<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-14336) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [X]
POST-EFFECTIVE AMENDMENT NO. 93 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 96
VANGUARD WINDSOR FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
IT IS PROPOSED THAT THIS REGISTRATION STATEMENT BECOME EFFECTIVE:
on June 1, 1999 pursuant to paragraph (a) of Rule 485.
WE HAVE ELECTED TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24f-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. WE FILED OUR RULE
24(f)(2) NOTICE FOR THE YEAR ENDED OCTOBER 31, 1998, ON JANUARY 26, 1999.
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<PAGE> 2
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Front and Back Cover Pages...................... Front and Back Cover Pages
Item 2. Risk/Return Summary: Investments, Risks, and
Performance..................................... Fund Profile
Item 3. Risk/Return Summary: Fee Table.................. Fee Table
Item 4. Investment Objectives, Principal Investment
Strategies, and Related Risks................... A Word About Risk; Who Should Invest;
Primary Investment Strategies
Item 5. Management's Discussion of Fund Performance..... Herein incorporated by reference to
Registrant's Annual Report to
Shareholders dated October 31, 1998
filed with the Securities & Exchange
Commission's EDGAR system on December
18, 1998
Item 6. Management, Organization, and Capital
Structure....................................... The Fund and Vanguard; Investment
Adviser
Item 7. Shareholder Information......................... Share Price; Dividends, Capital
Gains, and Taxes; Investing with
Vanguard
Item 8. Distribution Arrangements....................... Inside Front Cover Page
Item 9. Financial Highlights Information................ Financial Highlights
</TABLE>
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page and Table of Contents................ Cover Page; Table of Contents
Item 11. Fund History.................................... Description of the Trust
Item 12. Description of the Trust and its Investments and
Risks........................................... Investment Policies; Description of
the Trust; and Fundamental Investment
Limitations
Item 13. Management of the Fund.......................... Management of the Trust
Item 14. Control Persons and Principal Holders
of Securities................................... Management of the Trust
Item 15. Investment Advisory and Other Services.......... Investment Advisory Services
Item 16. Brokerage Allocation and Other Practices........ Portfolio Transactions
Item 17. Capital Stock and Other Securities.............. Description of the Trust
Item 18. Purchase, Redemption, and Pricing of Shares..... Purchase of Shares; Redemption of
Shares; Share Price
Item 19. Taxation of the Fund............................ Description of the Trust
Item 20. Underwriters.................................... Not Applicable
Item 21. Calculation of Performance Data................. Yield and Total Return
Item 22. Financial Statements............................ Financial Statements
</TABLE>
<PAGE> 3
VANGUARD WINDSOR FUND
Prospectus
June 1, 1999
A Growth and Income Stock Mutual Fund
CONTENTS
1 FUND PROFILE
2 ADDITIONAL INFORMATION
3 A WORD ABOUT RISK
3 WHO SHOULD INVEST
3 PRIMARY INVESTMENT STRATEGIES
6 THE FUND AND VANGUARD
7 INVESTMENT ADVISERS
8 YEAR 2000 CHALLENGE
8 DIVIDENDS, CAPITAL GAINS, AND TAXES
9 SHARE PRICE
10 FINANCIAL HIGHLIGHTS
11 INVESTING WITH VANGUARD
11 SERVICES AND ACCOUNT FEATURES
12 TYPES OF ACCOUNTS
12 BUYING SHARES
14 REDEEMING SHARES
17 TRANSFERRING REGISTRATION
17 FUND AND ACCOUNT UPDATES
GLOSSARY (inside back cover)
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Windsor Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 4
1
FUND PROFILE
The following profile summarizes key features of Vanguard Windsor Fund.
INVESTMENT OBJECTIVE
The Fund is a common stock fund that seeks to provide long-term growth of
capital. As a secondary objective, the Fund seeks to provide some dividend
income.
INVESTMENT STRATEGIES
The Fund invests primarily in large- and medium-size companies whose stocks are
considered by the Fund's adviser to be undervalued. Undervalued stocks are
generally those that are out of favor with investors and currently trading at
prices that, the adviser feels, are below what the stocks are worth in relation
to their earnings. These stocks typically -- but not always -- have
lower-than-average price/earnings (P/E) ratios and higher-than-average dividend
yields.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Investment style risk, which is the chance that returns from large- and
mid-capitalization value stocks will trail returns from the overall stock
market.
- - Manager risk, which is the chance that poor security selection will cause the
Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based securities
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
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ANNUAL TOTAL RETURNS
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<TABLE>
<S> <C>
1989 15.02%
1990 -16.50%
1991 28.55%
1992 16.50%
1993 19.37%
1994 -0.15%
1995 30.15%
1996 26.35%
1997 21.37%
1998 0.31%
</TABLE>
[BAR CHART]
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During the period shown in the bar chart, the highest return for a calendar
quarter was 18.25% (quarter ended March 31, 1991) and the lowest return for a
quarter was -20.34% (quarter ended September 30, 1990).
<TABLE>
<CAPTION>
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998
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1 YEAR 5 YEARS 10 YEARS
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<S> <C> <C> <C>
Vanguard Windsor Fund 0.81% 15.09% 13.37%
S&P 500 Index 28.58 24.06 19.21
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</TABLE>
<PAGE> 5
2
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Windsor Fund's expense ratio in fiscal year 1998 was 0.27%,
or $2.70 per $1,000 of average net assets. The average growth and income equity
mutual fund had expenses in 1998 of 1.20%, or $12 per $1,000 of average net
assets, according to Lipper Inc., which reports on the mutual fund industry.
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended October 31, 1998.
<TABLE>
SHAREHOLDER FEES (fees paid directly from your investment)
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Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.24%
12b-1 Distribution Fees: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.27%
</TABLE>
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
<TABLE>
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C>
$28 $87 $152 $343
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</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS
Dividends are paid semiannually in June and December; capital gains, if any, are
paid in December
INVESTMENT ADVISERS
- - Wellington Management Company, LLP, Boston, Mass., since inception
- - Sanford C. Bernstein & Co., New York City, N.Y., since June 1, 1999
INCEPTION DATE
October 23, 1958
NET ASSETS AS OF OCTOBER 31, 1998
$18.4 billion
SUITABLE FOR IRAS
Yes
MINIMUM INITIAL INVESTMENT
$3,000; $1,000 for IRAs and custodial accounts for minors
NEWSPAPER ABBREVIATION
Wndsr
VANGUARD FUND NUMBER
022
CUSIP NUMBER
922018106
TICKER SYMBOL
VWNDX
<PAGE> 6
3
A WORD ABOUT RISK
This prospectus describes the risks you would face as an investor in Vanguard
Windsor Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in Vanguard Windsor Fund, you
should also take into account your personal tolerance for the daily fluctuations
of the stock market.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You are seeking a value-oriented investment that seeks to provide long-term
growth as well as some dividend income.
- - You wish to add a value-oriented growth and income stock fund to your
existing holdings, which could include other stock investments as well as
bond, money market, and tax-exempt investments.
- - You are seeking growth of capital and income over the long term -- at least
five years.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND IF
YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage
short-term trading:
- - The Fund reserves the right to reject any purchase request -- including
exchanges from other Vanguard funds --that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of excessive
trading by the investor.
- - There is a limit on the number of times you can exchange into and out of the
Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing -- switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment advisers use in pursuit
of the Fund's objectives of long-term growth in capital and some dividend
income. It also explains how the advisers implement these strategies. In
addition, this section discusses several important risks -- market risk,
investment style risk, concentration risk, and manager risk -- faced by
investors in the Fund. The Fund's Board of Trustees oversees the management of
the Fund and may change the investment strategies in the interest of
shareholders.
MARKET EXPOSURE
The Fund is a value fund. Its primary strategy is to invest in large- and
mid-capitalization common stocks that have favorable prospects for growth of
earnings and dividend income, but whose prices do not reflect this potential for
positive returns. The Fund may also invest in securities that are convertible to
common stocks.
<PAGE> 7
4
PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such factors as earnings and book value, and
these stocks typically pay above-average dividend yields. Growth funds generally
focus on companies believed to have above-average potential for growth in
revenue and earnings. Reflecting the market's high expectations for superior
growth, the prices of such stocks are typically above-average in relation to
such measures as revenue, earnings, book value, and dividends. Value and growth
stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. In general, value funds are
appropriate for investors who want some dividend income and the potential for
capital gains but are less tolerant of share-price fluctuations. Growth funds,
by contrast, appeal to investors who will accept more volatility in hopes of a
greater increase in share price. Growth funds also may appeal to investors with
taxable accounts who want a higher proportion of returns to come as capital
gains (which may be taxed at lower rates than dividend income).
[FLAG] THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK
MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND
PERIODS OF FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Composite Stock Price Index, a
widely used barometer of market activity. (Total returns consist of dividend
income plus change in market price.) Note that the returns shown do not include
the costs of buying and selling stocks or other expenses that a real-world
investment portfolio would incur. Note, also, that the gap between best and
worst tends to narrow over the long term.
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies -- and mutual funds that hold these
stocks -- can be classified by the companies' market value, or capitalization.
Generally, Vanguard defines large-capitalization (large-cap) funds as those
holding stocks of companies whose outstanding shares have a market value
exceeding $10 billion. Mid-cap funds hold stocks of companies with a market
value between $1 billion and $10 billion. Small-cap funds typically hold stocks
of companies with a market value of less than $1 billion.
<TABLE>
<CAPTION>
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U.S. STOCK MARKET RETURNS (1926 - 1998)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Best 54.2% 24.1% 19.9% 17.7%
Worst -43.1 -12.4 -0.8 3.1
Average 13.1 10.7 11.0 11.0
- --------------------------------------------------------------------------------
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1998. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 10.7%, returns for individual 5-year periods
ranged from a - 12.4% average (from 1928 through 1932) to 24.1% (from 1994
through 1998). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or this Fund in particular.
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE POSSIBILITY
THAT RETURNS FROM LARGE- AND MID-CAPITALIZATION VALUE STOCKS WILL TRAIL
RETURNS FROM OTHER ASSET CLASSES OR THE OVERALL STOCK MARKET. AS A
GROUP, VALUE STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER -- OR
WORSE -- THAN COMMON STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST,
LASTED FOR AS LONG AS SEVERAL YEARS.
<PAGE> 8
5
PLAIN TALK ABOUT
FUND DIVERSIFICATION
In general, the more diversified a fund's stock holdings, the less likely it is
that a specific stock's poor performance will hurt the fund. One measure of a
fund's diversification is the percentage of its assets represented by its ten
largest holdings. The average U.S. equity mutual fund has about 30% of its
assets invested in its ten largest holdings, while some less-diversified mutual
funds have more than 50% of their assets invested in the stocks of just ten
companies.
SECURITY SELECTION
Vanguard Windsor Fund employs two primary investment advisers, each of whom
independently chooses and maintains a portfolio of common stocks for the Fund.
Each adviser is responsible for a specific percentage of the Fund's assets.
These investment advisers employ active investment methods, which means that
securities are bought according to the advisers' evaluations about companies and
their financial prospects, and about the stock market and the economy in
general. Each adviser will sell a security when it is no longer as attractive as
alternative investments.
While the advisers use different processes to select securities for their
portfolios, both are committed to investing in large- and mid-cap stocks that,
in their opinion, are undervalued. Undervalued stocks are generally those that
are out of favor with investors and currently trading at prices that, the
adviser feels, are below what the stocks are worth in relation to their
earnings. These stocks typically -- but not always -- have lower-than-average
price/earnings (P/E) ratios and higher-than-average dividend yields.
Wellington Management Company, LLP (WMC), is expected to be responsible for
about 67% to 75% of the Fund's assets. A stock's value is the key element in
WMC's selection process. WMC considers several fundamental factors, including
the stock's projected growth rate, earnings potential, dividend yield, and P/E
ratio. To be a candidate for purchase, a stock must have strong prospects for
capital appreciation, but be trading at a price lower than what is expected of a
stock with such potential.
Like WMC, Sanford C. Bernstein & Co. (Bernstein), uses traditional methods of
stock selection -- research and analysis -- to identify undervalued stocks.
Bernstein also employs quantitative valuation tools to identify attractive
stocks and the most opportune time to purchase them. Bernstein is expected to be
responsible for about 25% to 33% of the Fund's assets.
Any Fund assets held in cash reserves will be managed by Vanguard Core
Management Group (the Group). Vanguard may invest the Fund's cash reserves in
stock futures. This strategy is intended to keep the Fund more fully invested in
common stocks while retaining cash on hand to meet liquidity needs. See "Other
Investment Policies and Risks" on the next page for more details on the Fund's
policy on futures.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT THE
ADVISERS MAY DO A POOR JOB OF SELECTING STOCKS.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 42%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for all domestic stock funds is
approximately 85%, according to Morningstar, Inc.
<PAGE> 9
6
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in undervalued common stocks, the Fund may make certain other
kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, it reserves the right
to invest up to 20% of its assets in foreign securities. These securities may be
traded in U.S. or foreign markets. To the extent that it owns foreign stocks,
the Fund is subject to (1) country risk, which is the possibility that political
events (such as a war), financial problems (such as government default), or
natural disasters (such as an earthquake) will weaken a country's economy and
cause investments in that country to lose money; and (2) currency risk; which is
the possibility that Americans investing abroad could lose money because of a
rise in the value of the U.S. dollar versus foreign currencies.
The Fund may invest in money market instruments, fixed-income securities,
convertible securities, and other equity securities such as preferred stock. The
Fund may invest up to 15% of its assets in restricted securities with limited
marketability or other illiquid securities.
The Fund may also invest, to a limited extent, in stock futures and
options contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial -- in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The value of all futures and options contracts in which
the Fund acquires an interest cannot exceed 20% of total assets.
The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may, from time to time, take temporary defensive measures -- such as
holding cash reserves without limit -- that are inconsistent with the Fund's
primary investment strategies, in response to adverse market, economic,
political, or other conditions. In taking such measures, the Fund may not
achieve its investment objective.
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 distinct investment portfolios holding net assets
worth more than $480 billion. All of the Vanguard funds share in the expenses
associated with business operations, such as personnel, office space, equipment,
and advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
<PAGE> 10
7
INVESTMENT ADVISERS
The Fund employs two primary investment advisers for the bulk of its assets and
uses Vanguard Core Management Group to manage its cash reserves. Each adviser
manages the Fund subject to the control of the Trustees and officers of the
Fund.
Wellington Management Company, LLP (WMC), 75 State Street, Boston, MA 02109,
served as the Fund's sole investment adviser from the Fund's inception in 1958
until June of 1999.
WMC's advisory fee is paid quarterly. This fee is based on certain annual
percentage rates applied to the Fund's average month-end assets for each
quarter.
In addition, WMC's advisory fee is increased or decreased, based on the
cumulative investment performance of its portion of the Fund over a trailing
36-month period as compared with the cumulative total return of the Standard and
Poor's 500 Index over the same period.
Sanford C. Bernstein & Co. (Bernstein), 767 Fifth Avenue, New York City, NY
10153, was added as an investment adviser to the Fund in June of 1999. Like WMC,
Bernstein's advisory fee is paid quarterly. The fee is based on certain annual
percentage rates applied to the Fund's average month-end assets for each
quarter. Bernstein's advisory fee is increased or decreased, based on the
cumulative investment performance of its portion of the Fund over a trailing
36-month period as compared with the cumulative total return of the Russell 1000
Index over the same period.
Vanguard Core Management Group (the Group), P.O. Box 2600, Valley Forge, PA
19482, provides investment advisory services to many Vanguard funds, managing
more than $146 billion in total assets at the end of 1998. The Group provides
advisory services to the Fund on an at-cost basis.
For the year ended October 31, 1998, the advisory fee paid to WMC represented
an effective annual rate of 0.12% of the Fund's average net assets before a
decrease of 0.08% based on performance.
The Fund has authorized the advisers to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to
all transactions.
In the interest of obtaining better execution of a transaction, the advisers
may choose brokers who charge higher commissions. If more than one broker can
obtain the best available price and favorable execution of a transaction, then
the advisers are authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the advisers or the Fund. Also,
the Fund may direct the advisers to use a particular broker for certain
transactions in exchange for commission rebates or research services provided to
the Fund.
PLAIN TALK ABOUT
THE FUND'S ADVISERS
Wellington Management Company, LLP, (WMC) is an investment advisory firm founded
in 1928. As of October 31, 1998, WMC managed more than $196 billion in assets.
The manager responsible for overseeing WMC's portion of the Fund is:
CHARLES T. FREEMAN, Senior Vice President and Partner of WMC; has worked in
investment management since 1967; with WMC since 1969; B.S., M.B.A., University
of Pennsylvania.
Mr. Freeman was appointed Fund Manager in January 1996, following the
retirement of John B. Neff, who had managed the Fund since 1964. Mr. Freeman had
been Assistant Fund Manager since 1974.
Sanford C. Bernstein & Co. (Bernstein) is an investment advisory firm founded
in 1968. As of October 31, 1998, Bernstein managed more than $80 billion in
assets. The managers responsible for overseeing Bernstein's portion of the Fund
are MARILYN G. FEDAK, Chief Investment Officer and Chairman of the U.S. Equity
Investment Policy Group at Bernstein since 1993; has worked in investment
management since 1972; has managed portfolio investments since joining Bernstein
in 1984; B.B.A., University of Wisconsin; M.B.A., Harvard Business School; and
STEVEN PISARKIEWICZ, with Bernstein since 1989, serving as Senior Portfolio
Manager since 1997; B.S., University of Missouri; M.B.A., University of
California at Berkeley.
The manager responsible for Vanguard Core Management Group's (the Group)
portion of the Fund is GEORGE U. SAUTER, Managing Director of Vanguard; has
worked in investment management since 1985; primary responsibility for Vanguard
Core Management Group since joining the firm in 1987; A.B., Dartmouth College;
M.B.A., University of Chicago.
<PAGE> 11
8
The Board of Trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser, either as a
replacement for the current advisers or as an additional adviser. However, any
such change will be communicated to shareholders in writing.
YEAR 2000 CHALLENGE
The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted, high-quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal systems.
Vanguard is diligently working with external partners, suppliers, and vendors,
including fund managers and other service providers, to assure that the systems
with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal systems
and external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Fund's operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations, or financial condition. Additionally, the Fund's performance could
be hurt if a computer-system failure at a company or governmental unit affects
the price of securities the Fund owns.
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. The capital gains are either short-term or long-term depending on
whether the fund held the securities for less than or more than one year.
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends less expenses) as well as any capital gains realized from the sale
of its holdings. Income distributions generally occur in June and December;
capital gains distributions generally occur in December. You can receive
distributions of income or capital gains in cash, or you can have them
automatically invested in more shares of the Fund. In either case, these
distributions are taxable to you. It is important to note that distributions of
dividends and capital gains that are declared in December -- if paid to you by
the end of January -- are taxed as if they had been paid to you in December.
Vanguard will send you a statement each year showing the tax status of all
your distributions. If you have chosen to receive dividend and/or capital gains
distributions in cash, and the postal or other delivery service is unable to
deliver checks to your address of record, we will change the distribution option
so that all dividends and other distributions are automatically invested in
additional shares. We will not pay interest on uncashed distribution checks.
- - The dividends and short-term capital gains that you receive are considered
ordinary income for tax purposes.
- - Any distributions of net long-term capital gains by the Fund are taxable to
you as long-term capital gains, no matter how long you've owned shares in the
Fund.
<PAGE> 12
9
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a distribution, because doing so can cost you money in taxes. This is
known as "buying a dividend." For example: on December 15, you invest $5,000,
buying 250 shares for $20 each. If the fund pays a distribution of $1 per share
on December 16, its share price would drop to $19 (not counting market change).
You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received -- even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
- - Although the Fund does not seek to realize any particular amount of capital
gains during a year, such gains are realized from time to time as by-products
of its ordinary investment activities. Consequently, distributions may vary
considerably from year to year.
- - If you sell or exchange shares, any gain or loss you have is a taxable event.
This means that you may have a capital gain to report as income, or a capital
loss to report as a deduction, when you complete your federal income tax
return.
- - Distributions of dividends or capital gains, and capital gains or losses from
your sale or exchange of Fund shares, may be subject to state and local
income taxes as well.
The tax information in this prospectus is provided as general information and
will not apply to you if you are investing through a tax-deferred account such
as an IRA or a qualified employee benefit plan. (Non-U.S. investors may be
subject to U.S. withholding and estate tax.) You should consult your tax adviser
about the tax consequences of an investment in the Fund.
IMPORTANT NOTE: By law, the Fund must withhold 31% of your taxable
distributions and any redemption proceeds if you do not provide your correct
taxpayer identification number, or certify that it is correct, or if the IRS
instructs the Fund to do so.
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading on the New York Stock Exchange (the NAV
is not calculated on holidays or other days the Exchange is closed). Net asset
value per share is computed by adding up the total value of the Fund's
investments and other assets, subtracting any of its liabilities (debts), and
then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -----------------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Funds." Different newspapers use
different abbreviations of the Fund's name, but the most common is WNDSR.
<PAGE> 13
10
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1998 with a net asset value (price) of $19.55 per share.
During the year, the Fund earned $.23 per share from investment income (interest
and dividends). There was a decline of $.32 per share in the value of
investments held or sold by the Fund, resulting in a net decline of $.09 from
investment operations.
Shareholders received $3.12 per share in the form of dividend and capital
gains distributions. A portion of each year's distributions may come from the
prior year's income or capital gains.
Investment losses ($.09 per share) plus the distributions ($3.12 per share)
resulted in a share price of $16.34 at the end of the year. This was a decrease
of $3.21 per share (from $19.55 at the beginning of the year to $16.34 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was -0.78% for the
year.
As of October 31, 1998, the Fund had $18.4 billion in net assets. For the
year, its expense ratio was 0.27% ($2.70 per $1,000 of net assets); and net
investment income amounted to 1.31% of its average net assets. It sold and
replaced securities valued at 48% of its net assets.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been derived from the financial statements
audited by PricewaterhouseCoopers LLP, independent accountants, whose report --
along with the Fund's financial statements -- is included in the Fund's most
recent annual report to shareholders. You may have the annual report sent to you
without charge by contacting Vanguard.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
VANGUARD WINDSOR FUND
-----------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 19.55 $ 16.99 $ 15.55 $ 14.55 $ 14.95
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .23 .36 .43 .44 .44
Net Realized and Unrealized Gain (Loss)
on Investments (.32) 3.94 2.85 1.86 .42
-----------------------------------------------------------------------------------
Total from Investment Operations (.09) 4.30 3.28 2.30 .86
-----------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.24) (.41) (.46) (.44) (.37)
Distributions from Realized Capital Gains (2.88) (1.33) (1.38) (.86) (.89)
-----------------------------------------------------------------------------------
Total Distributions (3.12) (1.74) (1.84) (1.30) (1.26)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 16.34 $ 19.55 $ 16.99 $ 15.55 $ 14.55
===================================================================================================================================
TOTAL RETURN -0.78% 27.04% 23.16% 17.80% 6.35%
===================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $ 18,355 $ 20,678 $ 15,841 $ 13,008 $ 11,406
Ratio of Total Expenses to
Average Net Assets 0.27% 0.27% 0.31% 0.45% 0.45%
Ratio of Net Investment Income to
Average Net Assets 1.31% 1.89% 2.75% 3.01% 3.11%
Turnover Rate 48% 61% 34% 32% 34%
===================================================================================================================================
</TABLE>
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a measure of past dividend income. Total return includes both
past dividend income (assuming that it has been reinvested) plus realized and
unrealized capital appreciation (or depreciation). Neither yield nor total
return should be used to predict the future performance of a fund.
"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.
<PAGE> 14
11
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer. Booklets providing detailed information are available on the services
marked with a [BOOK]. Please call us to request copies.
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Fund unless you notify us otherwise.
VANGUARD DIRECT DEPOSIT SERVICE(TM) [BOOK]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
VANGUARD AUTOMATIC EXCHANGE SERVICE(TM) [BOOK]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
VANGUARD FUND EXPRESS(R) [BOOK]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
VANGUARD DIVIDEND EXPRESS(TM) [BOOK]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [BOOK]
Toll-free 24-hour access to Vanguard fund and account information -- as well as
some transactions -- by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange fund shares.
ACCESS VANGUARD(TM) www.vanguard.com [COMPUTER]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through the website. We will then send to you, by mail, an account
access password that allows you to process the following financial and
administrative transactions online:
- - Open a new account*.
- - Buy, sell, or exchange shares of most funds.
- - Change your name/address.
- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
* Only current Vanguard shareholders can open a new account online, by
exchanging shares from other existing Vanguard accounts.
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-662-2738
Call Vanguard for information on your account, account transactions, and account
statements.
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
<PAGE> 15
12
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
FOR HOLDING PERSONAL TRUST ASSETS [BOOK]
Invest assets held in an existing personal trust.
FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOK]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
FOR AN ORGANIZATION [BOOK]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
VANGUARD PROTOTYPE PLANS
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
BUYING SHARES
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.
MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
A NOTE ON LOW BALANCES
The Fund reserves the right to close any nonretirement account whose balance
falls below the minimum initial investment. The Fund will deduct a $10 annual
fee in June if your nonretirement account balance at that time is below $2,500.
The fee is waived if your total Vanguard account assets are $50,000 or more.
BY MAIL TO . . . [ENVELOPE]
open a new account
Complete and sign the application form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form.
<PAGE> 16
13
Make your check payable to: The Vanguard Group-22
All purchases must be made in U.S. dollars, and checks must be drawn on
U.S. banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2600 455 Devon Park Drive
Valley Forge, PA 19482-2600 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
BY TELEPHONE TO . . . [PHONE]
open a new account
Call Vanguard Tele-Account* 24 hours a day -- or Client Services during business
hours -- to exchange from another Vanguard fund account with the same
registration (name, address, taxpayer identification number, and account type).
add to an existing account
Call Vanguard Tele-Account* 24 hours a day -- or Client Services during business
hours -- to exchange from another Vanguard fund account with the same
registration (name, address, taxpayer identification number, and account type).
Use Vanguard Fund Express (see "Services and Account Features") to transfer
assets from your bank account. Call Client Services before your first use to
verify that this option is in place.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
* You must obtain a Personal Identification Number through Tele-Account at
least seven days before you request your first exchange.
IMPORTANT NOTE: Once you've requested a telephone transaction and a confirmation
number has been assigned, the transaction cannot be revoked. We reserve the
right to refuse any purchase request.
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call Client Services to arrange your wire transaction. Wire transactions are not
available for retirement accounts, except for asset transfers and direct
rollovers.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Windsor Fund-22
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]
<PAGE> 17
14
BUYING SHARES (CONTINUED)
You can redeem (that is, sell or exchange) shares purchased by check or
Vanguard Fund Express at any time. However, while your redemption request will
be processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
Keep in mind that if you buy or sell Fund shares through a registered
broker/dealer or investment adviser, the broker/dealer or adviser may charge you
a service fee.
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
We must consider the interests of all Fund shareholders and so reserve the right
to refuse any purchase that will disrupt the Fund's operation or performance.
REDEEMING SHARES
This section describes how you can redeem -- that is, sell or exchange -- the
Fund's shares.
When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.
* Proceeds sent to third parties require a signature guarantee; see footnote on
page 16.
When Exchanging Shares:
- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus. For
exchanges, the purchase side of the transaction will be based on the receiving
fund's next-determined share price, again subject to any special rules discussed
in this prospectus.
NOTE: Once a redemption is requested and a confirmation number given, the
transaction CANNOT be canceled.
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
ONLINE REQUESTS [COMPUTER]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through the website. We will then send you, by mail, an account access password
that will enable you to sell or exchange shares online (as well as perform other
transactions).
NOTE: The Vanguard funds whose shares you cannot exchange online or by
telephone are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND,
VANGUARD INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, VANGUARD
TOTAL INTERNATIONAL STOCK INDEX FUND, and VANGUARD GROWTH AND INCOME FUND. These
funds do, however, permit online and telephone exchanges within IRAs and other
retirement accounts. If you sell shares of these funds online, you will receive
a redemption check at your address of record.
TELEPHONE REQUESTS [PHONE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day -- or Client Services during business
hours -- to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
<PAGE> 18
15
Retirement Accounts:
You can exchange -- but not sell -- shares by calling Tele-Account or Client
Services.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
[CHECKBOX] The ten-digit account number.
[CHECKBOX] The name and address exactly as registered on the account.
[CHECKBOX] The primary Social Security or employer identification number as
registered on the account.
[CHECKBOX] The Personal Identification Number, if applicable.
Please note that Vanguard will not be responsible for any account losses due
to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
MAIL REQUESTS [ENVELOPE]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
Vanguard Retirement Accounts:
For information on how to request distributions from:
- - Traditional IRAs and Roth IRAs -- call Client Services.
- - SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans -- call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1120 455 Devon Park Drive
Valley Forge, PA 19482-1120 Wayne, PA 19087-1815
<PAGE> 19
16
REDEEMING SHARES (CONTINUED)
For clients of Vanguard's Institutional Division...
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
We must consider the interests of all fund shareholders and so reserve the right
to delay delivery of your redemption proceeds -- up to seven days -- if the
amount will disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in kind, i.e., in securities, rather than in cash. If
payment is made in kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of two ways: check, or exchange
to another Vanguard fund.
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
[CHECKBOX] The Fund name and account number.
[CHECKBOX] The amount of the transaction (in dollars or shares).
[CHECKBOX] Signatures of all owners exactly as registered on the account (for
mail requests).
[CHECKBOX] Signature guarantees (if required).*
[CHECKBOX] Any supporting legal documentation that may be required.
[CHECKBOX] Any outstanding certificates representing shares to be redeemed.
* For instance, a signature guarantee must be provided by all registered
account shareholders when redemption proceeds are to be sent to a different
person or address. A signature guarantee can be obtained from most banks,
credit unions, and licensed brokers.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.
- - Your round trips through the Fund must be at least 30 days apart.
- - The Fund may refuse a share purchase at any time, for any reason.
- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, "round trip" covers transactions accomplished by any combination
of methods, including transactions conducted by check, wire, or exchange to/from
another Vanguard fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
<PAGE> 20
17
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
ALL TRADES FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been received
and a confirmation number assigned.
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison to its industry benchmark), an overview of the markets, a report
from the advisers, and the Fund's financial statements which include a listing
of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more Fund shareholders have the same last name and address, we send just one
Fund report to that address -- instead of mailing separate reports to each
shareholder. If you want us to send separate reports, however, you may notify
our Client Services Department at 1-800-662-2739.
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
PORTFOLIO SUMMARY [BOOK]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
FUND FINANCIAL REPORTS
Mailed in December and June for this Fund.
<PAGE> 21
18
FUND AND ACCOUNT UPDATES (CONTINUED)
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
AVERAGE COST REVIEW STATEMENT [BOOK]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using the average cost single category method.
<PAGE> 22
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<PAGE> 23
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<PAGE> 24
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments, which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
COUNTRY RISK
The possibility that events within a country such as changes in regulation,
political or financial troubles, or natural disasters will adversely affect the
market value of securities issued by companies or governments in that country.
CURRENCY RISK
The possibility that an American's foreign investment will lose money because of
unfavorable currency exchange rate movements.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH AND INCOME STOCK FUND
A mutual fund that seeks moderate capital appreciation and some dividend income
by investing primarily in stocks.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as revenue, earnings, book value, and dividends.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 25
[SHIP]
[VANGUARD LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about Vanguard Windsor Fund, the following
documents are available free upon request:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during the most recent fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
contact us as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
www.vanguard.com
If you are a current Fund shareholder and would like information about your
account, account transactions, and/or account statements, please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-662-2738
INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Fund are also available on the SEC's website (www.sec.gov), or you can
receive copies of this information, for a fee, by writing the Public Reference
Section, Securities and Exchange Commission, Washington, DC 20549-6009.
Fund's Investment Company Act file number: 811-834
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P022N - 06/01/1999
<PAGE> 26
VANGUARD WINDSOR FUND
Participant Prospectus
June 1, 1999
A Growth and Income Stock Mutual Fund
CONTENTS
1 FUND PROFILE
2 ADDITIONAL INFORMATION
3 A WORD ABOUT RISK
3 WHO SHOULD INVEST
3 PRIMARY INVESTMENT STRATEGIES
6 THE FUND AND VANGUARD
7 INVESTMENT ADVISERS
8 YEAR 2000 CHALLENGE
8 DIVIDENDS, CAPITAL GAINS, AND TAXES
9 SHARE PRICE
10 FINANCIAL HIGHLIGHTS
11 INVESTING WITH VANGUARD
11 ACCESSING FUND INFORMATION BY COMPUTER
GLOSSARY (inside back cover)
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Windsor Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
IMPORTANT NOTE
This prospectus is intended for participants in employer-sponsored retirement or
savings plans. Another version -- for investors who would like to open a
personal investment account -- can be obtained by calling Vanguard at
1-800-662-7447.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 27
1
FUND PROFILE
The following profile summarizes key features of Vanguard Windsor Fund.
INVESTMENT OBJECTIVE
The Fund is a common stock fund that seeks to provide long-term growth of
capital. As a secondary objective, the Fund seeks to provide some dividend
income.
INVESTMENT STRATEGIES
The Fund invests primarily in large- and medium-size companies whose stocks are
considered by the Fund's adviser to be undervalued. Undervalued stocks are
generally those that are out of favor with investors and currently trading at
prices that, the adviser feels, are below what the stocks are worth in relation
to their earnings. These stocks typically -- but not always -- have
lower-than-average price/earnings (P/E) ratios and higher-than-average dividend
yields.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Investment style risk, which is the chance that returns from large- and
mid-capitalization value stocks will trail returns from the overall stock
market.
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five, and ten calendar years compare with those of a broad-based securities
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
Annual Total Returns
[BAR CHART]
<TABLE>
<S> <C>
1989 15.02%
1990 -15.50%
1991 28.55%
1992 16.50%
1993 19.37%
1994 -0.15%
1995 30.15%
1996 26.36%
1997 21.97%
1998 0.81%
</TABLE>
During the period shown in the bar chart, the highest return for a
calendar quarter was 18.25% (quarter ended March 31, 1991) and the lowest return
for a quarter was -20.34% (quarter ended September 30, 1990).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Vanguard Windsor Fund 0.81% 15.09% 13.37%
S&P 500 Index 28.58 24.06 19.21
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 28
2
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Windsor Fund's expense ratio in fiscal year 1998 was 0.27%,
or $2.70 per $1,000 of average net assets. The average growth and income equity
mutual fund had expenses in 1998 of 1.20%, or $12 per $1,000 of average net
assets, according to Lipper Inc., which reports on the mutual fund industry.
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended October 31, 1998.
<TABLE>
<S> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.24%
12b-1 Distribution Fees: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.27%
</TABLE>
The following example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds. It
illustrates the hypothetical expenses that you would incur over various periods
if you invest $10,000 in the Fund. This example assumes that the Fund provides a
return of 5% a year, and that operating expenses remain the same. The results
apply whether or not you redeem your investment at the end of each period.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$28 $87 $152 $343
- --------------------------------------------------------------------------------
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS
Dividends are paid semiannually in June and December; capital gains, if any, are
paid in December
INVESTMENT ADVISERS
- - Wellington Management Company, LLP, Boston, Mass., since inception
- - Sanford C. Bernstein & Co., New York City, N.Y., since June 1, 1999
INCEPTION DATE
October 23, 1958
NET ASSETS AS OF OCTOBER 31, 1998
$18.4 billion
NEWSPAPER ABBREVIATION
Wndsr
VANGUARD FUND NUMBER
022
CUSIP NUMBER
922018106
TICKER SYMBOL
VWNDX
<PAGE> 29
3
A WORD ABOUT RISK
This prospectus describes the risks you would face as an investor in Vanguard
Windsor Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in Vanguard Windsor Fund, you
should also take into account your personal tolerance for the daily fluctuations
of the stock market.
Look for this [FLAG] symbol throughout the prospectus. It is used to
mark detailed information about each type of risk that you would confront as a
shareholder of the Fund.
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You are seeking a value-oriented investment that seeks to provide long-term
growth as well as some dividend income.
- - You wish to add a value-oriented growth and income stock fund to your
existing holdings, which could include other stock investments as well as
bond, money market, and tax-exempt investments.
- - You are seeking growth of capital and income over the long term -- at least
five years.
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing -- switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS
FUND IF YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage
short-term trading:
- - The Fund reserves the right to reject any purchase request -- including
exchanges from other Vanguard funds -- that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Exchanges" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment advisers use in pursuit
of the Fund's objectives of long-term growth in capital and some dividend
income. It also explains how the advisers implement these strategies. In
addition, this section discusses several important risks -- market risk,
investment style risk, concentration risk, and manager risk -- faced by
investors in the Fund. The Fund's Board of Trustees oversees the management of
the Fund and may change the investment strategies in the interest of
shareholders.
MARKET EXPOSURE
The Fund is a value fund. Its primary strategy is to invest in large- and
mid-capitalization common stocks that have favorable prospects for growth of
earnings and dividend income, but whose prices do not reflect this potential for
positive returns. The Fund may also invest in securities that are convertible to
common stocks.
<PAGE> 30
4
PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such factors as earnings and book value, and
these stocks typically pay above-average dividend yields. Growth funds generally
focus on companies believed to have above-average potential for growth in
revenue and earnings. Reflecting the market's high expectations for superior
growth, the prices of such stocks are typically above-average in relation to
such measures as revenue, earnings, book value, and dividends. Value and growth
stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. In general, value funds are
appropriate for investors who want some dividend income and the potential for
capital gains but are less tolerant of share-price fluctuations. Growth funds,
by contrast, appeal to investors who will accept more volatility in hopes of a
greater increase in share price. Growth funds also may appeal to investors with
taxable accounts who want a higher proportion of returns to come as capital
gains (which may be taxed at lower rates than dividend income).
[FLAG] THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT
STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG
PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF
RISING PRICES AND PERIODS OF FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows
the best, worst, and average total returns for the U.S. stock market over
various periods as measured by the Standard & Poor's 500 Composite Stock Price
Index, a widely used barometer of market activity. (Total returns consist of
dividend income plus change in market price.) Note that the returns shown do not
include the costs of buying and selling stocks or other expenses that a
real-world investment portfolio would incur. Note, also, that the gap between
best and worst tends to narrow over the long term.
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies -- and mutual funds that hold these
stocks -- can be classified by the companies' market value, or capitalization.
Generally, Vanguard defines large-capitalization (large-cap) funds as those
holding stocks of companies whose outstanding shares have a market value
exceeding $10 billion. Mid-cap funds hold stocks of companies with a market
value between $1 billion and $10 billion. Small-cap funds typically hold stocks
of companies with a market value of less than $1 billion.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1998)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Best 54.2% 24.1% 19.9% 17.7%
Worst -43.1 -12.4 -0.8 3.1
Average 13.1 10.7 11.0 11.0
- --------------------------------------------------------------------------------
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1998. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 10.7%, returns for individual 5-year periods
ranged from a -12.4% average (from 1928 through 1932) to 24.1% (from 1994
through 1998). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or this Fund in particular.
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE
POSSIBILITY THAT RETURNS FROM LARGE- AND MID-CAPITALIZATION
VALUE STOCKS WILL TRAIL RETURNS FROM OTHER ASSET CLASSES OR
THE OVERALL STOCK MARKET. AS A GROUP, VALUE STOCKS TEND TO GO
THROUGH CYCLES OF DOING BETTER -- OR WORSE --THAN COMMON STOCKS
IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG
AS SEVERAL YEARS.
<PAGE> 31
5
PLAIN TALK ABOUT
FUND DIVERSIFICATION
In general, the more diversified a fund's stock holdings, the less likely it is
that a specific stock's poor performance will hurt the fund. One measure of a
fund's diversification is the percentage of its assets represented by its ten
largest holdings. The average U.S. equity mutual fund has about 30% of its
assets invested in its ten largest holdings, while some less-diversified mutual
funds have more than 50% of their assets invested in the stocks of just ten
companies.
SECURITY SELECTION
Vanguard Windsor Fund employs two primary investment advisers, each of whom
independently chooses and maintains a portfolio of common stocks for the Fund.
Each adviser is responsible for a specific percentage of the Fund's assets.
These investment advisers employ active investment methods, which means
that securities are bought according to the advisers' evaluations about
companies and their financial prospects, and about the stock market and the
economy in general. Each adviser will sell a security when it is no longer as
attractive as alternative investments.
While the advisers use different processes to select securities for
their portfolios, both are committed to investing in large- and mid-cap stocks
that, in their opinion, are undervalued. Undervalued stocks are generally those
that are out of favor with investors and currently trading at prices that, the
adviser feels, are below what the stocks are worth in relation to their
earnings. These stocks typically -- but not always -- have lower-than-average
price/earnings (P/E) ratios and higher-than-average dividend yields.
Wellington Management Company, LLP (WMC), is expected to be responsible
for about 67% to 75% of the Fund's assets. A stock's value is the key element in
WMC's selection process. WMC considers several fundamental factors, including
the stock's projected growth rate, earnings potential, dividend yield, and P/E
ratio. To be a candidate for purchase, a stock must have strong prospects for
capital appreciation, but be trading at a price lower than what is expected of a
stock with such potential.
Like WMC, Sanford C. Bernstein & Co. (Bernstein), uses traditional
methods of stock selection -- research and analysis -- to identify undervalued
stocks. Bernstein also employs quantitative valuation tools to identify
attractive stocks and the most opportune time to purchase them. Bernstein is
expected to be responsible for about 25% to 33% of the Fund's assets.
Any Fund assets held in cash reserves will be managed by Vanguard Core
Management Group (the Group). Vanguard may invest the Fund's cash reserves in
stock futures. This strategy is intended to keep the Fund more fully invested in
common stocks while retaining cash on hand to meet liquidity needs. See "Other
Investment Policies and Risks" on the next page for more details on the Fund's
policy on futures.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT
THE ADVISERS MAY DO A POOR JOB OF SELECTING STOCKS.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 42%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for all domestic stock funds is
approximately 85%, according to Morningstar, Inc.
<PAGE> 32
6
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in undervalued common stocks, the Fund may make certain other
kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, it reserves the right
to invest up to 20% of its assets in foreign securities. These securities may be
traded in U.S. or foreign markets. To the extent that it owns foreign stocks,
the Fund is subject to (1) country risk, which is the possibility that political
events (such as a war), financial problems (such as government default), or
natural disasters (such as an earthquake) will weaken a country's economy and
cause investments in that country to lose money; and (2) currency risk; which is
the possibility that Americans investing abroad could lose money because of a
rise in the value of the U.S. dollar versus foreign currencies.
The Fund may invest in money market instruments, fixed-income
securities, convertible securities, and other equity securities such as
preferred stock. The Fund may invest up to 15% of its assets in restricted
securities with limited marketability or other illiquid securities.
The Fund may also invest, to a limited extent, in stock futures and
options contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial -- in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The value of all futures and options contracts in which
the Fund acquires an interest cannot exceed 20% of total assets.
The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may, from time to time, take temporary defensive measures --
such as holding cash reserves without limit -- that are inconsistent with the
Fund's primary investment strategies, in response to adverse market, economic,
political, or other conditions. In taking such measures, the Fund may not
achieve its investment objective.
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 distinct investment portfolios holding net assets
worth more than $480 billion. All of the Vanguard funds share in the expenses
associated with business operations, such as personnel, office space, equipment,
and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
<PAGE> 33
7
INVESTMENT ADVISERS
The Fund employs two primary investment advisers for the bulk of its assets and
uses Vanguard Core Management Group to manage its cash reserves. Each adviser
manages the Fund subject to the control of the Trustees and officers of the
Fund.
Wellington Management Company, LLP (WMC), 75 State Street, Boston, MA
02109, served as the Fund's sole investment adviser from the Fund's inception in
1958 until June of 1999.
WMC's advisory fee is paid quarterly. This fee is based on certain
annual percentage rates applied to the Fund's average month-end assets for each
quarter.
In addition, WMC's advisory fee is increased or decreased, based on the
cumulative investment performance of its portion of the Fund over a trailing
36-month period as compared with the cumulative total return of the Standard and
Poor's 500 Index over the same period.
Sanford C. Bernstein & Co. (Bernstein), 767 Fifth Avenue, New York
City, NY 10153, was added as an investment adviser to the Fund in June of 1999.
Like WMC, Bernstein's advisory fee is paid quarterly. The fee is based on
certain annual percentage rates applied to the Fund's average month-end assets
for each quarter. Bernstein's advisory fee is increased or decreased, based on
the cumulative investment performance of its portion of the Fund over a trailing
36-month period as compared with the cumulative total return of the Russell 1000
Index over the same period.
Vanguard Core Management Group (the Group), P.O. Box 2600, Valley
Forge, PA 19482, provides investment advisory services to many Vanguard funds,
managing more than $146 billion in total assets at the end of 1998. The Group
provides advisory services to the Fund on an at-cost basis.
For the year ended October 31, 1998, the advisory fee paid to WMC
represented an effective annual rate of 0.12% of the Fund's average net assets
before a decrease of 0.08% based on performance.
The Fund has authorized the advisers to choose brokers or dealers to
handle the purchase and sale of securities for the Fund, and to get the best
available price and most favorable execution from these brokers with respect to
all transactions.
In the interest of obtaining better execution of a transaction, the
advisers may choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and favorable execution of a
transaction, then the advisers are authorized to choose a broker who, in
addition to executing the transaction, will provide research services to the
advisers or the Fund. Also, the Fund may direct the advisers to use a particular
broker for certain transactions in exchange for commission rebates or research
services provided to the Fund.
PLAIN TALK ABOUT
THE FUND'S ADVISERS
Wellington Management Company, LLP, (WMC) is an investment advisory firm founded
in 1928. As of October 31, 1998, WMC managed more than $196 billion in assets.
The manager responsible for overseeing WMC's portion of the Fund is:
CHARLES T. FREEMAN, Senior Vice President and Partner of WMC; has
worked in investment management since 1967; with WMC since 1969; B.S., M.B.A.,
University of Pennsylvania.
Mr. Freeman was appointed Fund Manager in January 1996, following the
retirement of John B. Neff, who had managed the Fund since 1964. Mr. Freeman had
been Assistant Fund Manager since 1974.
Sanford C. Bernstein & Co. (Bernstein) is an investment advisory firm
founded in 1968. As of October 31, 1998, Bernstein managed more than $80 billion
in assets. The managers responsible for overseeing Bernstein's portion of the
Fund are MARILYN G. FEDAK, Chief Investment Officer and Chairman of the U.S.
Equity Investment Policy Group at Bernstein since 1993; has worked in investment
management since 1972; has managed portfolio investments since joining Bernstein
in 1984; B.B.A., University of Wisconsin; M.B.A., Harvard Business School; and
STEVEN PISARKIEWICZ, with Bernstein since 1989, serving as Senior Portfolio
Manager since 1997; B.S., University of Missouri; M.B.A., University of
California at Berkeley.
The manager responsible for Vanguard Core Management Group's (the
Group) portion of the Fund is GEORGE U. SAUTER, Managing Director of Vanguard;
has worked in investment management since 1985; primary responsibility for
Vanguard Core Management Group since joining the firm in 1987; A.B., Dartmouth
College; M.B.A., University of Chicago.
<PAGE> 34
8
The Board of Trustees may, without prior approval from shareholders,
change the terms of an advisory agreement or hire a new investment adviser,
either as a replacement for the current advisers or as an additional adviser.
However, any such change will be communicated to shareholders in writing.
YEAR 2000 CHALLENGE
The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted,
high-quality performance from our computer systems before, during, and after
2000. In July 1998, we completed the renovation and initial testing of our
internal systems. Vanguard is diligently working with external partners,
suppliers, and vendors, including fund managers and other service providers, to
assure that the systems with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal
systems and external relationships, Vanguard is further developing contingency
plans intended to assure that unexpected systems failures will not adversely
affect the Fund's operations. Vanguard intends to monitor these processes
through the rollover of 1999 into 2000 and to quickly implement alternate
solutions if necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations, or financial condition. Additionally, the Fund's performance could
be hurt if a computer-system failure at a company or governmental unit affects
the price of securities the Fund owns.
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends less expenses), as well as any capital gains realized from the
sale of its holdings. Income distributions generally occur in June and December;
capital gains distributions generally occur in December.
Dividend and capital gains distributions of Fund shares that are held
as an investment option in an employer-sponsored retirement or savings plan will
be reinvested in additional Fund shares and accumulate on a tax-deferred basis.
You will not owe taxes on these distributions until you begin withdrawals. You
should consult your plan administrator, your plan's Summary Plan Document, or
your own tax adviser about the tax consequences of an investment in the Fund and
of any plan withdrawals.
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. The capital gains are either short-term or long-term depending on
whether the fund held the securities for less than or more than one year.
<PAGE> 35
9
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading on the New York Stock Exchange (the NAV
is not calculated on holidays or other days the Exchange is closed). Net asset
value per share is computed by adding up the total value of the Fund's
investments and other assets, subtracting any of its liabilities (debts), and
then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = ---------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder
because it indicates the current value of your investment. The Fund's NAV,
multiplied by the number of shares you own, gives you the dollar amount you
would have received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their
market value when market quotations are readily available. When these quotations
are not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings
of most major newspapers under the heading "Vanguard Funds." Different
newspapers use different abbreviations of the Fund's name, but the most common
is Wndsr.
<PAGE> 36
10
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1998 with a net asset value (price) of $19.55 per share.
During the year, the Fund earned $.23 per share from investment income (interest
and dividends). There was a decline of $.32 per share in the value of
investments held or sold by the Fund, resulting in a net decline of $.09 from
investment operations.
Shareholders received $3.12 per share in the form of dividend and
capital gains distributions. A portion of each year's distributions may come
from the prior year's income or capital gains.
Investment losses ($.09 per share) plus the distributions ($3.12 per
share) resulted in a share price of $16.34 at the end of the year. This was a
decrease of $3.21 per share (from $19.55 at the beginning of the year to $16.34
at the end of the year). For a shareholder who reinvested the distributions in
the purchase of more shares, the total return from the Fund was -0.78% for the
year.
As of October 31, 1998, the Fund had $18.4 billion in net assets. For
the year, its expense ratio was 0.27% ($2.70 per $1,000 of net assets); and net
investment income amounted to 1.31% of its average net assets. It sold and
replaced securities valued at 48% of its net assets.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been derived from the financial statements
audited by PricewaterhouseCoopers LLP, independent accountants, whose report --
along with the Fund's financial statements -- is included in the Fund's most
recent annual report to shareholders. You may have the annual report sent to you
without charge by contacting Vanguard.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
VANGUARD WINDSOR FUND
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 19.55 $ 16.99 $ 15.55 $ 14.55 $ 14.95
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .23 .36 .43 .44 .44
Net Realized and Unrealized Gain (Loss)
on Investments (.32) 3.94 2.85 1.86 .42
-----------------------------------------------------------------------------
Total from Investment Operations (.09) 4.30 3.28 2.30 .86
-----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.24) (.41) (.46) (.44) (.37)
Distributions from Realized Capital Gains (2.88) (1.33) (1.38) (.86) (.89)
-----------------------------------------------------------------------------
Total Distributions (3.12) (1.74) (1.84) (1.30) (1.26)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 16.34 $ 19.55 $ 16.99 $ 15.55 $ 14.55
====================================================================================================================================
TOTAL RETURN -0.78% 27.04% 23.16% 17.80% 6.35%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $18,355 $20,678 $15,841 $13,008 $11,406
Ratio of Total Expenses to
Average Net Assets 0.27% 0.27% 0.31% 0.45% 0.45%
Ratio of Net Investment Income to
Average Net Assets 1.31% 1.89% 2.75% 3.01% 3.11%
Turnover Rate 48% 61% 34% 32% 34%
====================================================================================================================================
</TABLE>
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a measure of past dividend income. Total return includes both
past dividend income (assuming that it has been reinvested) plus realized and
unrealized capital appreciation (or depreciation). Neither yield nor total
return should be used to predict the future performance of a fund.
"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.
<PAGE> 37
11
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- - If you have any questions about the Fund or Vanguard, including the Fund's
investment objective, strategies, or risks, contact Vanguard's Participant
Services Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on a Fund's
next-determined net asset value after Vanguard receives your request (or, in the
case of new contributions, the next-determined net asset value after Vanguard
receives the order from your plan administrator). As long as this request is
received before the close of trading on the New York Stock Exchange, generally
4 p.m. Eastern time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your
plan, consider the following:
- - Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- - Make sure to read that fund's prospectus. Contact Participant Services,
toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ON THE WORLD WIDE WEB www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
<PAGE> 38
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 39
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 40
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments, which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
COUNTRY RISK
The possibility that events within a country such as changes in regulation,
political or financial troubles, or natural disasters will adversely affect the
market value of securities issued by companies or governments in that country.
CURRENCY RISK
The possibility that an American's foreign investment will lose money because of
unfavorable currency exchange rate movements.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH AND INCOME STOCK FUND
A mutual fund that seeks moderate capital appreciation and some dividend income
by investing primarily in stocks.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as revenue, earnings, book value, and dividends.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 41
[SHIP]
[VANGUARD LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about Vanguard Windsor Fund, the following
documents are available free upon request:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during the most recent fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Fund.
The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.
To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Fund or other Vanguard funds, please
contact us as follows:
THE VANGUARD GROUP
PARTICIPANT SERVICES CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
www.vanguard.com
INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Fund are also available on the SEC's website (www.sec.gov), or you can
receive copies of this information, for a fee, by writing the Public Reference
Section, Securities and Exchange Commission, Washington, DC 20549-6009.
Fund's Investment Company Act file number: 811-834
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
I022N-06/01/1999
<PAGE> 42
PART B
VANGUARD WINDSOR FUNDS
(THE "TRUST")
STATEMENT OF ADDITIONAL INFORMATION
JUNE 1, 1999
This Statement is not a prospectus, but should be read in conjunction with
the current Prospectuses relating to the Windsor Fund (dated June 1, 1999) or
the Windsor II Fund (dated February 26, 1999), as appropriate. To obtain either
Prospectus or additional Annual Reports to Shareholders, which contain the
Funds' financial statements, as hereby incorporated by reference, please call:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Description of the Trust.................................... B-1
Investment Policies......................................... B-3
Share Price................................................. B-7
Purchase of Shares.......................................... B-8
Redemption of Shares........................................ B-8
Yield and Total Return...................................... B-8
Fundamental Investment Limitations.......................... B-9
Management of the Trust..................................... B-11
Investment Advisory Services................................ B-14
Portfolio Transactions...................................... B-22
Performance Measures........................................ B-23
Financial Statements........................................ B-26
</TABLE>
DESCRIPTION OF THE TRUST
ORGANIZATION
The Trust was organized as Wellington Equity Fund, a Delaware corporation,
in 1958. It then merged into a Maryland corporation in 1973, and subsequently
reorganized into a Pennsylvania business trust in 1985. The Trust then
reorganized as a Maryland corporation later in 1985. It was reorganized again as
a Delaware business trust in May 1998. Prior to its reorganization as a Delaware
business trust, the Trust was known as Vanguard/Windsor Funds, Inc. The Trust is
registered with the United States Securities and Exchange Commission under the
Investment Company Act of 1940 (the "1940 Act") as an open-end, diversified
management investment company. It currently offers the following funds and
classes of shares:
Vanguard Windsor Fund
Vanguard Windsor II Fund
(individually, the "Fund"; collectively, the "Funds")
The Trust has the ability to offer additional funds or classes of shares.
There is no limit on the number of full and fractional shares that the Trust may
issue for a single fund or class of shares.
SERVICE PROVIDERS
CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110, serves as the Trust's custodian. The custodian is
responsible for maintaining the Fund's assets and keeping all necessary accounts
and records.
B-1
<PAGE> 43
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Trust's independent public
accountants. The accountants audit financial statements and provide other
related services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Fund's transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.
CHARACTERISTICS OF THE TRUST'S SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Trust's shares, other
than the possible future termination of the Trust or any of its funds. The Trust
or any of its funds may be terminated by reorganization into another mutual fund
or by liquidation and distribution of the assets of the affected funds. Unless
terminated by reorganization or liquidation, the Trust and its funds will
continue indefinitely.
SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of the Trust will
not be personally liable for payment of the Trust's debts except by reason of
his or her own conduct or acts. In addition, a shareholder could incur a
financial loss on account of a Trust obligation only if the Trust itself had no
remaining assets with which to meet such obligation. We believe that the
possibility of such a situation arising is extremely remote.
DIVIDEND RIGHTS. The shareholders of a fund are entitled to receive any
dividends or other distributions declared for such fund. No shares have priority
or preference over any other shares of the same fund with respect to
distributions. Distributions will be made from the assets of a fund, and will be
paid ratably to all shareholders of the fund (or class) according to the number
of shares of such fund (or class) held by shareholders on the record date. The
amount of income dividends per share may vary between separate share classes of
the same fund based upon differences in the way that expenses are allocated
between share classes pursuant to a multiple class plan.
VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any class or series; or (iii)
the Trustees determine that it is necessary or desirable to obtain a shareholder
vote. The 1940 Act requires a shareholder vote under various circumstances,
including to elect or remove Trustees upon the written request of shareholders
representing 10% or more of the Trust's net assets, and to change any
fundamental policy of the Trust. Shareholders of the Trust receive one vote for
each dollar of net asset value owned on the record date, and a fractional vote
for each fractional dollar of net asset value owned on the record date. However,
only the shares of the fund affected by a particular matter are entitled to vote
on that matter. Voting rights are non-cumulative and cannot be modified without
a majority vote.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the net assets of applicable Fund.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with shares
of the Trust.
CONVERSION RIGHTS. There are no conversion rights associated with shares
of the Trust.
REDEMPTION PROVISIONS. The Trust's redemption provisions are described in
its current prospectus and elsewhere in this Statement of Additional
Information.
SINKING FUND PROVISIONS. The Trust has no sinking fund provisions.
CALLS OR ASSESSMENT. The Trust's shares, when issued, are fully paid and
non-assessable.
TAX STATUS OF THE TRUST
Each Fund qualifies as a "regulated investment company" under Subchapter M
of the Internal Revenue Code. This special tax status means that a Fund will not
be liable for federal tax on income and capital gains distributed to
shareholders. In order to preserve its tax status, each Fund must comply with
certain requirements. If a Fund fails to meet these requirements in any taxable
year, it will be subject to tax on its taxable income at corporate rates, and
all
B-2
<PAGE> 44
distributions from earnings and profits, including any distributions of net
tax-exempt income and net long-term capital gains, will be taxable to
shareholders as ordinary income. In addition, the Fund could be required to
recognize unrealized gains, pay substantial taxes and interest, and make
substantial distributions before regaining its tax status as a regulated
investment company.
INVESTMENT POLICIES
The following policies supplement the investment objectives and policies
set forth in each Fund's Prospectus.
REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements with
domestic banks, or brokers or dealers, either for temporary defensive purposes
due to market conditions, or to generate income from its excess cash balances. A
repurchase agreement is an agreement under which the series acquires a money
market instrument (generally a security issued by the U.S. Government or an
agency thereof, a banker's acceptance or a certificate of deposit) from a
domestic bank, broker or dealer, subject to resale to the seller at an agreed
upon price and date (normally the next business day). A repurchase agreement may
be considered a loan collateralized by securities. The resale price reflects an
agreed upon interest rate effective for the period the instrument is held by the
series and is unrelated to the interest rate on the underlying instrument. In
these transactions, the securities acquired by the Fund (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by a custodian bank until repurchased. In
addition, the Board of Trustees will monitor the repurchase agreement
transactions for each Fund generally and will establish guidelines and standards
for review by the investment adviser of the creditworthiness of any bank, broker
or dealer party to a repurchase agreement relating to any of the Funds.
The use of repurchase agreements involves certain risks. For example, if
the seller of the securities under an agreement defaults on its obligation to
repurchase the underlying securities at a time when the value of these
securities has declined, the Fund may incur a loss upon disposition of the
securities. If the seller becomes insolvent and subject to liquidation or
reorganization under bankruptcy or other laws, a bankruptcy court may determine
that the underlying securities are collateral for a loan by the Fund not within
the control of the Fund and therefore subject to sale by the trustee in
bankruptcy. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying securities. While the Trust's
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
LENDING OF SECURITIES. Each Fund may lend its portfolio securities for
either short or long-term periods to qualified institutional investors
(typically brokers, dealers, banks or other financial institutions) who need to
borrow securities in order to complete certain transactions, such as covering
short sales, avoiding failures to deliver securities or completing arbitrage
operations. By lending its portfolio securities, each Fund attempts to increase
its income through the receipt of interest on the loan. Any gain or loss in the
market price of the securities loaned that might occur during the term of the
loan would be for the account of the Fund. The terms, and the structure of such
loans must be consistent with the Investment Company Act of 1940, and the Rules
and Regulations or interpretations of the Securities and Exchange Commission
(the "Commission") thereunder. These provisions limit the amount of securities a
fund may lend to 33 1/3% of the Fund's total assets, and require that (a) the
borrower pledge and maintain with the Fund collateral consisting of cash, an
irrevocable letter of credit or securities issued or guaranteed by a domestic
bank or the United States Government having a value at all times not less than
100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the Fund at any time, and (d) the Fund receives reasonable
interest on the loan (which may include the Fund investing any cash collateral
in interest bearing short-term investments), any distributions on the loaned
securities and any increase in their market value. Loan arrangements made will
comply with all other applicable regulatory requirements, including the rules of
the New York Stock Exchange, which rules require the borrower, after notice, to
redeliver the securities within the normal settlement time of three business
days. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Board of
Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
B-3
<PAGE> 45
approved by the investment company's Trustees. In addition, voting rights pass
with the loaned securities, but if a material event occurs affecting an
investment on loan, the loan must be called and the securities voted.
VANGUARD INTERFUND LENDING PROGRAM. The SEC has issued an exemptive order
permitting the Funds to participate in Vanguard's interfund lending program.
This program allows the Vanguard funds to borrow money from and loan money to
each other for temporary or emergency purposes. The program is subject to a
number of conditions, including the requirement that no fund may borrow or lend
money through the program unless it receives a more favorable interest rate than
is available from a typical bank for a comparable transaction. In addition, a
fund may participate in the program only if and to the extent that such
participation is consistent with the fund's investment objective and other
investment policies. The Boards of Trustees of the Vanguard funds are
responsible for ensuring that the interfund lending program operates in
compliance with all conditions of the SEC's exemptive order.
TEMPORARY INVESTMENTS. The Funds may take temporary defensive measures
that are inconsistent with the Funds' normal investment strategies in response
to adverse market, economic, political or other conditions. Such measures could
include investments in (a) highly liquid short-term fixed income securities
issued by or on behalf of municipal or corporate issuers, obligations of the
U.S. Government and its agencies, commercial paper, and bank certificates of
deposit; (b) shares of other investment companies which have investment
objectives consistent with those of the Fund; (c) repurchase agreements
involving any such securities; and (d) other money market instruments. There is
no limit on the extent to which the Funds may take temporary defensive measures.
In taking such measures, the Funds may fail to achieve its investment objective.
FOREIGN INVESTMENTS. As indicated in the Prospectuses, each of the Funds
may invest up to 20% of its assets in securities of foreign companies. Investors
should recognize that investing in foreign companies involves certain special
considerations which are not typically associated with investing in U.S.
companies.
Country Risk. As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in companies in those countries.
Although the Funds will endeavor to achieve the most favorable execution
costs in their portfolio transactions in foreign securities, fixed commissions
on many foreign stock exchanges are generally higher than negotiated commissions
on U.S. exchanges. In addition, it is expected that the expenses for custodial
arrangements of the Funds' foreign securities will be somewhat greater than the
expenses for the custodial arrangement for handling U.S. securities of equal
value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Funds receive from their foreign investments.
Currency Risk. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Funds may temporarily hold
uninvested reserves in bank deposits in foreign currencies, a Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the Funds permit them to enter
into forward foreign currency exchange contracts in order to hedge holdings and
commitments against changes in the level of future currency rates. Such
contracts involve an obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract.
ILLIQUID SECURITIES. Each Fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities that may not be sold or
disposed of in the ordinary course of business within seven business days at
approximately the value at which they are being carried on the Fund's books.
B-4
<PAGE> 46
Each Fund may invest in restricted, privately placed securities that, under
SEC rules, may be sold only to qualified institutional buyers. Because these
securities can be resold only to qualified institutional buyers, they may be
considered illiquid securities -- meaning that they could be difficult for the
Fund to convert to cash if needed.
If a substantial market develops for a restricted security held by the
Fund, it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Fund's Board of Trustees. This generally includes
securities that are unregistered that can be sold to qualified institutional
buyers in accordance with Rule 144A under the 1933 Act. While the Fund's
investment adviser determines the liquidity of restricted securities on a daily
basis, the Board oversees and retains ultimate responsibility for the adviser's
decisions. Several factors the Board considers in monitoring these decisions
include the valuation of a security, the availability of qualified institutional
buyers, and the availability of information about the security's issuer.
FUTURES CONTRACTS. Each Fund may enter into stock futures contracts,
options, and options on futures contracts only for the purpose of remaining
fully invested and reducing transactions costs. Futures contracts provide for
the future sale by one party and purchase by another party of a specified amount
of a specific security at a specified future time and at a specified price.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission ("CFTC"), a U.S. Government agency. Assets committed
to futures contracts will be segregated to the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. Each Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
interest rates. Each Fund intends to use futures contracts only for bona fide
hedging purposes.
Regulations of the CFTC applicable to the Trust require that all of each of
the Fund's futures transactions constitute bona fide hedging transactions except
to the extent that the aggregate initial margins and premiums required to
establish any non-hedging positions do not exceed five percent of the value of
the Funds. Each Fund will only sell futures contracts to protect securities it
owns against price declines or purchase contracts to protect against an increase
in the price of securities it intends to purchase. As evidence of this hedging
interest, each Fund expects that approximately 75% of its futures contract
purchases will be "completed;" that is, equivalent amounts of related securities
will have been purchased or are being purchased by the Fund upon sale of open
futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the exposure of the Fund's income to market
fluctuations, the use of futures contracts may be a more effective means of
B-5
<PAGE> 47
hedging this exposure. While each Fund will incur commission expenses in both
opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of portfolio securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS. A Fund will not
enter into futures contract transactions to the extent that, immediately
thereafter, the sum of its initial margin deposits on open contracts exceeds 5%
of the market value of the Fund's total assets. In addition, a Fund will not
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under these contracts and its investments in options would
exceed 20% of the Fund's total assets. Assets committed to futures contracts or
options will be held in a segregated account.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may
be closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if a Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a Fund may be
required to make delivery of the instruments underlying interest rate futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the ability to effectively hedge its portfolio.
A Fund will minimize the risk that it will be unable to close out a futures
contract by only entering into futures contracts which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due to the extremely high degree of leverage involved in futures
pricing. As a result, a relatively small price movement in a futures contract
may result in immediate and substantial loss (as well as gain) to the investor.
For example, if at the time of purchase, 10% of the value of the futures
contract is deposited as margin, a subsequent 10% decrease in the value of the
futures contract would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the original margin deposit if
the contract were closed out. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the contract. However,
because the futures strategies of each Fund are engaged in only for hedging
purposes, the advisers do not believe that the Funds are subject to the risks of
loss frequently associated with futures transactions. Either Fund would
presumably have sustained comparable losses if, instead of the futures contract,
it had invested in the underlying security and sold it after the decline.
RISK FACTORS IN OPTIONS TRANSACTIONS. When a Fund invests in an option, it
purchases the right to buy (call options) or sell (put options) specified
securities, at a specified price, on a specified date or within a specified
period of time. In consideration of the right to buy or sell underlying
securities, the Fund pays a premium, which represents the maximum amount of the
Fund's potential loss on the transaction if it chooses not to exercise the
option or enter into a closing transaction before the option's expiration. Of
course, securities purchased pursuant to a call option may subsequently decline
in value, to the Fund's detriment. Similarly, securities sold pursuant to a put
option may subsequently rise in value, with the Fund missing out on these gains.
In both cases, the Fund would have incurred transaction costs to exercise the
option, in addition to the option premium.
There is the risk of loss by a Fund of margin deposits in the event of
bankruptcy of a broker with whom the Fund has an open position in a futures
contract or related option. Additionally, investments in futures and options
involve the risk that the investment adviser will incorrectly predict stock
market and interest rate trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
B-6
<PAGE> 48
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. Each Fund is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on futures contracts as of the end of the year as
well as those actually realized during the year. In most cases, any gain or loss
recognized with respect to a futures contract is considered to be 60% long-term
capital gain or loss and 40% short-term capital gain or loss, without regard to
the holding period of the contract. Furthermore, sales of futures contracts
which are intended to hedge against a change in the value of securities held by
a Fund may affect the holding period of such securities and, consequently, the
nature of the gain or loss on such securities upon disposition. The Fund may be
required to defer the recognition of losses on futures contracts to the extent
of any unrecognized gains on related positions held by the series.
In order for a Fund to continue to qualify for Federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, and gains from the sale of securities
or foreign currencies, or other income derived from the Fund's business of
investing in securities or currencies. It is anticipated that any net gain
realized from the closing of futures contracts will be considered qualifying
income for purposes of the 90% requirement.
Each Fund will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes, including unrealized
gains at the end of the Fund's fiscal year on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised on the nature of
the payments.
SHARE PRICE
Each Fund's share price, or "net asset value" per share, is calculated by
dividing the total assets of the Fund, less all liabilities, by the total number
of shares outstanding. The net asset value is determined as of the close of the
New York Stock Exchange (generally 4:00 p.m. Eastern time) on each day that the
Exchange is open for trading.
Portfolio securities for which market quotations are readily available
(includes those securities listed on national securities exchanges, as well as
those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales
price on the day the valuation is made. Such securities which are not traded on
the valuation date are valued at the mean of the bid and ask prices. Price
information on exchange-listed securities is taken from the exchange where the
security is primarily traded. Securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities.
Short-term instruments (those acquired with remaining maturities of 60 days
or less) may be valued at cost, plus or minus any amortized discount or premium,
which approximates market value.
Bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Foreign securities are valued at the last quoted sales price, according to
the broadest and most representative market, available at the time the Fund is
valued. If events which materially affect the value of a Fund's investments
occur after the close of the securities markets on which such securities are
primarily traded, those investments may be valued by such methods as the Board
of Trustees deems in good faith to reflect fair value.
In determining the Fund's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars using the officially quoted daily exchange rates used by Morgan
Stanley Capital International in calculating their various benchmarking indices.
This officially quoted exchange rate may be determined prior to or after the
close of a particular securities market. If such quotations are not available,
the rate of exchange will be determined in accordance with policies established
in good faith by the Board of Trustees.
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect fair value.
B-7
<PAGE> 49
The share price for each Fund can be found daily in the mutual fund
listings of most major newspapers under the heading of Vanguard Funds.
PURCHASE OF SHARES
The purchase price of shares of each Fund is the net asset value next
determined after the order is received in Good Order, as defined in the
Prospectus. The net asset value is calculated as of the close of the New York
Stock Exchange on each day the Exchange is open for business. An order received
prior to the close of the Exchange will be executed at the price computed on the
date of receipt; and an order received after the close of the Exchange will be
executed at the price computed on the next day the Exchange is open.
The Trust reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Trust, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts such as employee
benefit plans or under circumstances where certain economies can be achieved in
sales of each Fund's shares.
REDEMPTION OF SHARES
The Trust may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Commission; (ii) during any
period when an emergency exists, as defined by the rules of the Commission, as a
result of which it is not reasonably practicable for the Fund to dispose of
securities owned by it, or to determine fairly the value of its assets; and
(iii) for such other periods as the Commission may permit.
No charge is made by the Fund for redemptions. Any redemption may be more
or less than the shareholder's cost, depending on the market value of the Fund's
portfolio securities.
SIGNATURE GUARANTEES. To protect your account, the Trust and Vanguard from
fraud, signature guarantees are required for certain redemptions. A signature
guarantee verifies the authenticity of your signature. Examples of situations in
which signature guarantees are required are: (1) ALL REDEMPTIONS, REGARDLESS OF
THE AMOUNT INVOLVED, WHEN THE PROCEEDS ARE TO BE PAID TO SOMEONE OTHER THAN THE
REGISTERED ACCOUNT OWNER(S) AND/OR TO AN ADDRESS OTHER THAN THE ADDRESS OF
RECORD; AND (2) SHARE TRANSFER REQUESTS. These requirements are not applicable
to redemptions in Vanguard's prototype retirement plans, except in connection
with: (1) distributions made when the proceeds are to be paid to someone other
than the plan participant; (2) certain authorizations to effect exchanges by
telephone; and (3) when proceeds are to be wired. These requirements may be
waived by the Trust in certain instances.
Signature guarantees can be obtained from a bank, broker or any other
guarantor that Vanguard deems acceptable. NOTARIES PUBLIC ARE NOT ACCEPTABLE
GUARANTORS.
YIELD AND TOTAL RETURN
The yield of Vanguard Windsor Fund for the thirty-day period ended October
31, 1998 was 1.41%, and the yield for Vanguard Windsor II Fund for the same
period was 2.13%.
The average annual total returns for Vanguard Windsor Fund for the one-,
five- and ten-year periods ending October 31, 1998 were -0.78%, 14.23% and
12.78%, respectively. The average annual total returns for the one-, five-and
ten-year periods for Vanguard Windsor II Fund were 16.51%, 19.60% and 16.55%,
respectively. Total return is computed by determining the average compounded
rates of return over the one-, five- and ten-year periods set forth above that
would equate an initial amount invested at the beginning of the periods to the
ending redeemable value of the investment.
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<PAGE> 50
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return
for the periods of one year, five years, ten years or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by finding
the average annual compounded rates of return of a hypothetical investment over
such periods according to the following formula (average annual total return is
then expressed as a percentage):
T = (ERV/P)(1/n)-1
Where:
<TABLE>
<S> <C> <C>
T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made
at the beginning of the applicable period.
</TABLE>
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P)-1
Where:
<TABLE>
<S> <C> <C>
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made
at the beginning of the applicable period.
</TABLE>
SEC YIELDS
Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((a-b)/cd+1)(6)-1]
Where:
<TABLE>
<S> <C> <C>
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
</TABLE>
FUNDAMENTAL INVESTMENT LIMITATIONS
Each Fund is subject to the following fundamental investment limitations,
which cannot be changed in any material way without the approval of the holders
of a majority of the affected Fund's shares. For these purposes, a "majority" of
shares means shares representing the lesser of: (i) 67% or more of the votes
cast to approve a change, so long as shares representing more than 50% of the
Fund's net asset value are present or represented by proxy; or (ii) more than
50% of the Fund's net asset value.
B-9
<PAGE> 51
BORROWING. The Fund may not borrow money, except for temporary or
emergency purposes in an amount not exceeding 15% of the Fund's net assets. The
Fund may borrow money through banks, reverse repurchase agreements, or
Vanguard's interfund lending program only, and must comply with all applicable
regulatory conditions. The Fund may not make any additional investments whenever
its outstanding borrowings exceed 5% of net assets.
COMMODITIES. The Fund may not invest in commodities, except that it may
invest in stock futures contracts, stock options and options on stock futures
contracts. No more than 5% of the Fund's total assets may be used as initial
margin deposit for futures contracts, and no more than 20% of the Fund's total
assets may be invested in futures contracts or options at any time.
DIVERSIFICATION. With respect to 75% of its total assets, the Fund may
not: (i) purchase more than 10% of the outstanding voting securities of any one
issuer; or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.
ILLIQUID SECURITIES. The Fund may not acquire any security if, as a
result, more than 15% of its net assets would be invested in securities that are
illiquid.
INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total
assets in any one industry.
INVESTING FOR CONTROL. The Fund may not invest in a company for purposes
of controlling its management.
INVESTMENT COMPANIES. The Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
LOANS. The Fund may not lend money to any person except by purchasing
fixed income securities that are publicly distributed; by entering into
repurchase agreements, provided, however, that repurchase agreements maturing in
more than seven days, together with securities which do not have readily
available market quotations, will not exceed 15% of the Fund's total assets; by
lending its portfolio securities, or through Vanguard's interfund lending
program.
MARGIN. The Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.
REAL ESTATE. The Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate.
SENIOR SECURITIES. The Fund may not issue senior securities, except in
compliance with the 1940 Act.
The investment limitations set forth above are considered at the time
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction.
None of these limitations prevents the Trust from participating in The
Vanguard Group ("Vanguard"). Because the Trust is a member of the Group, the
Funds may own securities issued by Vanguard, make loans to Vanguard, and
contribute to Vanguard's costs or other financial requirement. See "Management
of the Trust" for more information.
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<PAGE> 52
MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES
The Officers of the Trust manage its day-to-day operations and are
responsible to the Trust's Board of Trustees. The Trustees set broad policies
for the Trust and choose its Officers. The following is a list of the Trustees
and Officers of the Trust and a statement of their present positions and
principal occupations during the past five years. As a group, the Trust's
Trustees and Officers own less than 1% of the outstanding shares of each Fund of
the Trust. Each Trustee also serves as a Director of The Vanguard Group, Inc.,
and as a Trustee of each of the 36 investment companies administered by Vanguard
(35 in the case of Mr. Malkiel and 28 in the case of Mr. MacLaury). The mailing
address of the Trustees and Officers of the Trust is Post Office Box 876, Valley
Forge, PA 19482.
JOHN C. BOGLE, (DOB: 5/8/1929) Senior Chairman and Trustee*
Senior Chairman and Director of The Vanguard Group, Inc., and Trustee of each of
the investment companies in The Vanguard Group; Director of The Mead Corp.
(Paper Products), General Accident Insurance, and Chris-Craft Industries, Inc.
(Broadcasting & Plastics Manufacturer).
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive Committee
of Johnson and Johnson (Pharmaceuticals/Consumer Products), Director of Johnson
& Johnson*MERCK Consumer Pharmaceuticals Co., Women First HealthCare, Inc.
(Research and Education Institution), Recording for the Blind and Dyslexic, The
Medical Center at Princeton, and Women's Research and Education Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution (Independent Non-Partisan
Research Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co. (Investment Management), The Jeffrey Co. (Holding Company), and Southern New
England Telecommunications Co.
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries
(Machinery/Coal/Appliances); Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals), and The Standard Products Co. (Rubber Products
Company).
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group); Director of Pacific Gas and Electric Co., Proctor & Gamble
Co., NACCO Industries (Machinery/Coal/Appliances), and Newfield Exploration Co.
(Energy); formerly, Director and Senior Partner of McKinsey & Co., and President
of New York University.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Chairman and Chief Executive Officer of Rohm & Haas Co. (Chemicals); Director of
Cummins Engine Co. (Diesel Engine Company), and The Mead Corp. (Paper Products);
and Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.
ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
- ---------------
*Officers of the Trust are "interested persons" as defined in the Investment
Company Act of 1940.
B-11
<PAGE> 53
THE VANGUARD GROUP
The Trust is a member of The Vanguard Group of Investment Companies, which
consists of more than 30 investment companies (the "Trusts"). Through their
jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Trust and
the other Trusts in The Vanguard Group obtain at cost virtually all of their
corporate management, administrative and distribution services. Vanguard also
provides investment advisory services on an at-cost basis to certain of the
Vanguard Trusts.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Trusts and also
furnishes the Trusts with necessary office space, furnishings and equipment.
Each Trust pays its share of Vanguard's total expenses which are allocated among
the Trusts under methods approved by the Board of Trustees of each Trust. In
addition, each Trust bears its own direct expenses, such as legal, auditing and
custodian fees.
The Trusts' Officers are also Officers and employees of Vanguard. No
Officer or employee owns, or is permitted to own, any securities of any external
adviser for the Trusts.
Vanguard adheres to a Code of Ethics established pursuant to Rule 17 j-1
under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines similar to, and in many
cases more restrictive than, those recommended by a blue ribbon panel of mutual
fund industry executives.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the Trusts.
The amounts which each of the Trusts has invested in Vanguard are adjusted from
time to time in order to maintain the proportionate relationship between each
Trust's relative net assets and its contribution to Vanguard's capital. At
October 31, 1998, Vanguard Windsor Fund had contributed capital of $3,375,000 to
Vanguard, representing 0.02% of the fund's net assets and 4.8% of Vanguard's
capitalization and, at that time, Vanguard Windsor II Fund had contributed
capital of $5,440,000 to Vanguard, representing 0.02% of the fund's net assets
and 7.8% of Vanguard's capitalization. The Amended and Restated Funds' Service
Agreement provides for the following arrangement: (a) each Vanguard Fund may be
called upon to invest up to 0.40% of its current net assets in Vanguard and (b)
there is no other limitation on the dollar amount that each Vanguard Fund may
contribute to Vanguard's capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Trusts by third parties.
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc. provides all distribution and marketing activities for
the Trusts in the Group. The principal distribution expenses are for
advertising, promotional materials and marketing personnel. Distribution
services may also include organizing and offering to the public, from time to
time, one or more new investment companies which will become members of The
Vanguard Group. The Trustee and Officers of Vanguard determine the amount to be
spent annually on distribution activities, the manner and amount to be spent on
each Trust, and whether to organize new investment companies.
One-half of the distribution expenses of a marketing and promotional nature
is allocated among the Trusts based upon their relative net assets. The
remaining one half of these expenses is allocated among the Trusts based upon
each Trust's sales for the preceding 24 months relative to the total sales of
the Trusts as a Group, provided, however, that no Trust's aggregate quarterly
rate of contribution for distribution expenses of a marketing and promotional
nature shall exceed 125% of the average distribution expense rate for The
Vanguard Group, and no Fund shall incur annual distribution expenses in excess
of .02 of 1% of its average month-end net assets. During the last three fiscal
years, the Funds incurred the following approximate amounts of The Vanguard
Group's management (including transfer agency), distribution and marketing
expenses.
B-12
<PAGE> 54
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FUND OCTOBER 31, 1996 OCTOBER 31, 1997 OCTOBER 31, 1998
---- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Vanguard Windsor Fund.................................. $28,612,000 $37,527,000 $44,738,000
Vanguard Windsor II Fund............................... $29,497,000 $40,231,000 $68,805,000
</TABLE>
INVESTMENT ADVISORY SERVICES. Vanguard provides investment advisory
services to the Funds, and several other Vanguard funds. These services are
provided on an at-cost basis by an investment management staff employed directly
by Vanguard. The compensation and other expenses of this staff are paid by the
funds and Trusts utilizing these services.
TRUSTEE COMPENSATION
The same individuals serve as Trustees of all Vanguard Trusts (with two
exceptions, which are noted below), and each Trust pays a proportionate share of
the Trustees' compensation. The Trusts employ their officers on a shared basis,
as well. However, officers are compensated by The Vanguard Group, Inc., not the
Trusts.
INDEPENDENT TRUSTEES. The Trusts compensate their independent Trustees -- that
is, the ones who are not also officers of the Trust -- in three ways:
- The independent Trustees receive an annual fee for their service to the
Trusts, which is subject to reduction based on absences from scheduled
Board meetings.
- The independent Trustees are reimbursed for the travel and other expenses
that they incur in attending Board meetings.
- Upon retirement, the independent Trustees receive an aggregate annual fee
of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.
"INTERESTED" TRUSTEES. The Funds' interested Trustees -- Messrs. Bogle and
Brennan -- receive no compensation for their service in that capacity. However,
they are paid in their role as officers of The Vanguard Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for each
of the Trustees. For the Trust, we list the amounts paid as compensation and
accrued as retirement benefits by the Trust for each Trustee. In addition, the
table shows the total amount of benefits that we expect each Trustee to receive
from all Vanguard Trusts upon retirement, and the total amount of compensation
paid to each Trustee by all Vanguard Trusts. All information shown is for the
fiscal year ended October 31, 1998.
VANGUARD WINDSOR FUNDS
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR RETIREMENT
AGGREGATE BENEFITS ACCRUED ESTIMATED TOTAL COMPENSATION
COMPENSATION AS PART OF ANNUAL BENEFITS FROM ALL VANGUARD TRUSTS
NAMES OF TRUSTEES FROM THE TRUST TRUST EXPENSES UPON RETIREMENT PAID TO TRUSTEES(1)
----------------- -------------- --------------------- --------------- ------------------------
<S> <C> <C> <C> <C>
John C. Bogle None None None None
John J. Brennan None None None None
Barbara Barnes Hauptfuhrer(2) $10,375 $1,403 $15,000 $75,000
JoAnn Heffernan Heisen $ 3,458 $ 610 $15,000 $25,000
Robert E. Cawthorn(2) $ 6,052 $ 935 $ 6,000 $43,750
Bruce K. MacClaury $10,855 $1,050 $12,000 $70,000
Burton G. Malkiel $10,447 $1,009 $15,000 $75,000
Alfred M. Rankin, Jr. $10,375 $ 738 $15,000 $75,000
John C. Sawhill $10,375 $ 935 $15,000 $75,000
James O. Welch, Jr. $10,375 $1,079 $15,000 $75,000
J. Lawrence Wilson $10,375 $ 780 $15,000 $75,000
</TABLE>
- ---------------
(1) The amounts reported in this column reflect the total compensation paid to
each Trustee for their service as Trustee of 36 Vanguard Trusts (35 in the
case of Mr. Malkiel; 28 in the case of Mr. MacLaury).
(2) Mr. Cawthorn and Mrs. Hauptfuhrer have retired from the Trust's Board,
effective May 31, 1998 and December 31, 1998, respectively.
B-13
<PAGE> 55
INVESTMENT ADVISORY SERVICES
VANGUARD WINDSOR FUND
The Fund employs a multi-manager approach, using two primary investment
advisers for the bulk of its assets, and Vanguard Core Management Group to
manage its cash reserves.
WELLINGTON MANAGEMENT COMPANY, LLP
Wellington Management Company, LLP ("WMC") manages a portion of the assets
of Vanguard Windsor Fund. WMC discharges its responsibilities pursuant to an
investment advisory agreement and is subject to the control of the Officers and
Trustees of the Fund. WMC is a Massachusetts limited liability partnership, and
the following persons serve as managing partners of WMC: Robert W. Doran, Duncan
M. McFarland and John R. Ryan. WMC and its predecessor organizations have
provided investment advisory services to investment companies since 1928 and to
investment counseling clients since 1960. Charles T. Freeman, Senior Vice
President and Partner of WMC, has served as portfolio manager of the Fund since
January, 1996.
Vanguard Windsor Fund pays WMC a basic fee at the end of each fiscal
quarter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to Vanguard Windsor Fund's average month-end net assets
managed by WMC (the "WMC Portfolio") for the quarter.
<TABLE>
<CAPTION>
NET ASSETS ANNUAL RATE
---------- -----------
<S> <C>
First $17.5 billion................................. 0.125%
Assets in excess of $17.5 billion of the WMC
Portfolio......................................... 0.100%
</TABLE>
The basic fee paid to WMC may be increased or decreased by applying an
adjustment formula based on investment performance of the WMC Portfolio. Such
formula provides for an increase or decrease in the basic fee paid to WMC each
quarter, depending upon the WMC Portfolio's investment performance for the
thirty-six months preceding the end of the quarter relative to the investment
record of the Standard and Poor's 500 Composite Stock Price Index (the "Index")
for the same period.
The Basic Fee, as provided above, shall be increased or decreased by
applying an incentive/penalty fee adjustment based on the investment performance
of the WMC Portfolio relative to the investment performance of the Index.
The following table sets forth the adjustment factors to the base advisory
fee payable by the Company to WMC under this investment advisory agreement:
For the first $17.5 billion of assets;
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VERSUS THE INDEX ADJUSTMENT*
---------------------------- ------------------
<S> <C>
Less than -12%................................... -0.67 X Basic Fee
Between -12% and -6%............................. -0.33 X Basic Fee
Between -6% and 6%............................... 0.00 X Basic Fee
Between 6% and 12%............................... +0.33 X Basic Fee
More than 12%.................................... +0.67 X Basic Fee
</TABLE>
For assets over $17.5 billion;
<TABLE>
<S> <C>
Less than -12%................................... -0.90 X Basic Fee
Between -12% and -6%............................. -0.45 X Basic Fee
Between -6% and 6%............................... 0.00 X Basic Fee
Between 6% and 12%............................... +0.45 X Basic Fee
More than 12%.................................... +0.90 X Basic Fee
</TABLE>
- ---------------
*For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period; provided,
however, that certain adjustments to the WMC Portfolio's average assets may be
made as necessary to reflect Windsor Fund's conversion to a multi-manager
structure on June 1, 1999.
B-14
<PAGE> 56
The above incentive/penalty fee will not be fully operable until the
quarter ending July 31, 1999. Until that date, a "blended" fee rate consisting
of varying percentages of (i) the performance adjustment based on the schedule
set forth above (the "new rate"), and (ii) the performance adjustment based on
the schedule set forth in Vanguard Windsor Fund's previous investment advisory
agreement with WMC (the "previous rate") shall be used as follows:
1) QUARTER ENDING JANUARY 31, 1997. The incentive/penalty fee was
calculated as the sum of 16.7% of the fee payable under the new rate
plus 83.3% of the fee payable under the previous rate.
2) QUARTER ENDING APRIL 30, 1997. The incentive/penalty fee was
calculated as the sum of 25% of the fee payable under the new rate plus
75% of the fee payable under the previous rate.
3) QUARTER ENDING JULY 31, 1997. The incentive/penalty fee was calculated
as the sum of 33% of the fee payable under the new rate plus 67% of the
fee payable under the previous rate.
4) QUARTER ENDING OCTOBER 31, 1997. The incentive/penalty fee was
calculated as the sum of 41.6% of the fee payable under the new rate
plus 58.4% of the fee payable under the previous rate.
5) QUARTER ENDING JANUARY 31, 1998. The incentive/penalty fee was
calculated as the sum of 50% of the fee payable under the new rate plus
50% of the fee payable under the previous rate.
6) QUARTER ENDING APRIL 30, 1998. The incentive/penalty fee was
calculated as the sum of 58.4% of the fee payable under the new rate
plus 41.6% of the fee payable under the previous rate.
7) QUARTER ENDING JULY 31, 1998. The incentive/penalty fee was calculated
as the sum of 67% of the fee payable under the new rate plus 33% of the
fee payable under the previous rate.
8) QUARTER ENDING OCTOBER 31, 1998. The incentive/penalty fee was
calculated as the sum of 75% of the fee payable under the new rate and
25% of the fee payable under the previous rate.
9) QUARTER ENDING JANUARY 31, 1999. The incentive/penalty fee shall be
calculated as the sum of 83.3% of the fee payable under the new rate
plus 16.7% of the fee payable under the previous rate.
10) QUARTER ENDING APRIL 30, 1999. The incentive/penalty fee shall be
calculated as the sum of 91.7% of the fee payable under the new rate
plus 8.3% of the fee payable under the previous rate.
11) QUARTER ENDING JULY 31, 1999. New rate fully operable.
- ---------------
(1) The previous incentive/penalty fee structure provided that the Basic Fee be
increased or decreased by an amount equal to .05% per annum (.0125 per
quarter) of the average month-end assets if the Fund's investment
performance for the 36 months preceding the end of the quarter was between 6
and 12 percentage points above or below, respectively, the investment record
of the Standard & Poor's 500 Composite Stock Index (the "Index") and .10%
per annum (.025 per quarter) of the average month-end assets of the Fund if
the Fund's investment performance for the 36 months preceding the end of the
quarter was twelve percentage points or more above or below, respectively,
the investment record of the Index.
For purposes of incentive/penalty adjustments, the investment performance
of The WMC Portfolio for any period is expressed as a percentage of "WMC
Portfolio Unit Value" at the beginning of the period. This percentage is equal
to the sum of: (i) the change in the "WMC Portfolio Unit Value" during the
period; (ii) the value of Vanguard Windsor Fund's cash distributions from The
WMC Portfolio's net investment income and realized net capital gains (whether
long-term or short-term) having an ex-dividend date occurring within the period;
and (iii) the unit value of capital gains taxes paid or accrued during the
period by Vanguard Windsor Fund for undistributed realized long-term capital
gains realized from the WMC Portfolio. The investment record of the S&P Index
for any period is expressed as a percentage of the S&P Index level at the
beginning of the period. This percentage is equal to the sum of (i) the change
in the level of the S&P Index during the period, and (ii) the value, computed
consistently with the S&P Index, of cash distributions having an ex-dividend
date occurring within the period made by companies whose securities comprise the
S&P Index.
In addition, certain adjustments to the investment performance of the WMC
Portfolio may be made as necessary to reflect Windsor Fund's conversion to a
multi-manager structure on June 1, 1999.
B-15
<PAGE> 57
SANFORD C. BERNSTEIN & CO., INC.
Sanford C. Bernstein & Co., Inc. ("Bernstein") manages a portion of the
assets of Vanguard Windsor Fund. Bernstein discharges its responsibilities
pursuant to an investment advisory agreement and is subject to the control of
the Officers and Trustees of the Fund.
The Fund pays Bernstein a basic fee at the end of each of the Fund's fiscal
quarters, calculated by applying a quarterly rate, based on the following annual
percentage rates, to the average month-end net assets of the Bernstein Portfolio
for the quarter:
.15% on the first $1 billion of net assets;
.14% on the next $2 billion of net assets;
.12% on the next $2 billion of net assets;
.10% on net assets in excess of $5 billion.
Subject to a transition rule described in the Agreement, the Basic Fee, as
provided above, will be increased or decreased by the amount of a Performance
Fee Adjustment ("Adjustment"). The Adjustment will be calculated as a percentage
of the Basic Fee and will change proportionately with the investment performance
of the Fund relative to the investment performance of the Russell 1000 Value
Index (the "Index") for the thirty-six month period ending with the applicable
quarter. The Adjustment apply as follows:
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH
PERFORMANCE OF BERNSTEIN PORTFOLIO PERFORMANCE FEE ADJUSTMENT
VERSUS THE INDEX AS A PERCENTAGE OF BASIC FEE*
- ---------------------------------- ------------------------------
<S> <C>
Trails by more than 9% -50%
Trails by 0 to 9% Linear decrease from 0 to -50%
Exceeds by 0 to 9% Linear increase from 0 to +50%
Exceeds by more than 9% +50%
</TABLE>
- ---------------
* The Adjustment represents a percentage increase or decrease to the Basic Fee
payable to the Adviser for the quarter.
TRANSITION RULE FOR CALCULATING ADVISER'S COMPENSATION. The Performance
Fee Adjustment will not be fully operable until June 1, 2002. Until that time,
the following transition rules will apply:
(a) JUNE 1, 1999 THROUGH MAY 31, 2000. The Adviser's compensation
will be the Basic Fee. No Performance Fee Adjustment will apply during this
period.
(b) JUNE 1, 2000 THROUGH JUNE 30, 2002. Beginning June 1, 2000, the
Performance Fee Adjustment will take effect on a progressive basis with
regards to the number of months elapsed between July 1, 1999 and the
quarter for which the Adviser's fee is being computed. During this period,
the Performance Fee Adjustment that has been determined under Section will
be multiplied by a fraction. The fraction will equal the number of months
elapsed since July 1, 1999 divided by thirty-six.
(c) ON AND AFTER JULY 1, 2002. Beginning July 1, 2002, the
Performance Fee Adjustment will be fully operable.
OTHER SPECIAL RULES RELATING TO ADVISER'S COMPENSATION. The following
special rules will also apply to the Adviser's compensation:
BERNSTEIN PORTFOLIO PERFORMANCE. The investment performance of the
Bernstein Portfolio for any period, expressed as a percentage of the
"Bernstein Portfolio unit value" at the beginning of such period, will be
the sum of: (i) the change in the Bernstein Portfolio unit value during
such period; (ii) the unit value of the Fund's cash distributions from the
Bernstein Portfolio's net investment income and realized net capital gains
(whether long-term or short-term) having an ex-dividend date occurring
within such period; and (iii) the unit value of capital gains taxes paid or
accrued during such period by the Fund for undistributed realized long-term
capital gains realized from the Bernstein Portfolio. For this purpose, the
unit value of distributions per share of realized capital gains, of
dividends per share paid from investment income and of capital gains taxes
per share
B-16
<PAGE> 58
reinvested in the Bernstein Portfolio at the unit value in effect at the
close of business on the record date for the payment of such distributions
and dividends and the date on which provision is made for such taxes, after
giving effect to such distributions, dividends and taxes.
"BERNSTEIN PORTFOLIO UNIT VALUE." The "Bernstein Portfolio unit
value" will be determined by dividing the total net assets of the Bernstein
Portfolio by a given number of units. The number of units in the Bernstein
Portfolio initially will equal to the total shares outstanding of the Fund
on June 1, 1999. Subsequently, as assets are added to or withdrawn from the
Bernstein Portfolio, the number of units of the Bernstein Portfolio will be
adjusted based on the unit value of the Bernstein Portfolio on the day such
changes are executed.
INDEX PERFORMANCE. The investment record of the Index for any period,
expressed as a percentage of the Index at the beginning of such period,
will be the sum of: (i) the change in the level of the Index during such
period, and (ii) the value, computed consistently with the Index of cash
distributions having an ex-dividend date occurring within such period made
by companies whose securities comprise the Index. For this purpose, cash
distributions on the securities which comprise the Index will be treated as
reinvested in the Index at least as frequently as the end of each calendar
quarter following the payment of the dividend.
During the fiscal years ended October 31, 1996, 1997, and 1998 Vanguard
Windsor Fund paid the following advisory fees:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Basic Fee........................................... $18,816,000 $23,502,000 $ 24,971,000
Increase or Decrease for Performance
Adjustment........................................ (4,417,000) (11,821,000) (15,501,000)
----------- ----------- ------------
Total.......................................... $14,399,000 $11,681,000 $ 9,470,000
=========== =========== ============
</TABLE>
VANGUARD WINDSOR II FUND
Vanguard Windsor II Fund employs a "multi-manager" approach utilizing four
investment advisers.
BARROW, HANLEY, MEWHINNEY & STRAUSS
Vanguard Windsor II Fund has entered into an investment advisory agreement
with Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHM&S") to manage a portion of
the equity allocation of Vanguard Windsor II Fund (currently approximately 73%).
Under this agreement, BHM&S manages the investment and reinvestment of the
designated assets and continuously reviews, supervises and administers the
investment program of Vanguard Windsor II Fund with respect to those assets.
BHM&S discharges its responsibilities subject to the control of the Officers and
Trustees of the Trust.
BHM&S is a Texas corporation controlled by the following officers of BHM&S:
James Purdy Barrow, Principal; Bryant Miller Hanley, Jr., President, Secretary
and Treasurer; Michael Christopher Mewhinney, Principal; and John Luke Strauss,
Principal.
Vanguard Windsor II Fund pays BHM&S a basic fee at the end of each fiscal
quarter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to the average month-end net assets of Vanguard Windsor II
Fund managed by BHM&S for the quarter:
<TABLE>
<CAPTION>
NET ASSETS ANNUAL RATE
---------- -----------
<S> <C>
First $200 million.................................. 0.300%
Next $300 million................................... 0.200%
Next $500 million................................... 0.150%
Over $1 billion..................................... 0.125%
</TABLE>
The "Fund's" payments to BHM&S under the above schedule are subject to an
incentive/penalty fee arrangement which compares the performance of the Trust's
assets managed by BHM&S with the performance of
B-17
<PAGE> 59
the Standard & Poor's/BARRA Value Index. This arrangement provides for the
following adjustments to BHM&S's basic fee:
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VERSUS THE INDEX ADJUSTMENT
---------------------------- -----------------
<S> <C>
Less than or equal to -9%.................... -0.25 X Basic Fee
Between -9% and -6%.......................... -0.15 X Basic Fee
Between -6% and 6%........................... 0 X Basic Fee
Between 6% and 9%............................ +0.15 X Basic Fee
More than 9%................................. +0.25 X Basic Fee
</TABLE>
- ---------------
* For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period.
The BARRA Value Index includes stocks in the Standard and Poor's 500
Composite Stock Price Index with lower than average ratios of market price to
book value. These types of stocks are often referred to as "value" stocks.
The investment performance of the portion of Vanguard Windsor II Fund's
assets managed by BHM&S (the "BHM&S Portfolio") for any period is expressed as a
percentage of the "BHM&S Portfolio Unit Value" at the beginning of such period.
This percentage is equal to the sum of: (i) the change in the BHM&S Portfolio
Unit Value during such period; (ii) the unit value of the Fund's cash
distributions from the BHM&S Portfolio's net investment income and realized net
capital gains (whether long-term or short-term) having an ex-dividend date
occurring within such period; and (iii) the unit value of capital gains taxes
paid or accrued during such period by Vanguard Windsor II Fund for undistributed
realized long-term capital gains realized from the BHM&S Portfolio.
The "BHM&S Portfolio Unit Value" will be determined by dividing the total
net assets of the BHM&S Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the BHM&S Portfolio was equal to
the total shares outstanding of Vanguard Windsor II Fund. After such initial
date, as assets are added to or withdrawn from the BHM&S Portfolio, the number
of units of the BHM&S Portfolio will be adjusted based on the unit value of the
BHM&S Portfolio on the day such changes are executed.
The investment record of the BARRA Value Index is calculated quarterly by
(i) multiplying the total return for the quarter (change in market price plus
dividends) of each stock included in the BARRA Value Index by its weighting in
the BARRA Value Index at the beginning of the quarter, and (ii) adding the
values discussed in (i). For any period, therefore, the investment record of the
BARRA Value Index will be the compounded quarterly returns of the BARRA Value
Index.
During the fiscal years ended October 31, 1996, 1997, and 1998, Vanguard
Windsor II Fund incurred advisory fees to BHM&S of approximately $11,475,528,
$16,925,953 (before a performance adjustment of $2,495,021), and $24,225,773
(before a performance adjustment of $3,887,915) respectively.
OTHER ADVISERS
On November 1, 1991, Vanguard Windsor II Fund added Equinox Capital
Management ("Equinox") and Tukman Capital Management ("Tukman") to manage the
investment and reinvestment of a portion of its equity allocation (approximately
10% each). Additionally, Vanguard's Core Management Group was added to manage
approximately 7% of the Vanguard Windsor II Fund's equity allocation. Equinox,
Tukman and Vanguard's Core Management Group discharge their respective
responsibilities subject to the control of the Trustees and Officers of the
Trust.
EQUINOX
Equinox is a Delaware corporation controlled by the following officers of
Equinox: Ronald J. Ulrich, President and Director; Wendy D. Lee, Managing
Director; David E. Walker, Principal; Laura Starr, Vice President; Jacqueline A.
Williams, Vice President; Mark W. Watson, Vice President; and Kenneth J. Doerr,
Vice President.
Under the terms of an investment advisory agreement, Vanguard Windsor II
Fund pays Equinox a basic fee at the end of each fiscal quarter, calculated by
applying a quarterly rate, based on the following annual percentage
B-18
<PAGE> 60
rates, to the portion of Vanguard Windsor II Fund's average month-end net assets
managed by Equinox for the quarter.
<TABLE>
<CAPTION>
NET ASSETS ANNUAL RATE
---------- -----------
<S> <C>
First $400 million.................................. .200%
Next $600 million................................... .150%
Next $1 billion..................................... .125%
Assets in excess of $2 billion...................... .100%
</TABLE>
The basic fee paid to Equinox may be increased or decreased by applying an
adjustment formula based on the investment performance of the portion of
Vanguard Windsor II Fund's assets managed by Equinox (the "Equinox Portfolio")
relative to the investment of the Russell 1000 Value Index. Such formula
provides for an increase or decrease in the basic fee paid to Equinox each
quarter, depending upon the Equinox Portfolio's investment performance for the
thirty-six months preceding the end of the quarter.
The following table sets forth the adjustment factors to the base advisory
fee payable by the Equinox Portfolio to Equinox under this investment advisory
agreement:
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE FEE
VERSUS THE INDEX ADJUSTMENT*
------------------- ------------------
<S> <C>
Less than -9%.................................... -0.50 X Basic Fee
Between -9% and -4.5%............................ -0.25 X Basic Fee
Between -4.5% and 4.5%........................... 0 X Basic Fee
Between 4.5% and 9%.............................. +0.25 X Basic Fee
More than 9%..................................... +0.50 X Basic Fee
</TABLE>
- ---------------
* For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period.
The above incentive/penalty fee will not be fully operable until the
quarter ending July 31, 1999. Until that date, a "blended fee rate" consisting
of varying percentages of (i) the performance adjustment based on the schedule
set forth above (the "new rate"), and (ii) the performance adjustment based on
the schedule set forth in Vanguard Windsor II Fund's previous investment
advisory agreement with Equinox (the "previous rate") shall be used as follows:
1) QUARTER ENDING OCTOBER 31, 1996. The incentive/penalty fee was
calculated as the sum of 8.3% of the fee payable under the new rate plus 91.7%
of the fee payable under the previous rate.
2) QUARTER ENDING JANUARY 31, 1997. The incentive/penalty fee was
calculated as the sum of 16.7% of the fee payable under the new rate plus 83.3%
of the fee payable under the previous rate.
3) QUARTER ENDING APRIL 30, 1997. The incentive/penalty fee was
calculated as the sum of 25% of the fee payable under the new rate plus 75% of
the fee payable under the previous rate.
4) QUARTER ENDING JULY 31, 1997. The incentive/penalty fee was calculated
as the sum of 33% of the fee payable under the new rate plus 67% of the fee
payable under the previous rate.
5) QUARTER ENDING OCTOBER 31, 1997. The incentive/penalty fee was
calculated as the sum of 41.6% of the fee payable under the new rate plus 58.4%
of the fee payable under the previous rate.
6) QUARTER ENDING JANUARY 31, 1998. The incentive/penalty fee was
calculated as the sum of 50% of the fee payable under the new rate plus 50% of
the fee payable under the previous rate.
7) QUARTER ENDING APRIL 30, 1998. The incentive/penalty fee was
calculated as the sum of 58.4% of the fee payable under the new rate plus 41.6%
of the fee payable under the previous rate.
8) QUARTER ENDING JULY 31, 1998. The incentive/penalty fee was calculated
as the sum of 67% of the fee payable under the new rate plus 33% of the fee
payable under the previous rate.
9) QUARTER ENDING OCTOBER 31, 1998. The incentive/penalty fee was
calculated as the sum of 75% of the fee payable under the new rate plus 25% of
the fee payable under the previous rate.
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<PAGE> 61
10) QUARTER ENDING JANUARY 31, 1999. The incentive/penalty fee was
calculated as the sum of 83.3% of the fee payable under the new rate plus 16.7%
of the fee payable under the previous rate.
11) QUARTER ENDING APRIL 30, 1999. The incentive/penalty fee was
calculated as the sum of 91.7% of the fee payable under the new rate plus 8.3%
of the fee payable under the previous rate.
12) QUARTER ENDING JULY 31, 1999. New rate fully operable.
- ---------------
The previous incentive/penalty fee structure provided that the Basic Fee be
increased or decreased by an amount equal to .05% per annum (.0125 per quarter)
of the average month-end assets if the Fund's investment performance for the 36
months preceding the end of the quarter was between 6 and 12 percentage points
above or below, respectively, the investment record of the Standard & Poor's 500
Composite Stock Index (the "Index") and .10% per annum (.025 per quarter) of the
average month-end assets of the Fund if the Fund's investment performance for
the 36 months preceding the end of the quarter was twelve percentage points or
more above or below, respectively, the investment record of the Index.
The investment performance of the Equinox Portfolio for any period is
expressed as a percentage of the "Equinox Portfolio Unit Value" at the beginning
of such period. This percentage is equal to the sum of: (i) the change in the
Equinox Portfolio Unit Value during such period; (ii) the unit value of Vanguard
Windsor II Fund's cash distributions from the Equinox Portfolio net investment
income and realized net capital gains (whether long-term or short-term) having
an ex-dividend date occurring within such period; and (iii) the unit value of
capital gains taxes paid or accrued during such period by Vanguard Windsor II
Fund for undistributed realized long-term capital gains realized from the
Equinox Portfolio.
The "Equinox Portfolio Unit Value" will be determined by dividing the total
net assets of the Equinox Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the Equinox Portfolio was equal to
the total shares outstanding of Vanguard Windsor II Fund. After such initial
date, as assets are added to or withdrawn from the Equinox Portfolio, the number
of units of the Equinox Portfolio will be adjusted based on the unit value of
the Equinox Portfolio on the day such changes are executed.
The investment record of the Russell 1000 Value Index will be calculated
quarterly by (i) multiplying the total return for the quarter (change in the
market price plus dividends) of each stock included in the Russell 1000 Value
Index by its weighting in the Russell 1000 Value Index at the beginning of the
quarter, and (ii) adding the values discussed in (i). For any period, therefore,
the investment record of the Russell 1000 Value Index will be the compounded
quarterly returns of the Russell 1000 Value Index.
During the fiscal years ended October 31, 1996, 1997 and 1998, Vanguard
Windsor II Fund incurred advisory fees to Equinox of approximately $1,980,458
(before a performance adjustment of $4,747), $2,791,342 (before a performance
adjustment of $408,295), and $3,945,052 (before a performance adjustment of
$868,234), respectively. These fees were paid under a previous fee schedule that
provided for a higher rate of fees.
TUKMAN
Tukman is a Delaware corporation controlled by the following officers of
Tukman: Melvin T. Tukman, President and Director, and Daniel L. Grossman, Vice
President.
Under the terms of an investment advisory agreement, the Fund pays Tukman a
basic fee at the end of each fiscal quarter, calculated by applying a quarterly
rate, based on the following annual percentage rates, to the average month-end
assets of the portion of Vanguard Windsor II Fund's assets managed by Tukman:
<TABLE>
<CAPTION>
NET ASSETS ANNUAL RATE
---------- -----------
<S> <C>
First $25 million................................... 0.400%
Next $125 million................................... 0.350%
Next $350 million................................... 0.250%
Next $500 million................................... 0.200%
Over $1 billion..................................... 0.150%
</TABLE>
The Trust's payments to Tukman under the above schedule are subject to an
incentive/penalty fee arrangement which compares the performance of the Fund
assets managed by Tukman with the performance of the
B-20
<PAGE> 62
Standard & Poor's 500 Composite Stock Price Index. This arrangement provides for
the following adjustments to Tukman's basic fee:
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VERSUS THE INDEX ADJUSTMENT
---------------------------- -----------------
<S> <C>
Less than or equal to -12%................... -0.50 x Basic Fee
Between -12% and -6%......................... -0.25 x Basic Fee
Between -6% and 6%........................... 0 x Basic Fee
Between 6% and 12%........................... +0.25 x Basic Fee
More than 12%................................ +0.50 x Basic Fee
</TABLE>
- ---------------
* For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period.
The investment performance of the portion of Vanguard Windsor II Fund's
assets managed by Tukman (the "Tukman Portfolio") for any period is expressed as
a percentage of the "Tukman Portfolio Unit Value" at the beginning of such
period. The percentage is equal to the sum of: (i) the change in the Tukman
Portfolio Unit Value during such period; (ii) the unit value of Vanguard Windsor
II Fund's cash distributions from the Tukman Portfolio net investment income and
realized net capital gains (whether long-term or short-term) having an
ex-dividend date occurring within such period; and (iii) the unit value of
capital gains taxes paid or accrued during such period by Vanguard Windsor II
Fund for undistributed realized long-term capital gains realized from the Tukman
Portfolio.
The "Tukman Portfolio Unit Value" will be determined by dividing the total
net assets of the Tukman Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the Tukman Portfolio was equal to
the total shares outstanding of Vanguard Windsor II Fund. After such initial
date, as assets are added to or withdrawn from the Tukman Portfolio, the number
of units of the Tukman Portfolio will be adjusted based on the unit value of the
Tukman Portfolio on the day such changes are executed.
The investment record of the S&P 500 will be calculated quarterly by (i)
multiplying the total return for the quarter (change in market price plus
dividends) of each stock included in the S&P 500 by its weighting in the S&P 500
at the beginning of the quarter, and (ii) adding the values discussed in (i).
For any period, therefore, the investment record of the S&P 500 will be the
compounded quarterly returns of the S&P 500.
During the fiscal years ended October 31, 1996, 1997, and 1998, Vanguard
Windsor II Fund incurred advisory fees to Tukman of approximately $2,699,458
(before a performance adjustment of $930,724), $3,622,904 (before a performance
adjustment of $785,658), and $5,126,168 (before a performance adjustment of
$992,760), respectively.
VANGUARD'S CORE MANAGEMENT GROUP
Since November 1, 1991, Vanguard's Core Management Group has provided
investment advisory services on an at-cost basis with respect to a portion of
Vanguard Windsor II Fund's equity allocation (currently approximately 5%). The
Core Management Group also provides investment advisory services to several
other Vanguard Trusts. The quantitative approach used by Vanguard's Core
Management Department is designed to generate highly predictable results
relative to a benchmark of large and medium capitalization "value" stocks. A
portfolio is constructed from attractively priced "value" stocks using an
optimizer to assure that the characteristics of the portfolio are similar to
that of the benchmark. The Core Management Group is supervised by the Officers
of the Trust.
DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS
Vanguard Windsor Fund's present agreement with WMC and Vanguard Windsor II
Fund's present agreements with BHM&S, Equinox and Tukman are renewable for
successive one-year periods if specifically approved by a vote of the Company's
Board of Trustees at a meeting called for the purpose of considering such
approval. The Board's approval must include the affirmative votes of a majority
of the Trustees who are neither parties to the contract or "interested persons"
of such parties (as defined in the Investment Company Act of 1940).
B-21
<PAGE> 63
Each investment advisory agreement is automatically terminated if assigned,
and may be terminated without penalty at any time (1) by majority vote of either
the Board of Trustees or the Company's outstanding shares upon 60 days' written
notice to the adviser, or (2) by the adviser upon 90 days' written notice to the
Company.
The Company's Board of Trustees may, without the approval of shareholders,
provide for:
(A) The employment of a new investment adviser pursuant to the terms of a
new advisory agreement, either as a replacement for an existing adviser
or as an additional adviser;
(B) A change in the terms of an advisory agreement; or
(C) The continued employment of an existing adviser, on the same advisory
contract terms, where a contract has been assigned because of a change
in control of the adviser.
Any such change will be communicated to shareholders in writing.
MORE INFORMATION ON ADVISERS' INCENTIVE/PENALTY FEES
In April 1972, the Commission issued Release No. 7113 (the "Release") under
the Investment Company Act of 1940 to call the attention of directors and
investment advisers to certain factors which must be considered in connection
with investment company incentive fee arrangements. One of these factors is to
"avoid basing significant fee adjustments upon random or insignificant
differences" between the investment performance of a fund and that of the
particular index with which it is being compared. The Release provides that
"preliminary studies (of the SEC staff) indicate that as a 'rule of thumb' the
performance difference should be at least (+ or -)10 percentage points" annually
before the maximum performance adjustment may be made. However, the Release also
states that "because of the preliminary nature of these studies, the Commission
is not recommending, at this time, that any particular performance difference
exist before the maximum fee adjustment may be made." The Release concludes that
the trustees of a trust "should satisfy themselves that the maximum performance
adjustment will be made only for performance differences that can reasonably be
considered significant." The Board of Trustees has fully considered the Release
and believes that the performance adjustments as included in the agreements with
WMC, BHM&S, Equinox and Tukman are entirely appropriate, although not within the
(+ or -)10 percentage points per year range suggested in the Release. Under the
Trust's investment advisory agreements, the maximum performance adjustments are
made at a difference of (+ or -)12 and (+ or -)6 percentage points from the
performance of the respective index over a thirty-six month period, which would
effectively be the equivalent of approximately (+ or -)4 and (+ or -)2
percentage points difference per year.
PORTFOLIO TRANSACTIONS
WMC, Bernstein, BHM&S, Equinox, Tukman and Vanguard's Core Management Group
are authorized to (with the approval of the Board of Trustees) select the
brokers or dealers that will execute the purchases and sales of portfolio
securities for the respective Fund of the Trust. The investment advisory
agreements direct the advisers to use their best efforts to obtain the best
available price and most favorable execution as to all transactions. Each
investment adviser has undertaken to execute each investment transaction at a
price and commission which provides the most favorable total cost or proceeds
reasonably obtainable under the circumstances.
In placing portfolio transactions, each investment adviser will use its
best judgment to choose the broker most capable of providing the brokerage
services necessary to obtain best available price and most favorable execution.
The full range and quality of brokerage services available will be considered in
making these determinations. In those instances where it is reasonably
determined that more than one broker can offer the brokerage services needed to
obtain the best available price and most favorable execution, consideration may
be given to those brokers which supply investment research and statistical
information and provide other services in addition to execution services to the
Fund and/or the investment adviser. Each investment adviser considers such
information useful in the performance of its obligations under the agreement,
but is unable to determine the amount by which such services may reduce its
expenses.
The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Board of Trustees, each investment adviser may cause
B-22
<PAGE> 64
the Fund to pay a broker-dealer which furnishes brokerage and research services
a higher commission than that which might be charged by another broker-dealer
for effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the adviser to the Trust and the other Trusts in the Group.
Currently, it is the Trust's policy that each investment adviser may at
times pay higher commissions in recognition of brokerage services felt necessary
for the achievement of better execution of certain securities transactions that
otherwise might not be available. An investment adviser will only pay such
higher commissions if it believes this to be in the best interest of the Fund.
Some brokers or dealers who may receive such higher commissions in recognition
of brokerage services related to execution of securities transactions are also
providers of research information to an investment adviser and/or the Trust.
However, the investment advisers have informed the Trust that they generally
will not pay higher commission rates specifically for the purpose of obtaining
research services.
During the last three fiscal years, the Funds paid the following in
brokerage commissions.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FUND OCTOBER 31, 1996 OCTOBER 31, 1997 OCTOBER 31, 1998
---- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Vanguard Windsor Fund.................................. $14,156,050 $28,780,109 $27,915,402
Vanguard Windsor II Fund............................... $10,653,330 $15,272,207 $21,836,954
</TABLE>
Some securities considered for investment by a Fund of the Trust may also
be appropriate for the other Fund and for other Trusts and/or clients served by
the investment adviser. If purchase or sale of securities consistent with the
investment policies of the Fund and one or more of these other Trusts or clients
served by the investment adviser are considered at or about the same time,
transactions in such securities will be allocated among the several Trusts and
clients in a manner deemed equitable by the investment adviser.
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member trusts of The Vanguard Group of Investment Companies.
Each of the investment company members of The Vanguard Group, including
Vanguard Windsor Fund and Vanguard Windsor II Fund, may from time to time use
one or more of the following unmanaged indices for comparative performance
purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- includes stocks selected
by Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.
STANDARD AND POOR'S 500/BARRA VALUE INDEX -- consists of the stocks in the
Standard and Poor's 500 Composite Stock Price Index ("S&P 500") with the lowest
price-to-book ratios, comprising 50% of the market capitalization of the S&P
500.
STANDARD & POOR'S MIDCAP 400 INDEX -- is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX -- contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX -- contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX -- consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 EQUITY INDEX -- consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
B-23
<PAGE> 65
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, Asia, and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN LONG-TERM TREASURY BOND INDEX -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX -- consists of over 4,500 U.S.
Treasury Agency and investment grade corporate bonds.
LEHMAN CORPORATE (Baa) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
BOND BUYER MUNICIPAL BOND INDEX -- is a yield index on current coupon high-grade
general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield for four high-grade, noncallable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB or better with maturities between
1 and 5 years. The index has a market value of over $1.6 trillion.
B-24
<PAGE> 66
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $700 billion.
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market weighted
index that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB- or better with maturities greater than 10 years. The index
has a market value of over $900 billion.
LIPPER BALANCED FUND AVERAGE -- an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
LIPPER GENERAL EQUITY FUND AVERAGE -- an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
LIPPER FIXED INCOME FUND AVERAGE -- an industry benchmark of average fixed
income funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
B-25
<PAGE> 67
FINANCIAL STATEMENTS
The Trust's Financial Statements for the year ended October 31, 1998,
including the financial highlights for each of the five fiscal years in the
period ended October 31, 1998, appearing in the Vanguard Windsor Fund and
Vanguard Windsor II Fund 1998 Annual Reports to Shareholders, and the reports
thereon of PricewaterhouseCoopers LLP, independent accountants, also appearing
therein, are incorporated by reference in this Statement of Additional
Information. For a more complete discussion of the performance, please see the
Trust's Annual Report to Shareholders, which may be obtained without charge.
B-26
