hand to meet any redemptions. We
believe this change will improve returns over the long run, although it should
lead to a slight increase in the Fund's share-price fluctuations.
IN SUMMARY
Stock investors have enjoyed historic gains in recent years. The S&P
500 Index produced a cumulative return just shy of +130% in the three
years ended April 30, 1998, an annualized rate of +32%--three times
the stock market's long-term rate of return. Such outsized returns
cannot be expected to continue indefinitely. Indeed, investors in
stocks are sure to encounter downturns--possibly severe ones--from time
to time.
Because the risks of stocks--like their returns--can be sizable, we
recommend that investors hold balanced portfolios of stock funds, bond funds,
and money market funds
2
<PAGE> 28
in proportions suitable to each person's financial situation, investment goals,
and attitude toward risk. Such a balanced portfolio should help investors to
"stay the course" toward their investment objectives, whether the financial
markets provide smooth or stormy sailing.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
May 13, 1998
Notice to Shareholders
At a special meeting on May 1, 1998, shareholders of Vanguard/Windsor II
overwhelmingly approved five proposals. The proposals and voting results were:
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. This change will reduce the
amount of state taxes the Fund pays annually by more than $1.9 million. Approved
by 96.48% of the shares voted, as follows:
<TABLE>
<CAPTION>
------------------------------------------------
FOR AGAINST ABSTAIN
------------------------------------------------
<S> <C> <C>
518,902,916 8,356,171 10,552,739
------------------------------------------------
</TABLE>
2a. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. Permits Windsor II
to participate in Vanguard's interfund lending program, which allows funds to
loan money to each other if--and only if--it makes good financial sense to do so
on both sides of the transaction. The interfund lending program won't be an
integral part of your Fund's investment program; it is a contingency arrangement
for managing unusual cash flows. Approved by 94.10% of the shares voted, as
follows:
<TABLE>
<CAPTION>
------------------------------------------------
FOR AGAINST ABSTAIN
------------------------------------------------
<S> <C> <C>
506,103,665 17,298,699 14,409,462
------------------------------------------------
</TABLE>
2b. INVESTMENT LIMITATION CHANGES--BORROWING MONEY AND PLEDGING ASSETS. This
change sets standard limits of 15% of net assets on the amount of money Vanguard
funds can borrow from all sources and on the amount of assets that can be
pledged to secure any loans. Approved by 92.94% of the shares voted, as follows:
<TABLE>
<CAPTION>
------------------------------------------------
FOR AGAINST ABSTAIN
------------------------------------------------
<S> <C> <C>
499,861,173 21,575,623 16,375,030
------------------------------------------------
</TABLE>
(continued on next page)
3
<PAGE> 29
2c. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN SECURITIES OWNED BY
AFFILIATES. This change eliminated a Fund policy of avoiding investments in
securities that are owned in certain amounts by Directors, officers, and key
advisory personnel. This policy was well-intentioned but wrongly focused and
unnecessary in light of the Fund's Code of Ethics and other regulatory
protections against conflicts of interest on the part of Fund management.
Approved by 93.24% of the shares voted, as follows:
<TABLE>
<CAPTION>
------------------------------------------------
FOR AGAINST ABSTAIN
------------------------------------------------
<S> <C> <C>
501,437,763 21,233,642 15,140,420
------------------------------------------------
</TABLE>
2d. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN ASSESSABLE SECURITIES. This
change eliminated a long-standing, arcane Fund policy of not purchasing
assessable securities. Such securities are not a factor in today's world of
publicly traded securities, where the Fund's investments are focused. Approved
by 93.53% of the shares voted, as follows:
<TABLE>
<CAPTION>
------------------------------------------------
FOR AGAINST ABSTAIN
------------------------------------------------
<S> <C> <C>
503,016,644 18,086,307 16,708,875
------------------------------------------------
</TABLE>
4
<PAGE> 30
THE MARKETS IN PERSPECTIVE
Six Months Ended April 30, 1998
Financial markets, it is said, don't like surprises. But when the surprises are
positive--remarkably strong economic growth coupled with conspicuously tame
inflation--the markets seem to cope quite nicely. So it was during the half-year
ended April 30, when the good times kept rolling for U.S. stock and bond
markets. The stock market produced half-year returns that would have been
excellent even for a full year. The bond market, helped by lower interest rates,
generated solid returns.
Plentiful jobs--the nation's unemployment rate fell in April to a 28-year
low of 4.3%--and rising wages clearly put American households in a buying mood.
(The stock market's big gains, by pumping up millions of families' investment
accounts, certainly didn't dampen spirits either.) With strong spending by
consumers leading the way, the U.S. economy grew at an annual rate of about 4%,
even after adjusting for inflation.
Although most economists believe that sustained growth in excess of 3% is
bound to be inflationary, evidence to support the theory has been scarce of
late. Consumer prices rose just 0.6% during the six months, and the Consumer
Price Index was up a relatively benign 1.4% for the 12 months ended April 30,
1998. Wholesale prices declined 1.2% during the past year. Stiff competitive
pressure, including an increasing flow of imported products and materials,
appears to be keeping the lid on prices, despite the bubbling economy.
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED APRIL 30, 1998
-------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- - -----------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 22.5% 41.1% 23.2%
Russell 2000 Index 11.9 42.4 18.5
MSCI EAFE Index 15.6 19.2 10.4
- - -----------------------------------------------------------------------
FIXED INCOME
Lehman Aggregate Bond Index 3.6% 10.9% 6.9%
Lehman 10-Year Municipal Bond Index 2.5 9.0 6.6
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.6 5.3 4.9
- - -----------------------------------------------------------------------
OTHER
Consumer Price Index 0.6% 1.4% 2.4%
- - -----------------------------------------------------------------------
</TABLE>
*Annualized.
Economic troubles in Asia--where currency and banking crises are
afflicting several nations--have resulted in lower prices for many imported
goods and are being blamed by some U.S. companies for cutting into profits. But
Asia's problems haven't spooked U.S. consumers and investors, and have only
slightly slowed the domestic economy's powerful momentum.
U.S. EQUITY MARKETS
Wall Street sprinted to record heights during the half-year. The gains were
broad-based, although the big blue chip stocks again led the way.
Large-capitalization stocks, as represented by the S&P 500 Index, returned
22.5%, nearly double the 11.9% return on the small-cap Russell 2000 Index.
Lower interest rates supported stock prices by making interest-bearing
investments relatively less attractive to investors looking for a place to put
new cash. The good inflation news helped, too. Even so, the size of the market's
gains was surprising in light of an evident slowing in the growth rate for
corporate profits. Since November, analysts have been reducing their estimates
of future corporate earnings, and actual profits reported
5
<PAGE> 31
for the January-March quarter were only modestly above those of first-quarter
1997. If corporate earnings growth does not accelerate, stocks may lose some of
their allure.
Health-care stocks were the market's best-performing sector during the
period, as a number of hot-selling new drugs and exciting potential therapies
heightened interest in pharmaceutical companies. Also, some health-maintenance
organization stocks rebounded from depressed levels. The only sectors that
didn't post double-digit gains during the half-year were integrated oil
companies (up 9.5%) and the "other energy" group, which includes oil-services
and exploration firms (down 3.5%). Lower energy prices--a key factor in
inflation's good behavior--explained the weakness in energy stocks.
U.S. FIXED-INCOME MARKETS
Fixed-income investors earned the coupon rates on their bonds during the
half-year, and saw a modest rise in the prices of their holdings, thanks to
declining interest rates. The Lehman Aggregate Bond Index, a good measure of the
overall market for taxable bonds, provided a 3.6% return for the six months,
bringing its total return over the past 12 months to 10.9%, a superb
inflation-adjusted return of 9.5%. The yield on the benchmark 30-year U.S.
Treasury bond decreased from 6.15% on October 31, 1997, to 5.95% on April 30. A
rate decline of 20 basis points in the face of such strong economic growth was
possible because inflation--the enemy of the fixed-income investor--was so weak
during the six months.
Short-term interest rates also declined, although the Federal Reserve
Board made no policy changes. The yield on 3-month U.S. Treasury bills fell from
5.20% on October 31 to 4.97% on April 30, at least partly because it became
clear that the federal government would run a sizable budget surplus, which will
reduce the Treasury's need to borrow and, therefore, reduce the supply of new
Treasury securities.
INTERNATIONAL EQUITY MARKETS
Europe's stock markets were even hotter than Wall Street during the first half
of fiscal 1998, while most Asian markets declined in U.S. dollar terms. Overall,
the Morgan Stanley Capital International Europe, Australasia, Far East Index
gained 15.6% in U.S. dollar terms. The Index returned 21.3% in local currency
terms, but a generally stronger U.S. dollar cut the result for U.S. investors.
European markets were buoyed by a variety of factors and rose 33.6% in
local-currency terms. The dollar's gains against European currencies diminished
the return for U.S. investors only slightly to a still-exceptional 29.2%. The
markets benefited from signs that the economic slump on the continent is ending,
from evidence that corporate managements are adopting a U.S.-style emphasis on
adding shareholder value, and from increasing confidence that the planned
adoption of the euro--a single European currency--would begin as planned in
January 1999.
The Pacific region's experience was very different. Although some emerging
markets (Malaysia, Thailand, South Korea) rebounded from their lows, stock
returns for the region on balance fell 8.8% in U.S.-dollar terms. Japan, by far
the Pacific Rim's largest market, was beset by economic recession and dropped
10.0%, while Hong Kong fell 9.6%. Investors in Tokyo were decidedly unimpressed
with the Japanese government's program for reviving the economy and dealing with
the problems of the nation's banking system.
Emerging markets, as a group, returned 5.6% in dollar terms. Gains in
Greece (50.0%), Hungary (30.1%), Brazil (16.6%), and Argentina (13.7%) more than
offset weakness in Asian emerging markets, most notably Indonesia (down a
stunning 61.4%).
6
<PAGE> 32
REPORT FROM THE ADVISER
The first half of fiscal 1998, which ended on April 30, was another very good
period for investors. The S&P 500 Index posted an impressive return of 22.5%.
Vanguard/ Windsor II's return of 21.8% almost matched that of the market and
exceeded both the 19.8% return of the S&P/BARRA Value Index and the 17.9%
earned by the average growth-and-income mutual fund.
These are indeed unusual times, as stock market returns have been running
at several times the historical average, and seem to improve with each
successive quarter. The economy has surely helped the market with good growth.
While employment is at an all-time high and the unemployment rate at its lowest
level in nearly three decades, there has been almost no inflation. Nonetheless,
the biggest reason for the good fortune of the stock market is the unprecedented
cash flow from individuals into mutual funds. We hope that these investors truly
have a long-term perspective, because equity markets are volatile.
The market averages are difficult to beat. Many managers, acting out of
self-preservation or on specific direction, have become "closet indexers." In
other words, they feel obligated to replicate in their funds the S&P 500 Index's
weightings in the largest issues. This approach "guarantees" that any
underperformance in their other holdings does not seriously penalize overall
results. With a good portion of the significant cash flow into mutual funds
being funneled into index funds and "closet indexers," one result is that the
biggest stocks seem to have become overpriced. The largest ten issues in the S&P
500 have a current price/earnings ratio of 35.9, a price/book ratio of 11.6, and
a dividend yield of 1.1%. This compares to your Fund's P/E of 17.3 (based on
forecast earnings), price/book of about 3.0, and dividend yield, before
expenses, of 2.5%. Based on your Fund's definition of value, the largest S&P
companies need to post significantly higher profitability and growth to justify
such lofty prices.
We have made every effort to insulate Windsor II from the adverse effects
of overvaluation in case of a market reversal. Our holdings definitely do not
replicate the S&P 500 Index. In fact, the top ten S&P stocks represent only 4%
of the assets in your Fund versus their 19% weighting in the Index.
We feel fortunate that Windsor II has performed well without having a
significant stake in these Index-dominating companies, and we believe that your
Fund's return will be superior to that of the Index at the end of this
unprecedented economic expansion and market explosion.
In the past six months, the Fund's makeup has changed somewhat. We reduced
our commitment to energy stocks, in the belief that there should be a closer
relationship between the price of the stocks and the price of oil. Electric
utilities represent a higher percentage of the Fund now than six months ago,
because this is one of the few sectors where we find high dividend yields.
Several of these stocks have also had good price
7
<PAGE> 33
moves. Retail stocks have performed well, and our holdings in miscellaneous
areas have increased generally for company-specific reasons.
We believe the current makeup of the Fund will serve you well.
Barrow, Hanley, Mewhinney & Strauss, Inc.
May 12, 1998
INVESTMENT PHILOSOPHY
The Fund reflects a belief that superior long-term investment results can be
achieved by holding a diversified portfolio of out-of-favor stocks with
below-average price/earnings ratios, above-average dividend yields, and the
prospect of above-average total return.
8
<PAGE> 34
PERFORMANCE SUMMARY
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Fund. Note, too, that both
share price and return can fluctuate widely, so an investment in the Fund could
lose money.
<TABLE>
<CAPTION>
WINDSOR II
TOTAL INVESTMENT RETURNS: JUNE 24, 1985-APRIL 30, 1998
- - -----------------------------------------------------------
WINDSOR II S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- - -----------------------------------------------------------
<S> <C> <C> <C> <C>
1985 -0.9% 1.1% 0.2% 1.8%
1986 31.2 4.4 35.6 33.2
1987 -0.6 1.5 0.9 6.4
1988 14.5 6.0 20.5 14.8
1989 19.5 5.2 24.7 26.4
1990 -21.5 4.0 -17.5 -7.5
1991 29.4 7.2 36.6 33.5
1992 7.9 4.6 12.5 10.0
1993 15.8 3.7 19.5 14.9
1994 -0.8 3.0 2.2 3.9
1995 19.2 3.9 23.1 26.4
1996 23.8 3.4 27.2 24.1
1997 28.1 3.2 31.3 32.1
1998* 20.0 1.8 21.8 22.5
- - -----------------------------------------------------------
</TABLE>
*Six months ended April 30, 1998.
See Financial Highlights table on page 18 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1998*
- - --------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ---------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Windsor II 6/24/1985 46.96% 22.06% 14.29% 4.25% 18.54%
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
9
<PAGE> 35
PORTFOLIO PROFILE
Windsor II
This Profile provides a snapshot of the Fund's characteristics as of April 30,
1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 11.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- - ----------------------------------------------------------
WINDSOR II S&P 500
- - ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 279 500
Median Market Cap $25.5B $44.0B
Price/Earnings Ratio 20.1x 24.4x
Price/Book Ratio 3.1x 4.4x
Yield 2.0% 1.5%
Return on Equity 17.1% 21.3%
Earnings Growth Rate 13.3% 16.2%
Foreign Holdings 1.6% 1.9%
Turnover Rate 32%* --
Expense Ratio 0.40%* --
Cash Reserves 1.6% --
*Annualized.
</TABLE>
INVESTMENT FOCUS
- - ----------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- - ----------------------------------------------------------
WINDSOR II S&P 500
<S> <C> <C>
R-Squared 0.90 1.00
Beta 0.86 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- - ------------------------------------------------------
<S> <C>
The Chase Manhattan Corp. 3.1%
International Business Machines Corp. 2.6
Sears, Roebuck & Co. 2.6
GTE Corp. 2.5
Waste Management Inc. 2.5
Anheuser-Busch Cos., Inc. 2.4
BankAmerica Corp. 2.1
Kmart Corp. 2.1
Williams Cos., Inc. 2.0
First Chicago NBD Corp. 2.0
- - ------------------------------------------------------
Top Ten 23.9%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- - -------------------------------------------------------------------------------------------------------------------------
APRIL 30, 1997 APRIL 30, 1998
-------------------------------------------------------------
WINDSOR II WINDSOR II S&P 500
-------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 3.5% 5.7% 3.2%
Consumer Discretionary 7.9 12.0 9.9
Consumer Staples 7.9 5.7 10.4
Financial Services 26.0 25.4 18.4
Health Care 4.4 1.7 11.8
Integrated Oils 11.1 6.2 6.8
Other Energy 4.4 3.2 1.2
Materials & Processing 3.8 3.1 5.8
Producer Durables 4.0 4.6 4.0
Technology 4.3 4.2 12.6
Utilities 12.4 18.0 10.2
Other 10.3 10.2 5.7
- - -------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 36
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a portfolio with a
beta of 1.20 would have seen its share price rise or fall by 12% when the
overall market rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a portfolio.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a portfolio's net assets represented by
stocks or American Depositary Receipts of companies based outside the United
States.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. An indicator of the size of companies in which a portfolio
invests; the midpoint of market capitalization (market price x shares
outstanding) of a portfolio's stocks, weighted by the proportion of the
portfolio's assets invested in each stock. Stocks representing half of the
portfolio's assets have market capitalization above the median, and the rest are
below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a portfolio, the weighted average P/E of the
stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's
future growth.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a portfolio, the weighted average return
on equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a portfolio's common stocks that come
from each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a portfolio has invested
in its ten largest stocks. (The average for stock mutual funds is about 30%.) As
this percentage rises, a portfolio's returns are likely to be more volatile
because they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Portfolios
with high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based on
income earned over the past 30 days and is annualized, or projected forward for
the coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
11
<PAGE> 37
FINANCIAL STATEMENTS
April 30, 1998 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, preferred stocks, bonds,
etc.) and by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the Fund's Net
Assets. Finally, Net Assets are divided by the outstanding shares of the Fund to
arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the Fund's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the Fund had available to distribute to shareholders as income dividends or
capital gains as of the statement date. Any Accumulated Net Realized Losses, and
any cumulative excess of distributions over net income or net realized gains,
will appear as negative balances. Unrealized Appreciation (Depreciation) is the
difference between the market value of the Fund's investments and their cost,
and reflects the gains (losses) that would be realized if the Fund were to sell
all of its investments at their statement-date values.
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------
MARKET
VALUE*
WINDSOR II SHARES (000)
- - ----------------------------------------------------------------
COMMON STOCKS (92.4%)+
- - ----------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (5.3%)
Autoliv, Inc. 100,970 $ 2,998
Borg-Warner Automotive, Inc. 27,300 1,698
Burlington Northern
Santa Fe Corp. 111,100 10,999
CNF Transportation, Inc. 93,800 3,623
CSX Corp. 1,993,600 104,664
Chrysler Corp. 14,204,700 570,851
Delta Air Lines, Inc. 81,500 9,474
Ford Motor Co. 10,789,400 494,289
General Motors Corp. 5,378,000 362,343
Meritor Automotive, Inc. 139,700 3,606
Norfolk Southern Corp. 130,100 4,350
Southwest Airlines Co. 139,100 3,817
- - - UAL Corp. 63,600 5,545
------------
1,578,257
------------
CONSUMER DISCRETIONARY (11.0%)
- - - Boise Cascade Office
Products Corp. 96,200 1,846
- - - Borders Group, Inc. 56,400 1,812
- - - Boston Chicken, Inc. 256,000 1,096
Browning-Ferris Industries, Inc. 1,873,000 63,916
Dayton Hudson Corp. 136,400 11,909
Deluxe Corp. 6,300 211
Dillard's Inc. 68,800 2,520
The Walt Disney Co. 1,763,844 219,268
R.R. Donnelley & Sons Co. 109,400 4,820
Eastman Kodak Co. 1,644,200 118,691
Family Dollar Stores, Inc. 146,500 4,981
Gannett Co., Inc. 3,550,900 241,239
- - - Host Marriott Corp. 82,300 1,600
IKON Office Solutions, Inc. 136,000 3,290
International Game
Technology 144,700 4,024
- - -(1)Kmart Corp. 35,372,300 616,805
Knight Ridder 23,000 1,341
Lee Enterprises, Inc. 73,300 2,295
- - - MGM Grand, Inc. 37,200 1,256
May Department Stores Co. 49,358 3,045
Maytag Corp. 135,200 6,963
The McGraw-Hill Cos., Inc. 34,000 2,633
New York Times Co. Class A 87,400 6,200
- - - Office Depot, Inc. 193,700 6,416
- - - OfficeMax, Inc. 77,200 1,452
Olsten Corp. 218,700 2,993
J.C. Penney Co., Inc. 12,700 903
Polaroid Corp. 39,700 1,747
Premark International, Inc. 85,700 2,860
- - - Promus Hotel Corp. 21,300 962
Sears, Roebuck & Co. 13,027,700 772,706
The Stanley Works 9,900 507
Time Warner, Inc. 1,740,500 136,629
- - - Toys R Us, Inc. 123,600 3,407
Tribune Co. 112,200 7,405
Wal-Mart Stores, Inc. 4,117,300 208,181
Washington Post Co. Class B 10,200 5,347
Waste Management Inc. 22,377,400 749,643
Whirlpool Corp. 1,041,900 75,017
Wolverine World Wide, Inc. 75,300 2,174
- - - Woolworth Corp. 294,100 6,764
------------
3,306,874
------------
CONSUMER STAPLES (5.3%)
Anheuser-Busch Cos., Inc. 15,492,600 709,755
Brown-Forman Corp. Class B 15,100 855
Campbell Soup Co. 118,300 6,070
</TABLE>
12
<PAGE> 38
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- - ----------------------------------------------------------------
<S> <C> <C>
- - - Corn Products International, Inc. 6,125 $ 218
Dean Foods Corp. 132,900 6,230
General Mills, Inc. 66,900 4,520
H.J. Heinz Co. 2,502,500 136,386
Imperial Tobacco Group ADR 12,448,100 175,829
Kellogg Co. 27,500 1,134
- - - The Kroger Co. 124,300 5,205
PepsiCo, Inc. 4,015,300 159,357
Philip Morris Cos., Inc. 7,589,300 283,176
RJR Nabisco Holdings Corp. 286,100 7,957
Sara Lee Corp. 1,367,200 81,434
- - - Vlasic Foods International, Inc. 11,830 273
Weis Markets, Inc. 500 18
------------
1,578,417
------------
FINANCIAL SERVICES (23.4%)
H.F. Ahmanson & Co. 5,286,800 403,119
Allstate Corp. 5,815,622 559,754
American Express Co. 4,299,508 438,550
American International
Group, Inc. 2,678,287 352,362
AmSouth Bancorp 138,200 8,620
Aon Corp. 3,731,875 240,706
Associates First Capital Corp. 3,444,411 257,470
BB&T Corp. 29,300 1,970
Banc One Corp. 1,944,030 114,333
The Bank of New York Co., Inc. 55,800 3,296
BankAmerica Corp. 7,421,146 630,797
BankBoston Corp. 116,000 12,521
Bankers Trust Corp. 11,700 1,511
Bear Stearns Co., Inc. 55,600 3,173
CIGNA Corp. 2,500 517
- - - CNA Financial Corp. 16,600 2,456
Capital One Financial Corp. 10,200 980
The Chase Manhattan Corp. 6,708,928 929,606
The Chubb Corp. 1,167,000 92,120
Citicorp 200,400 30,160
Comerica, Inc. 130,950 8,765
Conseco Inc. 146,600 7,275
Countrywide Credit
Industries, Inc. 105,000 5,079
Duke Realty Investments,
Inc. REIT 11,700 279
The Dun & Bradstreet Corp. 73,800 2,620
A.G. Edwards & Sons, Inc. 186,350 8,386
The Equitable Cos. 123,200 7,561
Everest Reinsurance
Holdings, Inc. 92,400 3,812
Fannie Mae 5,365,800 321,277
First Chicago NBD Corp. 6,470,771 600,973
First Empire State Corp. 5,300 2,703
First Union Corp. 145,882 8,808
Firstar Corp. 38,700 1,444
Fleet Financial Group, Inc. 29,100 2,514
General Re Corp. 6,300 1,408
Green Point Financial Corp. 152,800 6,064
The Hartford Financial Services
Group Inc. 103,900 11,507
Huntington Bancshares Inc. 1,200 43
KeyCorp 25,500 1,012
Lehman Brothers Holdings, Inc. 8,200 583
Loews Corp. 2,900 290
MBIA, Inc. 46,300 3,455
Mellon Bank Corp. 16,500 1,188
Mercury General Corp. 10,100 654
Merrill Lynch & Co., Inc. 55,100 4,835
The Money Store 181,200 5,957
J.P. Morgan & Co., Inc. 27,000 3,544
Morgan Stanley Dean
Witter & Co. 2,141,700 168,927
National City Corp. 12,400 859
NationsBank Corp. 434,387 32,905
Northern Trust Corp. 31,572 2,305
Norwest Corp. 409,900 16,268
Old Republic International Corp. 59,800 2,706
The PMI Group Inc. 48,300 3,924
PNC Bank Corp. 9,719,300 587,410
Providian Financial Corp. 129,100 7,770
Regions Financial Corp. 24,800 1,082
St. Paul Cos., Inc. 83,924 7,113
Star Banc Corp. 30,800 1,946
State Street Corp. 159,700 11,419
Summit Bancorp. 162,800 8,160
SunTrust Banks, Inc. 53,200 4,332
Transatlantic Holdings, Inc. 15,800 1,214
Travelers Property
Casualty Corp. 113,800 4,780
Travelers Group Inc. 6,742,837 412,577
- - - UICI 199,200 5,777
U.S. Bancorp 67,500 8,573
UnionBanCal Corp. 61,426 6,327
Valley National Bancorp 51,100 2,050
Wachovia Corp. 16,100 1,367
Washington Mutual, Inc. 4,270,500 299,202
Wells Fargo & Co. 732,700 270,000
Zions Bancorp 38,600 1,973
------------
6,977,023
------------
HEALTH CARE (1.6%)
Abbott Laboratories 78,800 5,762
Aetna Inc. 1,206,000 97,460
American Home Products Corp. 2,177,700 202,798
Becton, Dickinson & Co. 96,600 6,726
Bristol-Myers Squibb Co. 1,282,700 135,806
Pharmacia & Upjohn, Inc. 63,100 2,654
- - - Tenet Healthcare Corp. 251,900 9,431
United Healthcare Corp. 119,300 8,381
- - - Wellpoint Health Networks Inc.
Class A 76,500 5,518
------------
474,536
------------
INTEGRATED OILS (5.7%)
Amoco Corp. 8,414,000 372,320
Ashland, Inc. 109,600 5,795
Atlantic Richfield Co. 1,267,200 98,842
Chevron Corp. 226,700 18,745
Enron Corp. 185,700 9,134
Exxon Corp. 6,401,500 466,909
Mobil Corp. 1,832,700 144,783
Murphy Oil Corp. 42,500 2,186
Phillips Petroleum Co. 7,233,000 358,486
Royal Dutch Petroleum
Co. ADR 3,532,600 199,813
Sun Co., Inc. 138,800 5,613
</TABLE>
13
<PAGE> 39
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------
MARKET
VALUE*
WINDSOR II SHARES (000)
- - ----------------------------------------------------------------
<S> <C> <C>
Texaco Inc. 165,500 $ 10,178
USX-Marathon Group 163,100 5,841
------------
1,698,645
------------
OTHER ENERGY (3.0%)
- - - BJ Services Co. 23,000 863
- - - CalEnergy Co. 183,300 5,980
Camco International, Inc. 41,100 2,790
- - - EVI Inc. 19,200 1,022
(1)Occidental Petroleum Corp. 18,042,900 531,138
Schlumberger Ltd. 3,837,800 318,058
Tidewater, Inc. 140,100 5,551
Tosco Corp. 175,000 6,234
- - - Western Atlas, Inc. 78,600 6,209
------------
877,845
------------
MATERIALS & PROCESSING (2.9%)
Alumax, Inc. 8,900 439
Archer-Daniels-Midland Co. 409,500 8,804
Centex Corp. 25,200 876
Champion International Corp. 48,300 2,599
Crompton & Knowles Corp. 63,800 1,910
Dow Chemical Co. 108,000 10,442
E.I. du Pont de Nemours & Co. 453,300 33,006
Eastman Chemical Co. 1,132,050 77,828
Ethyl Corp. 203,700 1,553
Fort James Corp. 3,349,200 166,204
The Timber Co. 77,500 1,986
The BFGoodrich Co. 122,600 6,597
International Paper Co. 12,400 647
Johns Manville Corp. 111,500 1,819
Kimberly-Clark Corp. 1,058,200 53,704
Lafarge Corp. 41,100 1,644
(1)Millennium Chemicals Inc. 6,571,242 235,743
PPG Industries, Inc. 140,800 9,953
Pentair, Inc. 144,000 6,228
Phelps Dodge Corp. 114,000 7,652
Reynolds Metals Co. 24,900 1,643
Sonoco Products Co. 28,600 1,149
USG Corp. 35,000 1,798
USX-U.S. Steel Group 110,300 4,316
(1)Witco Chemical Corp. 5,431,800 215,235
------------
853,775
------------
PRODUCER DURABLES (4.3%)
AGCO Corp. 181,000 4,842
The Boeing Co. 22,800 1,141
Case Corp. 102,100 6,490
Caterpillar, Inc. 252,600 14,382
Cummins Engine Co., Inc. 81,200 4,415
Deere & Co. 161,700 9,449
Emerson Electric Co. 37,100 2,360
- - - General Semiconductor, Inc. 252,500 3,456
(1)Honeywell, Inc. 6,336,200 590,059
Lockheed Martin Corp. 63,500 7,072
Mark IV Industries, Inc. 231,200 4,870
Northrop Grumman Corp. 11,900 1,258
Pitney Bowes, Inc. 166,000 7,968
Tecumseh Products Co. Class A 109,100 5,496
Tektronix, Inc. 66,300 2,851
Thiokol Corp. 122,200 6,584
Thomas & Betts Corp. 138,800 8,102
United Technologies Corp. 70,400 6,930
Xerox Corp. 5,166,421 586,389
------------
1,274,114
------------
TECHNOLOGY (3.9%)
Computer Sciences Corp. 40,000 2,110
- - - DSC Communications Corp. 125,100 2,252
Electronic Data Systems Corp. 7,953,600 342,005
International Business
Machines Corp. 6,689,100 775,100
- - - Jabil Circuit, Inc. 121,600 4,271
- - - National Semiconductor Corp. 57,200 1,258
Rockwell International Corp. 141,800 7,932
- - - Storage Technology Corp. 112,100 9,465
- - - Tech Data Corp. 40,300 2,010
------------
1,146,403
------------
UTILITIES (16.7%)
AT&T Corp. 1,884,000 113,158
Ameren Corp. 179,100 7,097
American Electric Power
Co., Inc. 5,957,800 284,485
American Water Works Co., Inc. 42,500 1,272
Ameritech Corp. 520,700 22,162
Baltimore Gas & Electric Co. 195,600 6,161
Bell Atlantic Corp. 351,718 32,908
BellSouth Corp. 280,500 18,005
Boston Edison Co. 31,000 1,263
CMS Energy Corp. 176,600 7,715
(1)Central & South West Corp. 10,690,300 278,616
Century Telephone
Enterprises, Inc. 2,400 102
Consolidated Edison Inc. 200,000 9,050
DTE Energy Co. 218,900 8,578
Duke Energy Corp. 2,008,200 116,225
(1)Entergy Corp. 22,583,700 561,770
FPL Group, Inc. 165,100 10,247
FirstEnergy Corp. 9,639,277 291,588
GPU, Inc. 199,700 7,913
GTE Corp. 12,918,700 754,937
Houston Industries, Inc. 10,869,900 315,906
IPALCO Enterprises, Inc. 42,200 1,838
Kansas City Power & Light Co. 13,700 408
MCI Communications Corp. 98,600 4,961
New York State Electric &
Gas Corp. 191,500 7,995
PacifiCorp 100,000 2,325
Pinnacle West Capital Corp. 109,000 4,823
Public Service Enterprise
Group, Inc. 4,521,200 151,743
SBC Communications Inc. 13,944,198 577,813
Southern Co. 77,900 2,064
Sprint Corp. 80,500 5,499
Texas Utilities Co. 232,200 9,288
- - - U.S. Cellular Corp. 205,400 6,727
U S WEST Communications
Group 11,244,000 593,121
- - - U S WEST Media Group 54,800 2,069
UtiliCorp United, Inc. 147,200 5,538
(1)Williams Cos., Inc. 19,273,646 609,529
- - - WorldCom, Inc. 2,852,800 122,046
------------
4,956,945
------------
</TABLE>
14
<PAGE> 40
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- - ----------------------------------------------------------------
<S> <C> <C>
OTHER (9.3%)
Brunswick Corp. 91,800 $ 2,984
CBS Corp. 9,404,900 335,050
Crane Co. 61,300 3,299
(1)Dresser Industries, Inc. 10,479,000 554,077
Foster Wheeler Corp. 71,800 1,988
General Electric Co. 2,727,000 232,136
Hanson PLC ADR 4,528,550 134,158
(1)ITT Industries, Inc. 8,282,100 301,779
Minnesota Mining &
Manufacturing Co. 1,302,700 122,942
National Service Industries, Inc. 1,800 97
Raytheon Co. Class B 8,978,400 508,963
(1)Tenneco, Inc. 13,013,800 560,407
- - - Thermo Electron Corp. 25,000 995
------------
2,758,875
------------
- - ----------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $17,286,864) 27,481,709
- - ----------------------------------------------------------------
FACE
AMOUNT
(000)
- - ----------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (9.3%)
- - ----------------------------------------------------------------
Federal Home Loan Mortgage Corp.
5.43%, 5/27/1998 $ 58,000 57,773
5.44%, 5/22/1998 125,000 124,603
5.486%, 5/29/1998 67,000 66,717
5.497%, 6/19/1998 89,652 88,991
5.515%, 6/30/1998 15,521 15,381
Federal National Mortgage Assn.
5.44%, 5/13/1998 125,000 124,773
U.S. Treasury Bills
(2)4.97%, 7/23/1998 62,000 61,301
(2)5.03%, 7/9/1998 5,000 4,953
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.51%, 5/1/1998 2,241,878 2,241,878
5.52%, 5/1/1998--Note F 4,443 4,443
- - ----------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $2,790,800) 2,790,813
- - ----------------------------------------------------------------
TOTAL INVESTMENTS (101.7%)
(COST $20,077,664) 30,272,522
- - ----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.7%)
- - ----------------------------------------------------------------
Other Assets--Note C $ 172,904
Liabilities--Note F (690,484)
------------
(517,580)
- - ----------------------------------------------------------------
NET ASSETS (100%)
- - ----------------------------------------------------------------
Applicable to 910,134,341 outstanding
$.01 par value shares
(authorized 1,150,000,000 shares) $29,754,942
================================================================
NET ASSET VALUE PER SHARE $32.69
================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- Non-Income-Producing Security.
+ The combined market value of common stocks and index
futures contracts represents 98.4% of net assets. See
Note E in Notes to Financial Statements.
(1) Considered an affiliated company as the Fund owns more than 5% of the
outstanding voting securities of such company. The total market value of
investments in affiliated companies was $5,055,158,000.
(2) Securities with an aggregate value of $66,254,000 have been segregated as
initial margin for open futures contracts.
ADR-- American Depositary Receipt.
REIT-- Real Estate Investment Trust.
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------
AT APRIL 30, 1998, NET ASSETS CONSISTED OF:
- - ----------------------------------------------------------------
AMOUNT PER
(000) SHARE
- - ----------------------------------------------------------------
<S> <C> <C>
Paid in Capital $18,095,909 $19.88
Undistributed Net
Investment Income 161,285 .18
Accumulated Net
Realized Gains 1,238,775 1.36
Unrealized Appreciation--
Note E
Investment Securities 10,194,858 11.20
Futures Contracts 64,115 .07
- - ----------------------------------------------------------------
NET ASSETS $29,754,942 $32.69
================================================================
</TABLE>
15
<PAGE> 41
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If the
Fund invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------
WINDSOR II
SIX MONTHS ENDED APRIL 30, 1998
(000)
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 266,750
Interest 53,882
------------
Total Income 320,632
------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 16,150
Performance Adjustment 2,910
The Vanguard Group--Note C
Management and Administrative 28,509
Marketing and Distribution 2,926
Taxes (other than income taxes) 942
Custodian Fees 23
Auditing Fees 14
Shareholders' Reports 246
Annual Meeting and Proxy Costs 224
Directors' Fees and Expenses 25
------------
Total Expenses 51,969
Expenses Paid Indirectly--Note C (1,118)
------------
Net Expenses 50,851
- - -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 269,781
- - -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold* 1,104,053
Futures Contracts 134,080
- - -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 1,238,133
- - -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 3,529,811
Futures Contracts 65,300
- - -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 3,595,111
- - -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,103,025
=========================================================================================================================
</TABLE>
*Dividend income and realized net gain from affiliated companies were
$50,291,000 and $102,674,000, respectively.
16
<PAGE> 42
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the Fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
Fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------
WINDSOR II
-----------------------------------
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 1998 OCT. 31, 1997
(000) (000)
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 269,781 $ 465,699
Realized Net Gain 1,238,133 1,698,039
Change in Unrealized Appreciation (Depreciation) 3,595,111 2,753,749
-----------------------------------
Net Increase in Net Assets Resulting from Operations 5,103,025 4,917,487
-----------------------------------
DISTRIBUTIONS
Net Investment Income (355,934) (410,609)
Realized Capital Gain (1,694,592) (716,881)
-----------------------------------
Total Distributions (2,050,526) (1,127,490)
-----------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 3,825,963 5,466,998
Issued in Lieu of Cash Distributions 1,968,837 1,087,312
Redeemed (1,660,217) (2,534,333)
-----------------------------------
Net Increase from Capital Share Transactions 4,134,583 4,019,977
- - -------------------------------------------------------------------------------------------------------------------------
Total Increase 7,187,082 7,809,974
- - -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 22,567,860 14,757,886
-----------------------------------
End of Period $29,754,942 $22,567,860
=========================================================================================================================
1Shares Issued (Redeemed)
Issued 126,264 205,712
Issued in Lieu of Cash Distributions 70,040 45,084
Redeemed (54,856) (95,875)
-----------------------------------
Net Increase in Shares Outstanding 141,448 154,921
=========================================================================================================================
</TABLE>
17
<PAGE> 43
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the Fund;
and the extent to which the Fund tends to distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in the
Fund for one year. Finally, the table lists the Fund's Average Commission Rate
Paid, a disclosure required by the Securities and Exchange Commission beginning
in 1996. This rate is calculated by dividing total commissions paid on portfolio
securities by the total number of shares purchased and sold on which commissions
were charged.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------
WINDSOR II
YEAR ENDED OCTOBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------------
THROUGHOUT EACH PERIOD APRIL 30, 1998 1997 1996 1995 1994 1993
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $29.36 $24.04 $20.06 $17.33 $17.98 $15.75
- - -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .32 .64 .62 .58 .55 .50
Net Realized and Unrealized Gain (Loss)
on Investments 5.66 6.47 4.63 3.17 (.19) 2.47
--------------------------------------------------------------------------
Total from Investment Operations 5.98 7.11 5.25 3.75 .36 2.97
--------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.46) (.63) (.58) (.55) (.51) (.52)
Distributions from Realized Capital Gains (2.19) (1.16) (.69) (.47) (.50) (.22)
--------------------------------------------------------------------------
Total Distributions (2.65) (1.79) (1.27) (1.02) (1.01) (.74)
- - -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $32.69 $29.36 $24.04 $20.06 $17.33 $17.98
=========================================================================================================================
TOTAL RETURN 21.84% 31.27% 27.17% 23.08% 2.22% 19.51%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $29,755 $22,568 $14,758 $10,272 $8,246 $7,486
Ratio of Total Expenses to
Average Net Assets 0.40%* 0.37% 0.39% 0.40% 0.39% 0.39%
Ratio of Net Investment Income to
Average Net Assets 2.10%* 2.49% 2.92% 3.27% 3.26% 3.11%
Portfolio Turnover Rate 32%* 30% 32% 30% 24% 26%
Average Commission Rate Paid $.0500 $.0523 $.0483 N/A N/A N/A
- - -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
18
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS
Vanguard/Windsor II is registered under the Investment Company Act of 1940 as a
diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally
accepted accounting principles for mutual funds. The Fund consistently follows
such policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The Fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. FUTURES: The Fund uses S&P 500 Index and S&P MidCap 400 Index futures
contracts to a limited extent, with the objective of maintaining full exposure
to the stock market while maintaining liquidity. The Fund may purchase or sell
futures contracts to achieve a desired level of investment, whether to
accommodate portfolio turnover or cash flows from capital shares transactions.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of stocks held by the Fund and the
prices of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Barrow, Hanley, Mewhinney & Strauss, Inc.; Equinox Capital Management,
Inc.; and Tukman Capital Management, Inc., provide investment advisory services
to the Fund for fees calculated at an annual percentage rate of average net
assets. The basic fees thus computed for Barrow, Hanley, Mewhinney & Strauss,
Inc., are subject to quarterly adjustments based on performance relative to the
S&P/BARRA Value Index; such fees for Equinox Capital Management, Inc., are
subject to quarterly adjustments based on performance relative to the Russell
1000 Value Index; such fees for Tukman Capital Management, Inc., are subject to
quarterly adjustments based on performance relative to the S&P 500 Index.
19
<PAGE> 45
The Vanguard Group provides investment advisory services to a portion of
the Fund on an at-cost basis; the Fund paid Vanguard advisory fees of $132,000
for the six months ended April 30, 1998.
For the six months ended April 30, 1998, the aggregate investment
advisory fee represented an effective annual basic rate of 0.13% of average
net assets before an increase of $2,910,000 (0.02%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Fund under methods approved by the Board of Directors. At April 30, 1998,
the Fund had contributed capital of $1,653,000 to Vanguard (included in Other
Assets), representing 8.3% of Vanguard's capitalization. The Fund's Directors
and officers are also Directors and officers of Vanguard.
Vanguard has asked the Fund's investment advisers to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate to the Fund part of the commissions generated. Such
rebates are used solely to reduce the Fund's administrative expenses. For the
six months ended April 30, 1998, these arrangements reduced the Fund's expenses
by $1,118,000 (an annual rate of 0.01% of average net assets).
D. During the six months ended April 30, 1998, the Fund purchased
$5,777,220,000 of investment securities and sold $3,847,178,000 of investment
securities, other than temporary cash investments.
E. At April 30, 1998, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $10,194,858,000,
consisting of unrealized gains of $10,301,416,000 on securities that had risen
in value since their purchase and $106,558,000 in unrealized losses on
securities that had fallen in value since their purchase.
At April 30, 1998, the aggregate settlement value of open futures
contracts expiring in June 1998 and the related unrealized appreciation were:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
(000)
------------------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE APPRECIATION
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Index 5,829 $1,630,954 $55,697
S&P MidCap 400 Index 874 164,836 8,418
-----------------------------------------------------------------------------------------------
</TABLE>
F. The market value of securities on loan to brokers/dealers at April 30,
1998, was $3,352,000, for which the Fund held cash collateral of $4,443,000.
Cash collateral received is invested in repurchase agreements.
20
<PAGE> 46
DIRECTORS AND OFFICERS
JOHN C. BOGLE
Senior Chairman of the Board and Director of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Managing Director
of Global Health Care Partners/DLJ Merchant Banking Partners; Director of Sun
Company, Inc., and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions,
Inc., Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance
Co., and Ladies Professional Golf Association; Trustee Emerita of Wellesley
College.
BRUCE K. MacLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Amdahl Corp., Baker Fentress & Co., The
Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co., and
NACCO Industries.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DiSTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MacKINNON
Managing Director, Fixed Income Group.
F. WILLIAM McNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500,"
and "500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell
Company is the owner of trademarks and copyrights relating to the Russell
Indexes. "Wilshire 4500" and "Wilshire 5000" are trademarks of
Wilshire Associates.
<PAGE> 47
VANGUARD FAMILY OF FUNDS
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Equity Income Fund
Explorer Fund
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Portfolio
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Stock Portfolio
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Portfolio
Small Capitalization Value
Stock Portfolio
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Portfolio
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Portfolio
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(CA, FL, NJ, NY, OH, PA)
BALANCED FUNDS
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Portfolio
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Portfolio
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STAR Portfolio
Tax-Managed Fund
Balanced Portfolio
Wellesley Income Fund
Wellington Fund
Q732-4/1998
(C) 1998 Vanguard Marketing
Corporation, Distributor.
All rights reserved.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
[email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
