<PAGE> 1
VANGUARD
WINDSOR FUND
[PHOTO]
SEMIANNUAL
REPORT
APRIL 30, 1999
[THE VANGUARD GROUP LOGO]
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AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 8,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August 1,
1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto-- "Leading the way"--serves as a guiding principle
for our company.
- - The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped to
shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with clients;
and a focus on long-term investing. To our great regret, Mr. Morgan died on
September 2, 1998.
- - The 70th anniversary, on December 28, 1998, of the incorporation of Vanguard
Wellington Fund. It is the nation's oldest balanced mutual fund, and one of
only a handful of funds created in the 1920s that are still in operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
[GRAPHIC]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
4
ADVISER'S REPORT
6
PERFORMANCE SUMMARY
8
FUND PROFILE
9
FINANCIAL STATEMENTS
11
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman
The U.S. stock market continued its vigorous advance during the six months ended
April 30, 1999, the first half of Vanguard Windsor Fund's 1999 fiscal year.
After continuing to favor growth stocks during the first half of the period, the
market turned to value stocks during the second half, and Windsor Fund staged a
remarkable resurgence. When our semiannual period ended, Windsor had turned in a
return of +22.0%, more than 3 percentage points ahead of the average value
(growth and income) mutual fund and just a bit below the redoubtable Standard &
Poor's 500 Composite Stock Price Index.
<TABLE>
<CAPTION>
- --------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 1999
- --------------------------------------------------------
<S> <C>
Vanguard Windsor Fund +22.0%
- --------------------------------------------------------
Average Value Fund +18.8%
- --------------------------------------------------------
S&P 500 Index +22.3%
- --------------------------------------------------------
</TABLE>
The adjacent table compares Windsor's total return (capital change plus
reinvested dividends) for the six months with those of the average value mutual
fund and the S&P 500 Index, which is dominated by large-capitalization
stocks.The fund's return is based on an increase in net asset value from $16.34
per share on October 31, 1998, to $18.25 per share on April 30, 1999, adjusted
for a dividend of $0.13 per share paid from net investment income and a
distribution of $1.23 per share paid from net realized capital gains. Both
payments were made on December 21, 1998.
THE PERIOD IN REVIEW
A remarkable domestic economic environment--in which rapid growth in business
activity and high employment coexisted with tame inflation--set the stage for
the U.S. stock market's surge during the six months ended April 30. The overall
stock market, as measured by the Wilshire 5000 Equity Index, gained +22.8%, just
ahead of the best-known benchmark for large-cap stocks, the S&P 500 Index. In
contrast to the previous year, when growth stocks far outperformed value stocks,
returns from these segments of the S&P 500 Index during the half-year were
similar: +22.6% for growth stocks and +21.7% for value stocks. Large growth
stocks got off to a strong start, earning a return that was about twice that of
value stocks during the first three months of the half-year. However, the story
was much different from February through April, when value stocks earned +9.5%
while growth stocks returned just +0.5%.
The strength of the economy's expansion was worrisome to bond investors,
who are ever-vigilant for signs that inflation may accelerate. Inflation is the
bondholder's bane because it erodes the value of future interest and principal
payments. (Inflation also erodes the value of future stock dividends and
earnings, but stockholders, unlike bondholders, can hope to benefit if higher
prices for goods and services also translate into higher corporate profits.)
Interest rates rose moderately during the period, with the yield of the
benchmark 30-year U.S. Treasury bond ending the half-year at 5.66%, 50 basis
points above the
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bond's 5.16% yield at the beginning of the period. As interest rates rose, bond
prices declined, of course. During the half-year, these price declines shaved
2.3 percentage points from the return of the Lehman Brothers Aggregate Bond
Index, offsetting most of its interest income and resulting in a total return of
+0.7%.
PERFORMANCE OVERVIEW
Windsor Fund's +22.0% return was quite close to the +22.3% return of the S&P 500
Index. But your fund and the index arrived at the same location by very
different routes. Windsor's return trailed that of the index by 13.1 percentage
points after three months of our fiscal year, but outpaced it by nearly 13
percentage points in the final three months. The key to the turnaround was a
sudden shift in the market's attention from large-cap growth stocks--whose
valuations had reached stratospheric levels--toward such downtrodden cyclical
groups as the chemical, paper, and metals manufacturers in the materials &
processing sector.
Cyclical stocks--which make up a significant portion of Windsor Fund's
holdings--got a boost from strong U.S. economic growth and signs that economic
troubles abroad may be easing. In addition, many energy stocks benefited from
higher oil prices, which were spurred by oil-producing nations' efforts to
restrain their overall output. Nearly 20% of Windsor's stock holdings during the
period were in stocks of materials & processing companies, more than four times
that sector's weighting in the S&P 500. Almost all of these holdings' +26%
return came during the second quarter.
Overall, we trailed the index slightly because our stock selections in
the energy-related and financial-services sectors underperformed, more than
offsetting strong returns from our holdings in the utilities, producer-durables,
and auto & transportation groups.
The sudden swing in market leadership from growth stocks to value stocks
such as the cyclicals drove home a point we have made regularly: Returns from
growth and value stocks often diverge, but over long periods they have been
similar. It's too early to say whether the swing toward value stocks will endure
for a significant period. But Windsor Fund's emphasis on these stocks--typically
out-of-favor issues with relatively low price/earnings ratios--will endure.
As you know, we recently decided to add a second investment adviser,
Sanford C. Bernstein & Co., to manage a portion of the fund's assets. Bernstein
and our lead adviser, Wellington Management Company, will select stocks
independently of each other, using their own research and methodologies. But
both of these respected firms are value-oriented investment managers. As we said
in our recent letter to Windsor Fund shareholders, we believe that the addition
of a second adviser, by increasing the fund's diversification without watering
down its investment style, will prove beneficial to our shareholders. The
addition of a second adviser has the added benefit of increasing Windsor Fund's
capacity, which allows us to remove limitations on investments from current
shareholders and to reopen the fund to new accounts, effective June 1.
IN SUMMARY
During the semiannual period, the stock market once again demonstrated its
unpredictability. Price fluctuations were substantial--both for individual
stocks and for broader sectors of the market. And, just as market commentators
began to question whether value stocks were fated to perpetually underperform
glamorous growth issues, the value sectors bolted from the back of the pack to
the front.
2
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These events reaffirm the wisdom of holding a broadly diversified
portfolio comprising growth and value stock funds as well as bond funds and
money market funds. Each investor's mix of assets should reflect his or her
personal investment goals, time horizon, and tolerance for the ever-present
risks of investing. Once such a program is in place, we believe that the
soundest strategy is sticking with it--"staying the course."
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
May 13, 1999
3
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THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 1999
[PHOTO]
Global stock markets chalked up solid gains during the six months
ended April 30, 1999, aided by the efforts of central banks around the world to
ease monetary policy and lower short-term interest rates.
The remarkably strong U.S. economy helped out by playing locomotive for
the world's economies, soaking up record volumes of imported goods. Indeed, the
United States was the only major nation whose policymakers and bondholders had
to ponder whether growth was too rapid. Concern about a potential surge in
inflation was one reason that interest rates rose modestly and bond prices
generally slipped in the United States.
U.S. STOCK MARKETS
Stock prices soared during the half-year, reflecting both the domestic economy's
strength and the investing public's confidence in future growth of the economy
and corporate profits. The overall market, as measured by the Wilshire 5000
Equity Index, rose 22.8% during the six months ended April 30, while the S&P 500
Index, a proxy for large-capitalization stocks, gained 22.3%.
The midsummer shock of 1998--when the overall stock market fell by more
than 20%--seemed to be quickly forgotten by investors. Most apparently
overlooked the fact that corporate earnings were flat to slightly lower,
focusing instead on the potential for future earnings. Investors' confidence was
bolstered by the market's quick rebound from its summer stumble and by a general
easing of monetary policy by the world's central banks. The Federal Reserve
Board made three separate quarter-percentage-point reductions in short-term
interest rates during autumn 1998. Central banks in Europe, Asia, and Latin
America also cut rates. These actions lessened fears that the major economies
would be dragged down by the lingering effects of the economic crisis that
struck emerging markets beginning in mid-1997.
<TABLE>
<CAPTION>
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TOTAL RETURNS
PERIODS ENDED APRIL 30, 1999
----------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 22.3% 21.8% 26.9%
Russell 2000 Index 15.2 -9.3 13.0
Wilshire 5000 Index 22.8 17.0 24.5
MSCI EAFE Index 15.4 9.8 9.0
- ----------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.7% 6.3% 8.0%
Lehman 10-Year Municipal Bond Index 1.5 7.1 7.5
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.8 5.2
- ----------------------------------------------------------------------------
OTHER
Consumer Price Index 1.3% 2.3% 2.4%
- ----------------------------------------------------------------------------
</TABLE>
*Annualized.
U.S. consumers demonstrated their confidence in economic conditions by
spending freely, boosting sales of cars, houses, and goods in stores. And why
shouldn't they have been happy? U.S. gross domestic product grew by an annual
rate of 4.1% in the first three months of 1999, and the nation's unemployment
rate closed the period at 4.3%.
Improved prospects for global growth were a key factor in the continuing
advance of technology stocks (up nearly 42% for the six months) and the
resurgence of some value-stock sectors, such as materials & processing (up 27%)
and energy (integrated oil
4
<PAGE> 7
companies rose 22%; "other energy" stocks gained 23%). Retailers and other
companies in the consumer-discretionary sector gained 34%, reflecting the
strength of consumer spending. Not all consumer-related stocks benefited,
however. Consumer-staples companies, locked in tough price competition and still
feeling the effects of falling profits from overseas operations, were the
worst-performing group in the half-year, down 3%.
U.S. BOND MARKETS
For bond investors, the powerful economic expansion evident during the
November-April period was too much of a good thing. Economists confessed to
puzzlement that the expansion was not triggering an acceleration in wages or
consumer prices. But with oil prices rising, U.S. economic growth expanding at a
4.1% annual pace, and unemployment at 4.3% of the labor force, the lowest point
since February 1970, bond market participants figured that inflation was bound
to accelerate eventually. (This view gained credence shortly after the period's
end, when the Consumer Price Index was reported to have risen 0.7% in April, the
biggest monthly increase in eight years.)
Despite the Fed's actions to cut short-term interest rates, yields on
U.S. Treasury issues increased over the six months by one-half to three-quarters
of a percentage point. The yield of the 30-year Treasury bond rose 50 basis
points, to 5.66% on April 30 from 5.16% six months earlier. The yield of the
10-year Treasury rose to 5.35% from 4.61%. Very short-term rates didn't rise as
far: Yields on 3-month T-bills rose 22 basis points to 4.54% on April 30. Bond
prices, which move in the opposite direction from interest rates, fell. The
Lehman Brothers Aggregate Bond Index, a benchmark for investment-grade taxable
bonds, earned just 0.7%, as falling prices offset most of the index's 3.0%
interest income for the six-month period.
Municipal bonds suffered only slight price declines and outperformed
Treasury securities--a turnaround from the previous six months, when Treasuries
were bid up by investors seeking a safe haven during the summer 1998 market
turmoil.
Not all bond prices fell during the half-year. For high-yield issues, the
strong economy was a tonic. These bonds had suffered considerably during the
market turmoil of summer 1998, as investors feared a global economic downturn
would result in higher defaults by weaker companies. But when economic growth
turned out to be stronger than expected, high-yield bond prices rebounded,
augmenting the bonds' interest income. The Lehman High Yield Index returned 8.3%
during the half-year.
INTERNATIONAL STOCK MARKETS
Overseas stock markets posted gains during the period, despite lingering
economic weakness in Asia and sluggish growth in most of Europe's developed
economies. Crises in some key developing markets, including those of Brazil and
Russia, appeared to be easing as the semiannual period drew to a close. Overall,
the developed markets outside the United States gained 15.4% in U.S.-dollar
terms, as measured by the Morgan Stanley Capital International Europe,
Australasia, Far East (EAFE) Index. Stocks in Europe and Asia were boosted by
mergers and takeover activity and by signs that corporations were focusing more
intently on increasing shareholder value.
The biggest gains were in the Pacific region and in emerging markets, the
bourses that had suffered the biggest declines during 1997 and 1998. The Pacific
region gained 27.4%, despite a continuing recession in Japan, while the MSCI
Select Emerging Markets Free Index rose 30.8%. European stocks were up nearly
20% in local currencies, but these gains were cut to 10.9% for U.S. investors
because of the dollar's gains against the euro, a common currency adopted by 11
nations, and other European currencies.
5
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ADVISER'S REPORT
[PHOTO]
For the first six months of our new fiscal year, we were about even with the S&P
500 Index, 22.0% versus 22.3%, and well ahead of our two major peer group
benchmarks--the Lipper growth and income average and Morningstar large cap
value, whose total returns were 18.4% (excluding S&P 500 Index funds) and 17.4%,
respectively.
The half was really two distinctly different quarters. For the three
months ended January, we were well behind the S&P 500, 3.8% versus 16.9%, but
for the three months ended April, we were well ahead, 17.5% versus 4.7%. In the
January quarter, large-cap growth stocks dominated the market, and value styles
such as ours were at a significant disadvantage. However, a turn from growth to
value started in February and March, and this "rotation" became very intense in
April. As a footnote, our April quarter turned out to be the best quarter,
relative to the S&P 500 Index, in the fund's 40-year history.
We have been saying for some time, e.g. last year's Windsor Fund annual
report, that we were pointed to a different kind of market--one that would be
less narrowly and nervously focused on a short list of household name stocks,
one that would be more receptive to other kinds of stocks. We went on to argue
that this would occur, as in past market cycles, when folks got more comfortable
with the economic background--in this day and age, the relevant economy being
the global economy. In other words, we have been predicting a classic inflection
point in investor sentiment. Further, we were very confident that once we got
this turn to a broader market, we would fully participate, because our portfolio
was "working," in a fundamental sense, and was very cheap.
This turn appears now to have occurred in our April quarter. By the end
of January, it was clear that the Brazil crisis would not be as bad as feared,
and that Brazil was probably the last shoe to drop in the series of financial
and economic crises that rolled around the world beginning in October 1997.
Signs of improvement in non-Japan Asia have started to abound, Japan has
bottomed, Latin America's recession looks short and shallow, Europe should come
out of its inventory correction soon, and of course the U.S. economy is booming.
In short, the contrary model that we were talking about last fall, a recovering
world in 1999, and world GDP back on a normal 3% growth track next year, is now
becoming consensus thinking.
The stock market, taking its cue from all this, has in fact broadened in
the last three months, as we expected it would, and our portfolio has
participated, in spades. Our energy and other commodity cyclicals, some 30% of
the fund, and the obvious beneficiary of everybody getting more comfortable with
the world, led the way, up generally 25%-50% during the quarter. But we have
also seen real signs of life in other "value" stocks we own that have been
underperforming despite solid fundamentals, e.g. REITs, HMOs and
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<PAGE> 9
our hospital stocks. Citigroup, our largest holding, at 8% of the fund, was up
34% during the April quarter. In short, our portfolio did well in the April
quarter across a broad front.
These good absolute returns were only part of the explanation for our
strong relative performance in the second quarter. We were also helped by our
sharp underweighting in large-cap growth stocks, many of which languished during
the quarter. We don't own a share of large-cap technology, pharmaceutical, or
consumer nondurable stocks--they are all too rich for our blood at this time.
Interestingly, we outperformed other value funds during the quarter by nearly as
much as the S&P 500 Index. It is surprising that other value funds did not
outperform the S&P 500 more decisively in this period, given the rotation from
growth to value that was occurring. We suspect that there is a fair sprinkling
of growth stocks in some of these portfolios, and this dragged down their
results. In other words, our strict adherence to our value approach, which hurt
us last year, helped us in the April quarter, not only versus the market but
also versus other value funds.
For the calendar year 1999 to date, through April 30, we were over 8
percentage points ahead of the S&P 500, a little more than that ahead of the
Lipper growth and income average and Morningstar large value, and second among
the 30 largest equity funds.
Will the rotation from growth to value continue? It's hard to say. If the
evidence that the world economy is getting back on track continues to mount, the
rotation is likely to continue. In any event, we are confident that the
large-cap growth stocks, with their still very rich valuations relative to the
market, are unlikely to repeat the huge outperformance of stocks in general that
made our life so difficult in late 1997 and throughout 1998.
In summary, it feels like the stock market is now more of a level playing
field, and we can now do our opportunistic, bargain-hunting "thing" and have our
successes show in relative performance as they occur, instead of seeing them
washed away in a sea of large-cap growth domination. Historically, it is in such
broad markets that Windsor shines.
Charles T. Freeman, Portfolio Manager
Wellington Management Company, LLP
May 17, 1999
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by emphasizing common stocks that are generally misunderstood, out of favor, or
undervalued by fundamental measures such as price/earnings ratio or dividend
yield. The adviser will concentrate a large portion of the Fund's assets in
those securities it believes offer the best return potential.
7
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PERFORMANCE SUMMARY
WINDSOR FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely, so an investment in the fund could
lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: OCTOBER 31, 1978-APRIL 30, 1999
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WINDSOR FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1979 13.5% 6.0% 19.5% 15.3%
1980 17.2 7.0 24.2 32.1
1981 11.1 6.9 18.0 0.6
1982 14.2 7.0 21.2 16.3
1983 25.3 7.3 32.6 27.8
1984 9.6 6.9 16.5 6.3
1985 16.6 6.7 23.3 19.4
1986 22.8 6.5 29.3 33.2
1987 2.7 1.9 4.6 6.4
1988 18.9 8.1 27.0 14.8
1989 11.9 5.2 17.1 26.4
1990 -31.8 3.9 -27.9 -7.5
1991 35.7 9.0 44.7 33.5
1992 4.3 5.0 9.3 10.0
1993 24.6 3.7 28.3 14.9
1994 3.7 2.6 6.3 3.9
1995 14.2 3.6 17.8 26.4
1996 19.6 3.6 23.2 24.1
1997 24.3 2.7 27.0 32.1
1998 -2.0 1.2 -0.8 22.0
1999* 21.0 1.0 22.0 22.3
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</TABLE>
*Six months ended April 30, 1999.
See Financial Highlights table on page 16 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1999*
- -----------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION -----------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Windsor Fund 10/23/1958 -7.89% 16.23% 9.13% 3.84% 12.97%
- -----------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
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FUND PROFILE
WINDSOR FUND
This Profile provides a snapshot of the fund's characteristics as of April 30,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 10.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------
WINDSOR S&P 500
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 104 500
Median Market Cap $10.8B $66.4B
Price/Earnings Ratio 20.4x 29.0x
Price/Book Ratio 2.3x 5.1x
Yield 1.3% 1.3%
Return on Equity 14.3% 22.4%
Earnings Growth Rate 13.2% 15.4%
Foreign Holdings 13.7% 1.5%
Turnover Rate 28%* --
Expense Ratio 0.28%* --
Cash Reserves 1.2% --
</TABLE>
*Annualized.
INVESTMENT FOCUS
- ----------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
WINDSOR S&P 500
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.75 1.00
Beta 1.04 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ----------------------------------------------------------
<S> <C>
Citigroup, Inc. 8.0%
Alcoa Inc. 5.9
AT&T Corp. 5.1
Rhone-Poulenc SA 4.6
Columbia/HCA Healthcare Corp. 3.1
Burlington Resources, Inc. 3.0
Caterpillar, Inc. 2.9
News Corp. Ltd. ADR 2.6
Golden West Financial Corp. 2.6
Washington Mutual, Inc. 2.3
- ----------------------------------------------------------
Top Ten 40.1%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ---------------------------------------------------------------------------
APRIL 30, 1998 APRIL 30, 1999
-------------------------------------------
WINDSOR WINDSOR S&P 500
-------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 5.8% 6.0% 2.7%
Consumer Discretionary 0.4 2.6 13.0
Consumer Staples 0.0 0.0 7.9
Financial Services 22.8 28.0 17.2
Health Care 12.6 13.3 11.2
Integrated Oils 4.0 5.0 5.7
Other Energy 7.5 9.8 1.1
Materials & Processing 19.5 15.7 3.8
Producer Durables 12.0 5.7 3.9
Technology 5.1 4.3 16.8
Utilities 7.1 6.7 11.3
Other 3.2 2.9 5.4
- ---------------------------------------------------------------------------
</TABLE>
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BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH RESERVES. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
INVESTMENT FOCUS. This grid indicates the focus of a fund in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,
the more diversified it is and the more likely to perform in line with the
overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come from
each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 30%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
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FINANCIAL STATEMENTS
APRIL 30, 1999 (UNAUDITED)
[PHOTO]
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the fund's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the fund had available to distribute to shareholders as income dividends or
capital gains as of the statement date. Any Accumulated Net Realized Losses, and
any cumulative excess of distributions over net income or net realized gains,
will appear as negative balances. Unrealized Appreciation (Depreciation) is the
difference between the market value of the fund's investments and their cost,
and reflects the gains (losses) that would be realized if the fund were to sell
all of its investments at their statement-date values.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
MARKET
VALUE*
WINDSOR FUND SHARES (000)
- --------------------------------------------------------------------------
COMMON STOCKS (94.5%)+
- --------------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (5.7%)
Compagnie Generale des
Etablissements Michelin
Class B shares 7,552,136 $ 343,163
Canadian National
Railway Co. 3,514,700 221,865
Eaton Corp. 2,417,500 221,655
Delta Air Lines, Inc. 3,228,122 204,784
- -(1)America West Holdings Corp.
Class B 4,398,100 91,810
-----------
1,083,277
-----------
CONSUMER DISCRETIONARY (2.4%)
May Department Stores Co. 3,682,500 146,610
(1) Ross Stores, Inc. 2,433,500 111,789
- - BJ's Wholesale Club, Inc. 2,278,600 60,525
- - Jones Apparel Group, Inc. 1,765,000 58,245
TJX Cos., Inc. 1,596,300 53,177
Waste Management, Inc. 365,300 20,639
- -(1)HomeBase, Inc. 2,362,900 11,814
-----------
462,799
-----------
FINANCIAL SERVICES (26.4%)
BANKS--OUTSIDE NEW YORK CITY (4.5%)
Bank of America Corp. 5,330,371 383,787
First Union Corp. 4,367,798 241,867
U.S. Bancorp 3,493,500 129,478
National City Corp. 1,327,200 95,227
DIVERSIFIED FINANCIAL SERVICES (8.0%)
Citigroup, Inc. 20,275,000 1,525,694
INSURANCE--MULTI-LINE (4.5%)
CIGNA Corp. 4,971,600 433,461
Allstate Corp. 11,728,000 426,606
Horace Mann Educators Corp. 263,500 5,995
INSURANCE--PROPERTY-CASUALTY (0.6%)
PartnerRe Ltd. 2,080,200 85,808
IPC Holdings Ltd. 1,689,700 29,781
REAL ESTATE INVESTMENT TRUST (3.9%)
(1) Archstone Communities
Trust REIT 8,249,600 187,163
Equity Residential Properties
Trust REIT 3,489,100 161,371
(1) Liberty Property Trust REIT 5,433,500 131,083
Avalonbay Communities,
Inc. REIT 3,058,536 107,049
(1) Camden Property Trust REIT 2,283,600 61,657
Spieker Properties, Inc. REIT 1,323,500 51,947
CarrAmerica Realty Corp. REIT 1,748,600 43,278
SAVINGS & LOAN (4.9%)
(1) Golden West Financial Corp. 4,951,800 495,799
Washington Mutual, Inc. 10,620,264 436,758
-----------
5,033,809
-----------
HEALTH CARE (12.6%)
Rhone-Poulenc SA ADR 18,407,650 867,461
Columbia/HCA
Healthcare Corp. 24,300,000 599,906
Aetna Inc. 3,378,100 296,217
- - Tenet Healthcare Corp. 10,012,300 236,541
- - PacifiCare Health Systems,
Inc. Class B 1,710,000 136,426
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
MARKET
VALUE*
WINDSOR FUND SHARES (000)
- --------------------------------------------------------------------------
<S> <C> <C>
- -(1)Foundation Health Systems
Class A 7,267,660 $ 100,385
- -(1)PacifiCare Health Systems
Inc. Class A 1,183,300 86,751
Pharmacia & Upjohn, Inc. 1,200,100 67,206
Rhone-Poulenc SA Class A 102,071 4,858
-----------
2,395,751
-----------
INTEGRATED OILS (4.7%)
USX-Marathon Group 13,713,700 428,553
Shell Transport & Trading
Co. ADR 3,931,000 178,615
(1) Lyondell Chemical Co. 6,545,903 127,645
(1) Murphy Oil Corp. 2,528,200 118,667
(1) Cabot Oil & Gas Corp. Class A 2,467,800 43,186
-----------
896,666
-----------
OTHER ENERGY (9.3%)
(1) Burlington Resources, Inc. 12,267,000 565,049
(1) Transocean Offshore, Inc. 9,453,300 280,645
(1) Union Pacific Resources
Group, Inc. 13,941,500 195,181
Anadarko Petroleum Corp. 4,994,000 189,460
Apache Corp. 4,743,100 145,554
(1) Ultramar Diamond
Shamrock Corp. 5,515,200 127,194
(1) Valero Energy Corp. 5,417,300 120,874
Alberta Energy Co. Ltd. 2,233,300 65,882
- -(1)EEX Corp. 4,148,499 26,965
Noble Affiliates, Inc. 821,100 26,327
Devon Energy Corp. 739,675 24,594
-----------
1,767,725
-----------
MATERIALS & PROCESSING (14.8%)
Alcoa Inc. 17,910,734 1,114,943
(1) IMC Global Inc. 10,853,280 271,332
- - Smurfit-Stone Container Corp. 7,488,950 175,054
(1) Bowater Inc. 3,054,580 163,802
Abitibi-Consolidated, Inc. 12,226,500 145,190
Jefferson Smurfit Group
PLC ADR 4,881,941 130,592
(1) AK Steel Corp. 4,730,252 122,987
Hercules, Inc. 2,810,300 106,264
(1) Phosphate Resources
Partners LP 8,600,700 101,058
Anderson Exploration Ltd. 8,022,400 96,403
Air Products & Chemicals, Inc. 1,412,600 66,392
Pechiney SA ADR A 2,831,628 59,995
Lafarge Corp. 1,485,400 50,225
Donohue, Inc. Class A 3,172,500 47,926
- -(1)Kaiser Aluminum &
Chemical Corp. 5,929,334 46,323
- -(1)Albany International Corp. 1,792,641 43,472
- - Burlington Industries, Inc. 2,383,700 19,368
Ryerson Tull, Inc. 840,946 19,079
Century Aluminum Co. 2,000,000 16,000
(1) Mississippi Chemical Corp. 1,726,000 15,750
Deltic Timber Corp. 549,471 15,248
- - IMC Global Warrants
Exp. 12/22/2000 644,066 725
-----------
2,828,128
-----------
PRODUCER DURABLES (5.4%)
Caterpillar, Inc. 8,539,500 549,730
(1) Case Corp. 5,482,000 189,814
- -(1)Toll Brothers, Inc. 3,550,266 75,887
New Holland NV 4,574,500 66,330
- -(1)U.S. Home Corp. 1,196,795 40,990
Kaufman & Broad Home Corp. 1,595,000 38,778
- -(1)General Semiconductor, Inc. 3,552,500 26,644
(1) MDC Holdings, Inc. 1,156,300 22,692
- -(1)Beazer Homes USA, Inc. 787,464 18,161
-----------
1,029,026
-----------
TECHNOLOGY (4.1%)
- - General Instrument Corp. 7,289,900 266,081
(1) Scientific-Atlanta, Inc. 7,731,400 245,472
- -(1)Arrow Electronics, Inc. 6,773,700 123,197
- - Quantum Corp. 4,268,200 76,294
Avnet, Inc. 1,632,000 69,258
-----------
780,302
-----------
UTILITIES (6.4%)
AT&T Corp. 19,089,317 964,010
- - MCI WorldCom, Inc. 3,014,493 247,188
-----------
1,211,198
-----------
OTHER (2.7%)
Kemira Oy ADR 1,336,000 17,034
Miscellaneous (2.6%) 504,070
-----------
521,104
-----------
- --------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $13,472,701) 18,009,785
- --------------------------------------------------------------------------
PREFERRED STOCK (2.6%)
- --------------------------------------------------------------------------
News Corp. Ltd. ADR
(COST $298,591) 16,298,475 498,122
- --------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (1.9%)+
- --------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
(2) 4.77%, 7/28/1999 $ 15,000 14,833
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.89%, 5/3/1999 352,468 352,468
4.91%, 5/3/1999--Note F 3,900 3,900
- --------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $371,195) 371,201
- --------------------------------------------------------------------------
TOTAL INVESTMENTS (99.0%)
(COST $14,142,487) 18,879,108
- --------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
MARKET
VALUE*
(000)
- --------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (1.0%)
- --------------------------------------------------------------------------
Other Assets--Note C $ 331,672
Liabilities--Note F (153,191)
------------
178,481
- --------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------
Applicable to 1,044,327,243 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $19,057,589
==========================================================================
NET ASSET VALUE PER SHARE $18.25
==========================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- - Non-Income-Producing Security.
+ The fund invests a portion of its reserves in equity markets through the use
of index futures contracts. After giving effect to futures investments, the
fund's effective common stock and temporary cash investment positions
represent 96.2% and 0.2%, respectively of net assets. See Note E in Notes to
Financial Statements.
(1) Considered an affiliated company as the fund owns more than 5% of the
outstanding voting securities of such company. The total market value of
investments in affiliated companies was $4,391,238,000.
(2) Security segregated as initial margin for open futures contracts.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------
AT APRIL 30, 1999, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $13,559,207 $12.98
Undistributed Net
Investment Income 63,061 .06
Accumulated Net
Realized Gains 703,158 .67
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 4,736,621 4.54
Futures Contracts (4,458) --
- --------------------------------------------------------------------------
NET ASSETS $19,057,589 $18.25
==========================================================================
</TABLE>
13
<PAGE> 16
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If the
fund invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
WINDSOR FUND
SIX MONTHS ENDED APRIL 30, 1999
(000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 153,239
Interest 2,500
Security Lending 431
-------------
Total Income 156,170
-------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 11,073
Performance Adjustment (8,006)
The Vanguard Group--Note C
Management and Administrative 19,555
Marketing and Distribution 1,469
Custodian Fees 606
Auditing Fees 9
Shareholders' Reports 218
Trustees' Fees and Expenses 14
-------------
Total Expenses 24,938
Expenses Paid Indirectly--Note C (2,396)
-------------
Net Expenses 22,542
- -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 133,628
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold* 702,542
Futures Contracts --
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 702,542
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES
Investment Securities 2,710,053
Futures Contracts (4,458)
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 2,705,595
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,541,765
=========================================================================================================================
</TABLE>
*Dividend income and realized net gain from affiliated companies were
$50,548,000 and $144,486,000, respectively.
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
detailed in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined
on a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in
the fund, either by purchasing shares or by reinvesting distributions, as well
as the amounts redeemed. The corresponding numbers of Shares Issued and
Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
WINDSOR FUND
----------------------------------
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 1999 OCT. 31, 1998
(000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 133,628 $ 270,099
Realized Net Gain 702,542 1,346,037
Change in Unrealized Appreciation (Depreciation) 2,705,595 (1,700,942)
----------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 3,541,765 (84,806)
----------------------------------
DISTRIBUTIONS
Net Investment Income (141,766) (268,858)
Realized Capital Gain (1,341,488) (3,045,000)
----------------------------------
Total Distributions (1,483,254) (3,313,858)
----------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 559,115 1,632,455
Issued in Lieu of Cash Distributions 1,399,226 3,148,447
Redeemed (3,314,661) (3,704,909)
----------------------------------
Net Increase (Decrease) from Capital Share Transactions (1,356,320) 1,075,993
- -------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 702,191 (2,322,671)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 18,355,398 20,678,069
----------------------------------
End of Period $19,057,589 $18,355,398
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 34,608 92,583
Issued in Lieu of Cash Distributions 94,992 187,538
Redeemed (208,297) (214,952)
----------------------------------
Net Increase (Decrease) in Shares Outstanding (78,697) 65,169
=========================================================================================================================
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the
fund; and the extent to which the fund tends to distribute capital gains. The
table also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
WINDSOR FUND
YEAR ENDED OCTOBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -------------------------------------------------------------
THROUGHOUT EACH PERIOD APRIL 30, 1999 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $16.34 $19.55 $16.99 $15.55 $14.55 $14.95
- -----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .13 .23 .36 .43 .44 .44
Net Realized and Unrealized Gain (Loss)
on Investments 3.14 (.32) 3.94 2.85 1.86 .42
-------------------------------------------------------------------------
Total from Investment Operations 3.27 (.09) 4.30 3.28 2.30 .86
-------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.13) (.24) (.41) (.46) (.44) (.37)
Distributions from Realized Capital Gains (1.23) (2.88) (1.33) (1.38) (.86) (.89)
-------------------------------------------------------------------------
Total Distributions (1.36) (3.12) (1.74) (1.84) (1.30) (1.26)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $18.25 $16.34 $19.55 $16.99 $15.55 $14.55
=============================================================================================================================
TOTAL RETURN 22.00% -0.78% 27.04% 23.16% 17.80% 6.35%
=============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $19,058 $18,355 $20,678 $15,841 $13,008 $11,406
Ratio of Total Expenses to
Average Net Assets 0.28%* 0.27% 0.27% 0.31% 0.45% 0.45%
Ratio of Net Investment Income to
Average Net Assets 1.50%* 1.31% 1.89% 2.75% 3.01% 3.11%
Portfolio Turnover Rate 28%* 48% 61% 34% 32% 34%
=============================================================================================================================
</TABLE>
*Annualized.
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
Vanguard Windsor Fund is registered under the Investment Company Act of 1940 as
a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair value.
2. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. FUTURES: The fund uses S&P 500 Index futures contracts to a limited
extent, with the objective of maintaining full exposure to the stock market
while maintaining liquidity. The fund may purchase or sell futures contracts to
achieve a desired level of investment, whether to accommodate portfolio turnover
or cash flows from capital share transactions. The primary risks associated with
the use of futures contracts are imperfect correlation between changes in market
values of stocks held by the fund and the prices of futures contracts, and the
possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Wellington Management Company, LLP provides investment advisory services to
the fund for a fee calculated at an annual percentage rate of average net
assets. The basic fee is subject to quarterly adjustments based on performance
for the preceding three years relative to the S&P 500 Index. For the six months
ended April 30, 1999, the advisory fee represented an effective annual basic
rate of 0.12% of the fund's average net assets before a decrease of $8,006,000
(0.09%) based on performance.
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (continued)
In March and April 1999, the Board of Trustees approved the addition of a
second investment adviser, Sanford C. Bernstein & Co. ("Bernstein"), and a plan
for Bernstein to assume responsibility for managing a portion of the fund's net
assets by June 1, 1999.
The Vanguard Group manages the cash reserves of the fund on an at-cost
basis.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the Board of Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At April 30, 1999, the fund had contributed capital of $2,724,000 to
Vanguard (included in Other Assets), representing 0.01% of net assets and 3.9%
of Vanguard's capitalization. The fund's Trustees and officers are also
Directors and officers of Vanguard.
Vanguard has asked the fund's investment adviser to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate to the fund part of the commissions generated. Such
rebates are used solely to reduce the fund's administrative expenses. For the
six months ended April 30, 1999, directed brokerage arrangements reduced the
fund's expenses by $2,396,000 (an annual rate of 0.03% of average net assets).
D. During the six months ended April 30, 1999, the fund purchased $2,461,579,000
of investment securities and sold $5,807,738,000 of investment securities, other
than temporary cash investments.
E. At April 30, 1999, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $4,736,621,000,
consisting of unrealized gains of $5,839,140,000 on securities that had risen in
value since their purchase and $1,102,519,000 in unrealized losses on securities
that had fallen in value since their purchase.
At April 30, 1999, the aggregate settlement value of open futures
contracts expiring in June 1999 and the related unrealized depreciation were:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
(000)
------------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE DEPRECIATION
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Index 982 $328,111 $(4,458)
- -----------------------------------------------------------------------------------
</TABLE>
F. The market value of securities on loan to broker/dealers at April 30, 1999,
was $3,647,000, for which the fund held cash collateral of $3,900,000. Cash
collateral received is invested in repurchase agreements.
18
<PAGE> 21
TRUSTEES AND OFFICERS
JOHN C. BOGLE Founder, Senior Chairman of the Board, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & JohnsonoMerck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co., The Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co.,
NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell
Company is the owner of trademarks and copyrights relating to the
Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are
trademarks of Wilshire Associates.
<PAGE> 22
VANGUARD
MILESTONES
[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
Q222-06/11/1999
(C) 1999 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing
Corporation, Distributor.
<PAGE> 23
VANGUARD
WINDSOR II FUND
[PHOTO]
SEMIANNUAL
REPORT
APRIL 30, 1999
[THE VANGUARD GROUP LOGO]
<PAGE> 24
AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 8,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August 1,
1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto-- "Leading the way"--serves as a guiding principle
for our company.
- - The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped to
shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with clients;
and a focus on long-term investing. To our great regret, Mr. Morgan died on
September 2, 1998.
- - The 70th anniversary, on December 28, 1998, of the incorporation of Vanguard
Wellington Fund. It is the nation's oldest balanced mutual fund, and one of
only a handful of funds created in the 1920s that are still in operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
[GRAPHIC]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
3
ADVISER'S REPORT
5
FUND PROFILE
6
PERFORMANCE SUMMARY
8
FINANCIAL STATEMENTS
9
SEE THE NOTICE TO SHAREHOLDERS
ABOUT WINDSOR II FUND'S
INCOME DIVIDENDS ON PAGE 18.
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE> 25
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman
The U.S. stock market resumed its amazing ascent during the six months ended
April 30, 1999, the first half of Vanguard Windsor II Fund's fiscal year. Your
fund earned +17.3% for the six months, a fine result in absolute terms but a bit
behind the average return of our value-oriented peers, and further behind that
of the Standard & Poor's 500 Composite Stock Price Index, which combines both
growth and value stocks.
The table at right presents the six-month total returns (capital change
plus reinvested dividends) for Windsor II and its comparative standards. The
fund's return is based on an increase in net asset value from $31.07 per share
on October 31, 1998, to $32.86 per share on April 30, 1999, with the latter
figure adjusted for a dividend of $0.44 per share paid from net investment
income and a distribution of $2.67 per share paid from net realized capital
gains.
<TABLE>
<CAPTION>
- -------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 1999
- -------------------------------------------------------
<S> <C>
Vanguard Windsor II Fund +17.3%
- -------------------------------------------------------
Average Value Fund +18.8%
- -------------------------------------------------------
S&P 500 Index +22.3%
- -------------------------------------------------------
</TABLE>
THE PERIOD IN REVIEW
A remarkable domestic economic environment--in which rapid growth in business
activity and high employment coexisted with tame inflation--set the stage for
the U.S. stock market's surge during the six months ended April 30. The overall
stock market, as measured by the Wilshire 5000 Equity Index, gained +22.8%, just
ahead of the best-known benchmark for large-capitalization stocks, the S&P 500
Index.
In contrast to the previous year, when growth stocks far outperformed
value stocks, returns from these segments of the S&P 500 Index during the
half-year were similar: +22.6% for growth stocks and +21.7% for value stocks,
which are Windsor II's bread and butter. But the two groups took very different
routes to their destination. Growth stocks were up sharply during the first half
of the semiannual period, amassing a lead of nearly 11 percentage points over
value stocks. But the situation reversed during the final three months, as
energy and commodity companies posted sharp gains, helping value stocks to make
up most of their shortfall.
The strength of the economy's expansion, which buoyed stock prices for
the commodity sectors, was worrisome to bond investors, who are ever-vigilant
for signs that inflation may accelerate. Inflation is the bondholder's bane
because it erodes the value of future interest and principal payments.
(Inflation also erodes the value of future stock dividends and earnings, but
stockholders, unlike bondholders, can hope to benefit if higher prices for goods
and services also translate into higher corporate profits.)
Interest rates rose moderately during the period, with the yield of the
benchmark 30-year U.S. Treasury bond ending the half-year at 5.66%, 50 basis
points above the bond's 5.16% yield at the beginning of the period. As interest
rates rose, of course, bond prices declined. During the half-year, these price
declines shaved 2.3 percentage points from the return of the Lehman Brothers
Aggregate Bond Index, offsetting most of its interest income and resulting in a
total return of +0.7%.
1
<PAGE> 26
PERFORMANCE OVERVIEW
Vanguard Windsor II Fund's return of +17.3% trailed the return of the average
value (growth and income) fund by 1.5 percentage points and the return of the
S&P 500 Index by 5 percentage points. In relation to the index, we were hurt by
our small stake in technology--the hottest market sector (up about +42%) during
the half-year, but one that offers few stocks with attractive dividend yields.
Windsor II held about 3% of equity assets in tech stocks during the period, less
than one-fifth the weighting of this sector in the S&P 500 Index. The rest of
our shortfall versus both our average peer and the index can be attributed to
subpar stock selection. We earned only about +7% on our sizable stake in
utilities--about 18% of our stocks during the half-year--while the utilities
sector within the S&P 500 earned more than +22%. In essence, we did not own the
long-distance and cellular phone companies that were the sector's best
performers. Our holdings in the consumer-discretionary sector also
underperformed the market.
On the positive side, the fund benefited by having only a small position
in health-care stocks, which were generally laggards during the six-month
period. Adroit stock-picking among the energy companies also helped our results
versus our peers and the index.
As you know, our philosophy of maintaining a diversified portfolio of
value stocks--typically out-of-favor issues with below-average price/earnings
ratios and above-average dividend yields--is carried out by four managers, each
having full discretion in managing a portion of the fund's assets. The adjacent
table shows the allocation to each adviser as of April 30.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
TOTAL ASSETS MANAGED
AS OF APRIL 30, 1999
-----------------------
$ MILLION PERCENTAGE
- ----------------------------------------------------------------
<S> <C> <C>
Barrow, Hanley, Mewhinney &
Strauss, Inc. $23,432 68%
Equinox Capital Management, Inc. 4,260 12
Tukman Capital Management, Inc. 3,645 10
Vanguard Core Management Group 1,849 5
Cash Reserve* 1,568 5
- ----------------------------------------------------------------
Total $34,754 100%
- ----------------------------------------------------------------
</TABLE>
*This cash reserve is invested in equity index futures to simulate investment in
stocks; each adviser may also maintain a modest cash reserve.
IN SUMMARY
During the semiannual period, the stock market once again demonstrated its
unpredictability. Price fluctuations were substantial--both for individual
stocks and for broader sectors of the market. And just as market commentators
began to question whether value stocks were perpetually fated to underperform
glamorous growth stocks, the value sectors bolted from the back of the pack to
the front.
These events reaffirm the wisdom of holding a broadly diversified
portfolio comprising growth and value stock funds as well as bond funds and
money market funds. Each investor's mix of assets should reflect his or her
investment goals, time horizon, and tolerance for the ever-present risks of
investing. Once such a program is in place, we believe that the soundest
strategy is sticking with it--"staying the course."
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
May 14, 1999
2
<PAGE> 27
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 1999
[PHOTO]
Global stock markets chalked up solid gains during the six months ended April
30, 1999, aided by the efforts of central banks around the world to ease
monetary policy and lower short-term interest rates.
The remarkably strong U.S. economy helped out by playing locomotive for
the world's economies, soaking up record volumes of imported goods. Indeed, the
United States was the only major nation whose policymakers and bondholders had
to ponder whether growth was too rapid. Concern about a potential surge in
inflation was one reason that interest rates rose modestly and bond prices
generally slipped in the United States.
U.S. STOCK MARKETS
Stock prices soared during the half-year, reflecting both the domestic economy's
strength and the investing public's confidence in future growth of the economy
and corporate profits. The overall market, as measured by the Wilshire 5000
Equity Index, rose 22.8% during the six months ended April 30, while the S&P 500
Index, a proxy for large-capitalization stocks, gained 22.3%.
The midsummer shock of 1998--when the overall stock market fell by more
than 20%--seemed to be quickly forgotten by investors. Most apparently
overlooked the fact that corporate earnings were flat to slightly lower,
focusing instead on the potential for future earnings. Investors' confidence was
bolstered by the market's quick rebound from its summer stumble and by a general
easing of monetary policy by the world's central banks. The Federal Reserve
Board made three separate quarter-percentage-point reductions in short-term
interest rates during autumn 1998. Central banks in Europe, Asia, and Latin
America also cut rates. These actions lessened fears that the major economies
would be dragged down by the lingering effects of the economic crisis that
struck emerging markets beginning in mid-1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED APRIL 30, 1999
-----------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 22.3% 21.8% 26.9%
Russell 2000 Index 15.2 -9.3 13.0
Wilshire 5000 Index 22.8 17.0 24.5
MSCI EAFE Index 15.4 9.8 9.0
- ------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.7% 6.3% 8.0%
Lehman 10-Year Municipal Bond Index 1.5 7.1 7.5
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.8 5.2
- ------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.3% 2.3% 2.4%
- ------------------------------------------------------------------------------
</TABLE>
*Annualized.
U.S. consumers demonstrated their confidence in economic conditions by
spending freely, boosting sales of cars, houses, and goods in stores. And why
shouldn't they have been happy? U.S. gross domestic product grew by an annual
rate of 4.1% in the first three months of 1999, and the nation's unemployment
rate closed the period at 4.3%.
Improved prospects for global growth were a key factor in the continuing
advance of technology stocks (up nearly 42% for the six months) and the
resurgence of some value-stock sectors, such as materials & processing (up 27%)
and energy (integrated oil
3
<PAGE> 28
companies rose 22%; "other energy" stocks gained 23%). Retailers and other
companies in the consumer-discretionary sector gained 34%, reflecting the
strength of consumer spending. Not all consumer-related stocks benefited,
however. Consumer-staples companies, locked in tough price competition and still
feeling the effects of falling profits from overseas operations, were the
worst-performing group in the half-year, down 3%.
U.S. BOND MARKETS
For bond investors, the powerful economic expansion evident during the
November-April period was too much of a good thing. Economists confessed to
puzzlement that the expansion was not triggering an acceleration in wages or
consumer prices. But with oil prices rising, U.S. economic growth expanding at a
4.1% annual pace, and unemployment at 4.3% of the labor force, the lowest point
since February 1970, bond market participants figured that inflation was bound
to accelerate eventually. (This view gained credence shortly after the period's
end, when the Consumer Price Index was reported to have risen 0.7% in April, the
biggest monthly increase in eight years.)
Despite the Fed's actions to cut short-term interest rates, yields on
U.S. Treasury issues increased over the six months by one-half to three-quarters
of a percentage point. The yield of the 30-year Treasury bond rose 50 basis
points, to 5.66% on April 30 from 5.16% six months earlier. The yield of the
10-year Treasury rose to 5.35% from 4.61%. Very short-term rates didn't rise as
far: Yields on 3-month T-bills rose 22 basis points to 4.54% on April 30. Bond
prices, which move in the opposite direction from interest rates, fell. The
Lehman Brothers Aggregate Bond Index, a benchmark for investment-grade taxable
bonds, earned just 0.7%, as falling prices offset most of the index's 3.0%
interest income for the six-month period.
Municipal bonds suffered only slight price declines and outperformed
Treasury securities--a turnaround from the previous six months, when Treasuries
were bid up by investors seeking a safe haven during the summer 1998 market
turmoil.
Not all bond prices fell during the half-year. For high-yield issues, the
strong economy was a tonic. These bonds had suffered considerably during the
market turmoil of summer 1998, as investors feared a global economic downturn
would result in higher defaults by weaker companies. But when economic growth
turned out to be stronger than expected, high-yield bond prices rebounded,
augmenting the bonds' interest income. The Lehman High Yield Index returned 8.3%
during the half-year.
INTERNATIONAL STOCK MARKETS
Overseas stock markets posted gains during the period, despite lingering
economic weakness in Asia and sluggish growth in most of Europe's developed
economies. Crises in some key developing markets, including those of Brazil and
Russia, appeared to be easing as the semiannual period drew to a close. Overall,
the developed markets outside the United States gained 15.4% in U.S.-dollar
terms, as measured by the Morgan Stanley Capital International Europe,
Australasia, Far East (EAFE) Index. Stocks in Europe and Asia were boosted by
mergers and takeover activity and by signs that corporations were focusing more
intently on increasing shareholder value.
The biggest gains were in the Pacific region and in emerging markets, the
bourses that had suffered the biggest declines during 1997 and 1998. The Pacific
region gained 27.4%, despite a continuing recession in Japan, while the MSCI
Select Emerging Markets Free Index rose 30.8%. European stocks were up nearly
20% in local currencies, but these gains were cut to 10.9% for U.S. investors
because of the dollar's gains against the euro, a common currency adopted by 11
nations, and other European currencies.
4
<PAGE> 29
ADVISER'S REPORT
[PHOTO]
Vanguard Windsor II Fund's performance during the past six months has been
disappointing. The S&P 500 Index gained 22.3%, the value component of that index
gained 21.7%, and Windsor II returned 17.3%. Our underperformance occurred from
November through January. Since then, the fund has recovered nicely, but not
enough to erase a significant lag.
During the period, the economy was quite strong with high employment,
great homebuilding activity, and low inflation. There also appeared to be early
signs of recovery in the developing economies around the Pacific Rim. It was
weakness in these areas 18 months ago, you may recall, that caused considerable
problems for many U.S. industrial companies, particularly those producing
nondurable goods and raw materials. The whiff of a recovery in Asia--and hopes
that it would boost demand for industrial goods--seem to have helped shift the
stock market back toward industrial stocks.
Corporate earnings overall may improve as fortunes shift away from
technology to manufacturing, with a slowing in demand for the former and better
pricing for the latter. We would expect a modest increase in inflation.
An additional comment is in order on our performance during the first
three months of our fiscal year. As always, it's not just what you own but what
you do not own. The best-performing 25 stocks in the S&P/BARRA Value Index had a
55% total return for that three-month period. These stocks had an average
price/earnings ratio of 47 (if we exclude the eight names that had negative
earnings)--which is pretty far from a "value stock" P/E. The average dividend
yield of these 25 companies was 0.7%, largely because 13 have never paid a
dividend. Of course, had we known in advance that these stocks would perform as
they did, we would have owned them. But lacking that prescience, we chose to
follow our discipline and emphasize stocks with relatively low P/E ratios, low
price/book ratios, and high current dividend yields.
There seems to have been a decided shift in market leadership in the past
two months or so. Small- and mid-capitalization names are responding to their
individual fundamentals rather than being pressured by seemingly unrelated
external factors. Internet "trees" seem to be having trouble in growing to the
sky. Investors seem, finally, to be asking what growth is worth. After all,
price is the most important component when measuring the success of an
investment.
Windsor II continues to have large holdings in banks, which are still
quite cheap even after years of good performance. Oil-service companies are
doing very well as pricing improves. Electric utilities will act better if
progress is made toward deregulation. We believe that our retail holdings will
show nice returns as continuing growth in disposable income leads to ongoing
increases in store sales and as it becomes clear that the Internet will not
empty all the malls.
We feel the fund's current composition should provide good performance in
the second half of our fiscal year.
Barrow, Hanley, Mewhinney & Strauss, Inc.
May 12, 1999
INVESTMENT PHILOSOPHY
The fund reflects a belief that superior long-term investment results can be
achieved by holding a diversified portfolio of out-of-favor stocks with
below-average price/earnings ratios, above-average dividend yields, and the
prospect of above-average total return.
5
<PAGE> 30
FUND PROFILE
WINDSOR II FUND
This Profile provides a snapshot of the fund's characteristics as of April 30,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 7.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------------------------
WINDSOR II S&P 500
- -----------------------------------------------------------
<S> <C> <C>
Number of Stocks 271 500
Median Market Cap $26.3B $66.4B
Price/Earnings Ratio 20.7x 29.0x
Price/Book Ratio 3.2x 5.1x
Yield 1.9% 1.3%
Return on Equity 18.8% 22.4%
Earnings Growth Rate 8.3% 15.4%
Foreign Holdings 1.3% 1.5%
Turnover Rate 21%* --
Expense Ratio 0.39%* --
Cash Reserves 1.2% --
</TABLE>
*Annualized.
INVESTMENT FOCUS
- -----------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------------------------
WINDSOR II S&P 500
- -----------------------------------------------------------
<S> <C> <C>
R-Squared 0.90 1.00
Beta 0.88 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -----------------------------------------------------------
<S> <C>
The Chase Manhattan Corp. 3.1%
Bank of America Corp. 3.0
Anheuser-Busch Cos., Inc. 2.8
SBC Communications Inc. 2.5
Williams Cos., Inc. 2.5
GTE Corp. 2.5
Citigroup, Inc. 2.5
Honeywell, Inc. 2.4
Washington Mutual, Inc. 2.3
Waste Management, Inc. 2.3
- -----------------------------------------------------------
Top Ten 25.9%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ------------------------------------------------------------------------------------------------
APRIL 30, 1998 APRIL 30, 1999
---------------------------------------------------------
WINDSOR II WINDSOR II S&P 500
---------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 5.7% 3.9% 2.7%
Consumer Discretionary 12.0 12.9 13.0
Consumer Staples 5.7 6.6 7.9
Financial Services 25.4 28.0 17.2
Health Care 1.7 2.3 11.2
Integrated Oils 6.2 4.8 5.7
Other Energy 3.2 7.6 1.1
Materials & Processing 3.1 4.3 3.8
Producer Durables 4.6 4.4 3.9
Technology 4.2 2.8 16.8
Utilities 18.0 16.1 11.3
Other 10.2 6.3 5.4
- ------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 31
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH RESERVES. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investments.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
INVESTMENT FOCUS. This grid indicates the focus of a fund in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,
the more diversified it is and the more likely to perform in line with the
overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come from
each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 30%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
7
<PAGE> 32
PERFORMANCE SUMMARY
WINDSOR II FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely, so an investment in the fund could
lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: JUNE 24, 1985-APRIL 30, 1999
- -------------------------------------------------------
WINDSOR II FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -------------------------------------------------------
<C> <C> <C> <C> <C>
1985 -0.9% 1.1% 0.2% 1.8%
1986 31.2 4.4 35.6 33.2
1987 -0.6 1.5 0.9 6.4
1988 14.5 6.0 20.5 14.8
1989 19.5 5.2 24.7 26.4
1990 -21.5 4.0 -17.5 -7.5
1991 29.4 7.2 36.6 33.5
1992 7.9 4.6 12.5 10.0
1993 15.8 3.7 19.5 14.9
1994 -0.8 3.0 2.2 3.9
1995 19.2 3.9 23.1 26.4
1996 23.8 3.4 27.2 24.1
1997 28.1 3.2 31.3 32.1
1998 14.1 2.4 16.5 22.0
1999* 15.6 1.7 17.3 22.3
- -------------------------------------------------------
</TABLE>
*Six months ended April 30, 1999.
See Financial Highlights table on page 15 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1999*
- -----------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION --------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Windsor II Fund 6/24/1985 5.31% 22.90% 12.62% 3.89% 16.51%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
8
<PAGE> 33
FINANCIAL STATEMENTS
APRIL 30, 1999 (UNAUDITED)
[PHOTO]
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the fund's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the fund had available to distribute to shareholders as income dividends or
capital gains as of the statement date. Any Accumulated Net Realized Losses, and
any cumulative excess of distributions over net income or net realized gains,
will appear as negative balances. Unrealized Appreciation (Depreciation) is the
difference between the market value of the fund's investments and their cost,
and reflects the gains (losses) that would be realized if the fund were to sell
all of its investments at their statement-date values.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
VALUE*
WINDSOR II FUND SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (94.3%)+
- --------------------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (3.7%)
Ford Motor Co. 10,940,900 $ 699,534
General Motors Corp. 5,855,700 520,791
Burlington Northern
Santa Fe Corp. 333,300 12,207
Delta Air Lines, Inc. 151,600 9,617
Dana Corp. 189,800 8,944
PACCAR, Inc. 140,000 7,840
- - UAL Corp. 88,900 7,179
Tidewater Inc. 245,800 6,514
- - Continental Airlines, Inc. Class B 128,000 5,528
TRW, Inc. 127,600 5,351
Autoliv, Inc. 146,470 5,053
- - Navistar International Corp. 65,700 3,437
----------
1,291,995
----------
CONSUMER DISCRETIONARY (12.2%)
Waste Management, Inc. 14,070,997 795,011
Sears, Roebuck & Co. 15,906,200 731,685
- -(1)Kmart Corp. 39,622,500 589,385
(1)Service Corp. International 23,045,900 478,202
J.C. Penney Co., Inc. 7,378,200 336,630
Gannett Co., Inc. 3,948,000 279,568
Wal-Mart Stores, Inc. 5,347,000 245,962
Time Warner, Inc. 2,816,600 197,162
The Walt Disney Co. 5,670,532 180,039
Eastman Kodak Co. 1,955,600 145,937
Kimberly-Clark Corp. 2,376,400 145,703
- - Viacom Inc. Class B 262,800 10,742
Browning-Ferris Industries, Inc. 244,400 9,745
- - Tricon Global Restaurants, Inc. 149,400 9,618
- - Circus Circus Enterprises Inc. 397,600 8,374
- - Harrah's Entertainment, Inc. 367,100 8,076
Dayton Hudson Corp. 119,000 8,010
Maytag Corp. 106,300 7,268
- - Toys R Us, Inc. 294,800 6,412
Darden Restaurants Inc. 264,000 5,890
- - Neiman Marcus Group Inc. 231,900 5,580
The Warnaco Group, Inc.
Class A 201,000 5,364
R.R. Donnelley & Sons Co. 109,400 3,870
CKE Restaurants Inc. 208,890 3,421
- - OfficeMax, Inc. 322,000 3,260
Premark International, Inc. 85,700 3,155
May Department Stores Co. 74,037 2,948
- - Venator Group, Inc. 294,100 2,849
American Greetings Corp.
Class A 98,600 2,582
CBRL Group, Inc. 106,200 2,144
Dillard's Inc. 68,800 1,905
McDonald's Corp. 34,000 1,441
VF Corp. 24,300 1,251
Knight Ridder 23,000 1,238
- - ACNielson Corp. 28,600 797
----------
4,241,224
----------
CONSUMER STAPLES (6.2%)
Anheuser-Busch Cos., Inc. 13,386,400 978,880
Philip Morris Cos., Inc. 15,990,500 560,667
Imperial Tobacco Group ADR 12,448,100 245,850
PepsiCo, Inc. 4,791,600 176,990
H.J. Heinz Co. 2,781,100 129,843
Sara Lee Corp. 2,765,200 61,526
Bestfoods 123,200 6,183
IBP, Inc. 205,500 4,161
Tyson Foods, Inc. 101,000 2,089
Brown-Forman Corp. Class B 15,100 1,113
</TABLE>
9
<PAGE> 34
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
VALUE*
WINDSOR II FUND SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
- - The Kroger Co. 16,300 $ 885
Dean Foods Corp. 9,900 353
----------
2,168,540
----------
FINANCIAL SERVICES (26.4%)
BANKS--NEW YORK CITY (4.4%)
The Chase Manhattan Corp. 12,985,256 1,074,530
Bankers Trust Corp. 4,728,300 425,843
The Bank of New York Co., Inc. 366,400 14,656
J.P. Morgan & Co., Inc. 14,000 1,887
BANKS--OUTSIDE NEW YORK CITY (9.2%)
Bank of America Corp. 14,680,074 1,056,965
First Union Corp. 12,298,702 681,041
PNC Bank Corp. 9,709,200 561,920
Bank One Corp. 7,448,883 439,484
Wells Fargo Co. 8,093,700 349,547
Fleet Financial Group, Inc. 324,200 13,961
Wachovia Corp. 142,800 12,549
National City Corp. 172,800 12,398
Mellon Bank Corp. 158,500 11,779
BankBoston Corp. 236,900 11,608
KeyCorp 327,200 10,123
AmSouth Bancorp 185,400 8,818
Comerica, Inc. 130,950 8,520
City National Corp. 163,200 6,304
UnionBanCal Corp. 184,278 6,288
Zions Bancorp 62,600 4,175
SunTrust Banks, Inc. 49,300 3,525
M & T Bank Corp. 5,300 2,963
BB&T Corp. 58,600 2,340
Commerce Bancshares, Inc. 34,860 1,427
Provident Financial Group, Inc. 29,600 1,240
Regions Financial Corp. 26,800 1,012
Popular, Inc. 21,200 657
Fulton Financial Corp. 3,200 75
DATA PROCESS SERVICES (0.1%)
First Data Corp. 217,800 9,243
- - DST Systems, Inc. 110,000 6,408
Deluxe Corp. 6,300 218
DIVERSIFIED FINANCIAL SERVICES (4.4%)
Citigroup, Inc. 11,376,587 856,088
American Express Co. 2,873,008 375,466
Morgan Stanley Dean Witter
& Co. 1,680,000 166,635
American General Corp. 1,574,600 116,520
Transamerica Corp. 138,400 9,861
The CIT Group, Inc. 203,400 6,610
Merrill Lynch & Co., Inc. 38,600 3,240
Marsh & McLennan Cos., Inc. 6,600 505
FINANCE COMPANIES
FINOVA Group, Inc. 82,900 4,005
- - FIRSTPLUS Financial Group, Inc. 319,300 259
INFORMATION SERVICES
Dun & Bradstreet Corp. 107,400 3,947
INSURANCE--MULTILINE (4.4%)
Allstate Corp. 15,131,244 550,399
Aon Corp. 7,092,375 485,828
American International
Group, Inc. 3,975,330 466,853
The Hartford Financial Services
Group Inc. 185,600 10,939
Hartford Life, Inc. 122,000 6,382
Old Republic International Corp. 267,100 5,225
SAFECO Corp. 72,900 2,898
Reliance Group Holdings 89,400 671
CIGNA Corp. 7,500 654
American National Insurance Co. 4,700 326
- - Alleghany Corp. 510 94
INSURANCE--PROPERTY-CASUALTY (0.1%)
Travelers Property Casualty Corp. 188,200 6,493
Everest Reinsurance
Holdings, Inc. 152,900 4,635
The PMI Group Inc. 72,900 4,069
Mercury General Corp. 12,100 437
MISCELLANEOUS (1.3%)
Fannie Mae 5,834,700 413,899
Associates First Capital Corp. 1,024,701 45,407
Nationwide Financial
Services, Inc. 134,400 6,233
AMBAC Financial Group Inc. 95,900 5,790
REAL ESTATE INVESTMENT TRUST (0.1%)
Equity Office Properties Trust
REIT 309,400 8,528
Equity Residential Properties
Trust REIT 169,000 7,816
Simon Property Group, Inc. REIT 197,000 5,651
Spieker Properties, Inc. REIT 43,500 1,707
Duke Realty Investments, Inc. REIT 1,231 29
RENT & LEASE SERVICES
Ryder System, Inc. 227,200 5,992
SAVINGS & LOAN (2.4%)
Washington Mutual, Inc. 19,696,134 810,004
- - Golden State Bancorp Inc. 332,300 8,162
Golden West Financial Corp. 63,200 6,328
Green Point Financial Corp. 152,800 5,348
Peoples Bank Bridgeport 47,000 1,481
SECURITIES BROKERS & SERVICES
Countrywide Credit
Industries, Inc. 148,800 6,743
A.G. Edwards & Sons, Inc. 186,350 6,522
----------
9,176,183
----------
HEALTH CARE (2.2%)
American Home Products
Corp. 4,610,500 281,241
Columbia/HCA Healthcare
Corp. 6,266,900 154,714
Aetna Inc. 1,657,000 145,298
Bristol-Myers Squibb Co. 2,124,000 135,007
</TABLE>
10
<PAGE> 35
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
Pharmacia & Upjohn, Inc. 136,400 7,638
Abbott Laboratories 157,600 7,634
United Healthcare Corp. 119,300 6,696
- - Tenet Healthcare Corp. 251,900 5,951
- - Wellpoint Health Networks Inc.
Class A 76,500 5,374
- - Beverly Enterprises, Inc. 209,900 1,364
- - Humana, Inc. 98,800 1,346
----------
752,263
----------
INTEGRATED OILS (4.5%)
Phillips Petroleum Co. 9,056,400 458,480
(1)Occidental Petroleum Corp. 20,894,900 421,816
Exxon Corp. 2,622,600 217,840
Mobil Corp. 2,027,500 212,381
Enron Corp. 2,729,800 205,417
Chevron Corp. 177,200 17,676
Texaco Inc. 111,200 6,978
Sunoco, Inc. 159,000 5,684
Ashland, Inc. 122,700 5,184
USX-Marathon Group 163,100 5,097
Atlantic Richfield Co. 37,200 3,122
----------
1,559,675
----------
OTHER ENERGY (7.1%)
Williams Cos., Inc. 18,371,846 868,070
(1)Baker Hughes, Inc. 21,645,400 646,656
Halliburton Co. 15,156,900 646,063
Schlumberger Ltd. 4,851,200 309,870
Tosco Corp. 257,600 6,891
- - Noble Drilling Corp. 25,200 495
----------
2,478,045
----------
MATERIALS & PROCESSING (4.1%)
(1)Fort James Corp. 16,738,600 636,067
(1)Millennium Chemicals, Inc. 7,933,742 214,211
Hanson PLC ADR 3,426,750 167,697
(1)Witco Chemical Corp. 5,431,800 103,544
Air Products & Chemicals, Inc. 2,034,000 95,598
Phelps Dodge Corp. 1,373,900 86,899
Dow Chemical Co. 138,500 18,169
E.I. du Pont de Nemours & Co. 201,000 14,196
The Mead Corp. 179,500 7,505
Solutia, Inc. 286,600 6,986
The Timber Co. 258,000 6,644
Archer-Daniels-Midland Co. 429,975 6,450
Louisiana-Pacific Corp. 284,300 5,917
Lafarge Corp. 169,800 5,741
Armstrong World Industries Inc. 96,500 5,283
Westvaco Corp. 172,600 5,156
Fluor Corp. 150,000 5,006
The BFGoodrich Co. 122,600 4,873
Engelhard Corp. 190,100 3,648
USX-U.S. Steel Group 110,300 3,337
USG Corp. 35,000 2,043
- - Owens-Illinois, Inc. 68,700 1,992
Johns Manville Corp. 111,500 1,498
Owens Corning 30,800 1,097
----------
1,409,557
----------
PRODUCER DURABLES (4.1%)
(1)Honeywell, Inc. 8,676,400 822,089
Xerox Corp. 9,275,442 544,932
Caterpillar, Inc. 252,600 16,261
United Technologies Corp. 70,400 10,199
Lockheed Martin Corp. 199,800 8,604
Pitney Bowes, Inc. 100,800 7,050
Pentair, Inc. 144,000 6,768
Molex, Inc. 92,900 2,996
AGCO Corp. 274,200 2,708
Emerson Electric Co. 37,100 2,393
Tektronix, Inc. 66,300 1,608
Centex Corp. 40,800 1,492
Sundstrand Corp. 7,700 552
Tecumseh Products Co. Class A 4,460 273
----------
1,427,925
----------
TECHNOLOGY (2.6%)
Electronic Data Systems Corp. 7,893,900 424,297
International Business
Machines Corp. 1,262,100 264,016
Intel Corp. 2,730,000 167,042
- - Apple Computer, Inc. 188,600 8,676
- - Vitesse Semiconductor Corp. 122,500 5,673
Motorola, Inc. 63,000 5,048
- - General Instrument Corp. 128,000 4,672
- - Advanced Micro Devices, Inc. 277,300 4,558
Hewlett-Packard Co. 55,000 4,338
Adobe Systems, Inc. 66,700 4,227
- - The SABRE Group Holdings, Inc. 77,400 4,034
- - Seagate Technology Inc. 109,200 3,044
- - NCR Corp. 68,800 2,821
- - Tech Data Corp. 40,300 942
EG&G, Inc. 29,400 919
- - SCI Systems, Inc. 3,000 114
----------
904,421
----------
UTILITIES (15.2%)
SBC Communications Inc. 15,642,298 875,969
GTE Corp. 12,897,200 863,306
U S WEST, Inc. 12,733,484 666,120
(1)Entergy Corp. 19,851,400 620,356
American Electric Power
Co., Inc. 9,090,300 376,679
Reliant Energy, Inc. 10,869,900 307,754
(1)Central & South West Corp. 11,943,000 296,336
FirstEnergy Corp. 8,665,177 257,247
AT&T Corp. 4,613,317 232,973
- - MCI WorldCom, Inc. 2,671,048 219,026
Public Service Enterprise
Group, Inc. 5,302,500 212,100
Duke Energy Corp. 2,008,200 112,459
BellSouth Corp. 825,600 36,946
Bell Atlantic Corp. 414,636 23,893
Ameritech Corp. 310,600 21,257
Sprint Corp. 180,300 18,492
Southern Co. 442,500 11,975
Texas Utilities Co. 232,200 9,230
PG&E Corp. 286,000 8,884
Comcast Corp. Class A Special 123,900 8,139
DTE Energy Co. 187,100 7,636
Energy East Corp. 278,200 7,355
Century Telephone
Enterprises, Inc. 180,450 7,263
GPU, Inc. 188,300 7,179
- - MediaOne Group, Inc. 87,300 7,120
</TABLE>
11
<PAGE> 36
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
VALUE*
WINDSOR II FUND SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
Edison International 283,200 $ 6,938
Ameren Corp. 168,200 6,507
- - U.S. Cellular Corp. 135,900 6,447
PP&L Resources Inc. 222,288 6,210
- - MidAmerican Energy
Holdings Co. 184,900 5,951
Baltimore Gas & Electric Co. 195,600 5,501
Telephone & Data Systems, Inc. 90,900 5,443
BEC Energy 117,700 5,002
Consolidated Edison Inc. 99,200 4,507
ALLTEL Corp. 64,600 4,356
Pinnacle West Capital Corp. 109,000 4,231
FPL Group, Inc. 59,500 3,354
Allegheny Energy, Inc. 52,600 1,792
- - Sprint PCS 26,350 1,117
PECO Energy Corp. 15,000 712
- - Cablevision Systems Corp. Class B 5,500 426
Kansas City Power & Light Co. 13,700 366
----------
5,284,554
----------
OTHER (6.0%)
Raytheon Co. Class B 10,353,600 727,340
(1)Tenneco, Inc. 13,588,800 366,898
(1)ITT Industries, Inc. 9,282,100 334,156
AlliedSignal Inc. 5,441,800 319,706
General Electric Co. 2,784,200 293,733
Minnesota Mining &
Manufacturing Co. 219,600 19,544
Trinity Industries, Inc. 158,200 5,507
Loews Corp. 63,000 4,611
U.S. Industries, Inc. 227,700 4,227
Ogden Corp. 103,400 2,669
Crane Co. 91,950 2,661
Brunswick Corp. 98,600 2,366
Lancaster Colony Corp. 39,500 1,165
- - Berkshire Hathaway Inc. Class B 28 69
----------
2,084,652
----------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $21,971,870) 32,779,034
<CAPTION>
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (5.6%)+
- --------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
(2)4.77%, 7/28/1999 $ 3,000 2,967
Federal National Mortgage Association
(2)4.75%, 7/22/1999 65,000 64,293
U.S. Treasury Bill
(2)4.33%, 7/1/1999 10,000 9,928
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.89%, 5/3/1999 1,856,241 1,856,241
4.91%, 5/3/1999--Note G 10,731 10,731
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $1,944,170) 1,944,160
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(COST $23,916,040) 34,723,194
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.1%)
- --------------------------------------------------------------------------------
Other Assets--Note C 182,914
Liabilities--Note G (152,466)
- --------------------------------------------------------------------------------
30,448
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 1,057,678,372 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $34,753,642
================================================================================
NET ASSET VALUE PER SHARE $32.86
================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
-Non-Income-Producing Security.
+The fund invests a portion of its cash reserves in equity markets through the
use of index futures contracts. After giving effect to futures investments,
the fund's effective common stock and temporary cash investment positions
represent 98.8% and 1.1%, respectively of net assets. See Note F in Notes to
Financial Statements.
(1)Considered an affiliated company as the fund owns more than 5% of the
outstanding voting securities of such company. The total market value of
investments in affiliated companies was $5,529,716,000.
(2)Security segregated as initial margin for open futures contracts.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- --------------------------------------------------------
AT APRIL 30, 1999, NET ASSETS CONSISTED OF:
- --------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------
<S> <C> <C>
Paid in Capital $22,500,333 $21.27
Undistributed Net
Investment Income 198,663 .19
Accumulated Net
Realized Gains 1,184,750 1.12
Unrealized Appreciation--
Note F
Investment Securities 10,807,154 10.22
Futures Contracts 62,742 .06
- --------------------------------------------------------
NET ASSETS $34,753,642 $32.86
========================================================
</TABLE>
12
<PAGE> 37
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If the
fund invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
WINDSOR II FUND
SIX MONTHS ENDED APRIL 30, 1999
(000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 336,480
Interest 48,902
Security Lending 103
-----------
Total Income 385,485
-----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 19,544
Performance Adjustment 332
The Vanguard Group--Note C
Management and Administrative 37,723
Marketing and Distribution 2,909
Custodian Fees 45
Auditing Fees 14
Shareholders' Reports 480
Trustees' Fees and Expenses 25
-----------
Total Expenses 61,072
Expenses Paid Indirectly--Note D (1,233)
-----------
Net Expenses 59,839
- -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 325,646
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold* 982,920
Futures Contracts 303,212
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 1,286,132
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 3,545,943
Futures Contracts (34,743)
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 3,511,200
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,122,978
=========================================================================================================================
</TABLE>
*Dividend income and realized net loss from affiliated companies were
$67,446,000 and $9,082,000, respectively.
13
<PAGE> 38
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
WINDSOR II FUND
------------------------------------
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 1999 OCT. 31, 1998
(000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 325,646 $ 589,221
Realized Net Gain 1,286,132 2,457,628
Change in Unrealized Appreciation (Depreciation) 3,511,200 694,834
------------------------------------
Net Increase in Net Assets Resulting from Operations 5,122,978 3,741,683
------------------------------------
DISTRIBUTIONS
Net Investment
Income (421,807) (541,835)
Realized Capital Gain (2,559,633) (1,694,611)
------------------------------------
Total Distributions (2,981,440) (2,236,446)
------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 3,555,610 7,469,255
Issued in Lieu of Cash Distributions 2,845,388 2,144,820
Redeemed (3,427,555) (4,048,511)
------------------------------------
Net Increase from Capital Share Transactions 2,973,443 5,565,564
------------------------------------
Total Increase 5,114,981 7,070,801
------------------------------------
NET ASSETS
Beginning of Period 29,638,661 22,567,860
------------------------------------
End of Period $34,753,642 $29,638,661
==========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 115,727 243,421
Issued in Lieu of Cash Distributions 99,559 75,460
Redeemed (111,502) (133,672)
------------------------------------
Net Increase in Shares Outstanding 103,784 185,209
==========================================================================================================================
</TABLE>
14
<PAGE> 39
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
WINDSOR II FUND
YEAR ENDED OCTOBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------------
THROUGHOUT EACH PERIOD APR. 30, 1999 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $31.07 $29.36 $24.04 $20.06 $17.33 $17.98
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .32 .65 .64 .62 .58 .55
Net Realized and Unrealized Gain (Loss)
on Investments 4.58 3.91 6.47 4.63 3.17 (.19)
-------------------------------------------------------------------------
Total from Investment Operations 4.90 4.56 7.11 5.25 3.75 .36
-------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.44) (.66) (.63) (.58) (.55) (.51)
Distributions from Realized Capital Gains (2.67) (2.19) (1.16) (.69) (.47) (.50)
-------------------------------------------------------------------------
Total Distributions (3.11) (2.85) (1.79) (1.27) (1.02) (1.01)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $32.86 $31.07 $29.36 $24.04 $20.06 $17.33
===============================================================================================================================
TOTAL RETURN 17.27% 16.51% 31.27% 27.17% 23.08% 2.22%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $34,754 $29,639 $22,568 $14,758 $10,272 $8,246
Ratio of Total Expenses to
Average Net Assets 0.39%* 0.41% 0.37% 0.39% 0.40% 0.39%
Ratio of Net Investment Income to
Average Net Assets 2.05%* 2.16% 2.49% 2.92% 3.27% 3.26%
Portfolio Turnover Rate 21%* 31% 30% 32% 30% 24%
===============================================================================================================================
</TABLE>
*Annualized.
15
<PAGE> 40
NOTES TO FINANCIAL STATEMENTS
Vanguard Windsor II Fund is registered under the Investment Company Act of 1940
as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair value.
2. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. FUTURES: The fund uses S&P 500 Index and S&P MidCap 400 Index futures
contracts to a limited extent, with the objective of maintaining full exposure
to the stock market while maintaining liquidity. The fund may purchase or sell
futures contracts to achieve a desired level of investment, whether to
accommodate portfolio turnover or cash flows from capital shares transactions.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of stocks held by the fund and the
prices of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Barrow, Hanley, Mewhinney & Strauss, Inc.; Equinox Capital Management, Inc.;
and Tukman Capital Management, Inc., provide investment advisory services to the
fund for fees calculated at an annual percentage rate of average net assets. The
basic fees thus computed for Barrow, Hanley, Mewhinney & Strauss, Inc., are
subject to quarterly adjustments based on performance relative to the S&P/BARRA
Value Index; such fees for Equinox Capital Management, Inc., are subject to
quarterly adjustments based on performance relative to the Russell 1000 Value
Index; such fees for Tukman Capital Management, Inc., are subject to quarterly
adjustments based on performance relative to the S&P 500 Index.
16
<PAGE> 41
The Vanguard Group provides investment advisory services to a portion of
the fund on an at-cost basis; the fund paid Vanguard advisory fees of $238,000
for the six months ended April 30, 1999.
For the six months ended April 30, 1999, the aggregate investment advisory
fee represented an effective annual basic rate of 0.12% of average net assets
before an increase of $332,000 based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the Board of Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At April 30, 1999, the fund had contributed capital of $5,167,000 to
Vanguard (included in Other Assets), representing 0.01% of the fund's net assets
and 7.4% of Vanguard's capitalization. The fund's Trustees and officers are also
Directors and officers of Vanguard.
D. Vanguard has asked the fund's investment advisers to direct certain portfolio
trades, subject to obtaining the best price and execution, to brokers who have
agreed to rebate to the fund part of the commissions generated. Such rebates are
used solely to reduce the fund's administrative expenses. The fund's custodian
has also agreed to reduce its fees when the fund maintains cash on deposit in
the non-interest-bearing custody account. For the six months ended April 30,
1999, directed brokerage and custodian fee offset arrangements reduced expenses
by $1,226,000 and $7,000 respectively. The total expense reduction represented
an effective annual rate of 0.01% of the fund's average net assets.
E. During the six months ended April 30, 1999, the fund purchased $3,803,513,000
of investment securities and sold $3,100,529,000 of investment securities, other
than temporary cash investments.
F. At April 30, 1999, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $10,807,154,000,
consisting of unrealized gains of $11,591,936,000 on securities that had risen
in value since their purchase and $784,782,000 in unrealized losses on
securities that had fallen in value since their purchase.
At April 30, 1999, the aggregate settlement value of open futures
contracts expiring in June 1999 and the related unrealized appreciation were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(000)
---------------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE APPRECIATION
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Index 4,179 $1,396,309 $51,362
S&P MidCap 400 Index 866 171,511 11,380
- ----------------------------------------------------------------------------------------------------------
</TABLE>
G. The market value of securities on loan to broker/dealers at April 30, 1999,
was $8,740,000, for which the fund held cash collateral of $10,731,000. Cash
collateral received is invested in repurchase agreements.
17
<PAGE> 42
NOTICE TO SHAREHOLDERS
In the past, the semiannual income dividend that Vanguard Windsor II Fund
distributed to shareholders at midyear was paid at a "set rate" of $0.20 per
share. Income the fund earned during the period that was in excess of the set
rate was distributed in the December income dividend. Beginning with the
dividend to be paid in June 1999, Windsor II Fund will distribute income on a
"pay as you go" basis, rather than according to a set rate. We expect the June
1999 income dividend to be about $0.30 per share. We believe it is more
equitable to distribute substantially all of the income earned during the
semiannual period to the fund's shareholders at midyear.
18
<PAGE> 43
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director/Trustee of The Vanguard
Group, Inc., and each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & Johnson-Merck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co., The Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co.,
NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell
Company is the owner of trademarks and copyrights relating to the
Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are
trademarks of Wilshire Associates.
<PAGE> 44
VANGUARD
MILESTONES
[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago,
on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
Q732-06/11/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor
