Vanguard Windsor(TM)Fund
Annual Report October 31, 2000
[SHIP]
[THE VANGUARD GROUP LOGO]
<PAGE>
OUR REPORTS TO
THE OWNERS
At Vanguard, we regard our investors not as mere customers but as owners of the
enterprise. For that's exactly what a mutual fund shareholder is--part owner of
an investment company.
In our reports to you on how the company is doing, we have tried to convey
information without hyperbole and in the context of broad market trends and
relevant benchmarks.
We've introduced several changes to this year's annual reports to make them even
more useful. Among the changes:
- Larger type and redesigned graphics to make the reports easier to read.
- An at-a-glance summary of key points about fund performance and the
financial markets.
- A table--included for many funds--in which the investment adviser
highlights significant changes in holdings.
- Comparisons of fund performance and characteristics against both a broad
market index and a "best fit" benchmark.
We hope you'll find that these changes make the reports even more
accessible and informative.
SUMMARY
* Vanguard Windsor Fund earned 11.6% during the 12 months ended October 31,
2000, surpassing returns for both its average peer fund and its index
benchmarks.
* Value stocks in general, and Windsor's holdings in particular, rebounded
during the second half of the fiscal year.
* The fund benefited from strong stock picks in several sectors, especially the
financial services and consumer discretionary groups.
CONTENTS
1 Letter from the Chairman
6 Notice to Shareholders
7 Adviser's Report
9 Fund Profile
10 Glossary of Investment Terms
11 Performance Summary
12 Report on After-Tax Returns
13 Financial Statements
22 Report of Independent Accountants
<PAGE>
LETTER
from the Chairman
Fellow Shareholders,
VANGUARD WINDSOR FUND earned 11.6% in the fiscal year ended October 31, which
was a turbulent period for stocks. Windsor outpaced the broad market as well as
our benchmarks: the average multi-cap value fund, the Russell 1000 Value Index,
and the Standard & Poor's 500 Index.
We thank our shareholders for their patience in recent years when value
stocks generated returns well below those of growth issues. It took discipline
to stick with value investing when price momentum--buying stocks mainly because
their prices had risen--was a driving force on Wall Street. However, it appears
that pundits who declared the death of value investing were off target.
2000 TOTAL RETURNS FISCAL YEAR ENDED
OCTOBER 31
--------------------------------------------------
Vanguard Windsor Fund 11.6%
Average Multi-Cap Value Fund* 10.9
Russell 1000 Value Index 5.5
S&P 500 Index 6.1
--------------------------------------------------
*Derived from data provided by Lipper Inc.
The table above presents the 12-month returns of the fund and its
benchmarks. The fund's total return (capital change plus reinvested dividends)
is based on a decrease in net asset value from $16.91 per share on October 31,
1999, to $16.44 per share on October 31, 2000, and is adjusted for dividends
totaling $0.29 per share paid from net investment income and a distribution of
$1.90 per share paid from net realized capital gains.
If you own Vanguard Windsor Fund in a taxable account, we call your
attention to a review of the fund's after-tax returns on page 12.
MARKET BAROMETER AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 2000
ONE THREE FIVE
YEAR YEARS YEARS
--------------------------------------------------------------------------------
STOCKS
S&P 500 Index (Large-caps) 6.1% 17.6% 21.7%
Russell 2000 Index (Small-caps) 17.4 5.9 12.4
Wilshire 5000 Index (Entire market) 8.1 16.0 20.1
MSCI EAFE Index (International) -2.7 9.7 8.9
--------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index (Entire market) 7.3% 5.7% 6.3%
Lehman 10 Year Municipal Bond Index 8.2 5.0 5.7
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.7 5.2 5.2
================================================================================
CPI
Consumer Price Index 3.4% 2.5% 2.5%
--------------------------------------------------------------------------------
FINANCIAL MARKETS IN REVIEW
The U.S. stock market began the fiscal year like a skyrocket as investors
targeted technology-related stocks. In the first two months of the
1
<PAGE>
period, the broad market gained more than 11%. Fueling the increase were
favorable economic data: Production rose rapidly, unemployment fell below 4% of
the workforce, long-term interest rates declined, and inflation was
well-behaved, aside from a rise in energy prices.
But as the period progressed, the effects of higher short-term interest
rates--engineered by the Federal Reserve Board to slow the economy and forestall
inflation--began to show. Data suggested that the economy's expansion was
decelerating to a moderate pace. And despite solid increases in corporate
earnings, doubts grew that companies could sustain the growth pace amid a
slowing economy.
Investors seemed to grow wary of the lofty prices of many tech stocks in
relation to their earnings and other fundamentals. Value stocks--those issues
characterized by relatively low prices in relation to earnings, book value, and
dividends-- generally benefited from the market's increased emphasis on current
earnings.
TOTAL RETURNS
OCT. 31, 1999, TO APR. 30, 2000, TO FISCAL
APR. 30, 2000 OCT. 31, 2000 2000
--------------------------------------------------------------------------------
Russell 1000 Growth Index 18.7% -7.9% 9.3%
Russell 1000 Value Index -1.0 6.6 5.5
--------------------------------------------------------------------------------
The result was a significant split between first- and second-half results for
growth and value stocks, as the table above shows.
For the full 12 months, the overall market, as measured by the Wilshire
5000 Total Market Index, returned 8.1%--a decent result but below the
double-digit gains investors have seen in recent years. For a change, small- and
mid-capitalization stocks outpaced their large-cap counterparts: The small-cap
Russell 2000 Index returned 17.4% for the 12 months, 11.3 percentage points
ahead of the return of the large-cap S&P 500 Index.
The year saw huge variations in returns of various industry groups. For
example, higher oil and natural gas prices boosted the oil exploration and
services companies in the "other energy" group to a 49% return, making this the
top-performing sector within the S&P 500 Index. Other strong sectors included
producer durables (31%), health care (16%), and financial services (15%). The
year's big losers were telephone companies, which weighed down the utilities
group (-15%), and retailers, apparel makers, and other firms in the consumer
discretionary sector (-13%).
Short-term interest rates rose substantially during the year, with the
yield on 3-month U.S. Treasury bills increasing 1.3 percentage points. The
increase essentially matched the 1.25-point boost in the federal funds rate
accomplished in four steps by the Federal Reserve.
Yields were relatively flat, on balance, for most longer-term securities. A
rising federal budget surplus shrank the supply of U.S. Treasury bonds, and
2
<PAGE>
their yields declined slightly for the fiscal year: The 30-year Treasury's yield
fell from 6.16% to 5.79%. Yields on 10-year Treasuries fell by about a
quarter-point. In general, bonds turned in solid results during the 12 months.
The Lehman Brothers Aggregate Bond Index, a proxy for taxable investment-grade
bonds, returned 7.3%, outpacing the S&P 500 Index. Mortgage-backed securities
and high-quality corporate bonds performed well, benefiting from investors'
shift toward high-quality bonds and away from speculative issues. Prices of
high-yield bonds fell by more than 10%, on average, and the Lehman High Yield
Index returned -1.6%.
FISCAL 2000 PERFORMANCE OVERVIEW
Vanguard Windsor Fund's 11.6% return in the fiscal year ended October 31
represented a remarkable comeback. After declining -10.4% from November through
February, the fund generated a 24.6% return during the final eight months of our
fiscal year. Windsor's full-year gain placed it modestly ahead of the average
multi-cap value fund and far in advance of the Russell 1000 Value Index. We also
finished the year well ahead of the broad market indexes.
The turnabout was not the result of some sudden brilliant change in
strategy by our advisers--Wellington Management Company and Sanford C. Bernstein
& Co. They have continued to follow their disciplined approaches to selecting
stocks. Rather, it seemed that the market began to recognize the merits of a
number of stocks that our advisers had selected.
The standout group for Windsor was financial services stocks--the fund's
largest industry concentration at about one-quarter of assets on average. (This
group accounted for more than 30% of the Russell 1000 Value Index.) Windsor's
financial stocks earned an average of 26% during the fiscal year, nearly double
the average return for the sector in the Russell index. In the consumer
discretionary group, Windsor's holdings earned about 14% during the fiscal year,
compared with a -6% return for this group in the index. Windsor's health care
and materials & processing stocks also significantly outperformed those in the
index. On the other hand, our fund's overall return was hurt by very poor
results from its utilities stocks (down nearly -30%) and by having more than
triple the market weighting in the materials & processing sector, a poorly
performing segment of the market.
--------------------------------------------------------------------------------
The standout group for Windsor Fund was financial services stocks.
--------------------------------------------------------------------------------
The past year showed that patience and perspective are necessary virtues
for value investors, who by definition are choosing securities that have been
shunned by many other investors (that's why their prices are relatively low in
comparison with earnings and other measures).
We note that many individuals who gave into the temptation to alter their
investment allocations paid a heavy price. Consider that the largest flows
3
<PAGE>
of cash into technology-related mutual funds and out of value funds like Windsor
occurred in February and March 2000. The timing of these flows couldn't have
been worse.
That said, we don't pretend to know what the market has in store next, and
we continue to believe that long-term investors should maintain exposure to both
value stocks and growth stocks. As fiscal 2000 demonstrated, market leadership
can switch suddenly and decisively from growth to value and back again. As we
said in our letter one year ago, we believe that Windsor's disciplined approach
to seeking value gives the fund a good chance to achieve our goal of providing
superior long-term returns.
TOTAL ASSETS MANAGED OCTOBER 31, 2000
$ MILLION PERCENTAGE
--------------------------------------------------------------------------------
Wellington Management Company, llp $11,799 74%
Sanford C. Berstein & Co., LLC 3,867 24
Cash Investments* 269 2
--------------------------------------------------------------------------------
Total $15,935 100%
--------------------------------------------------------------------------------
*This cash is invested by The Vanguard Group in equity index futures to simulate
investment in stocks; each adviser also maintains a modest cash position.
The table above shows the current allocation of Windsor Fund assets between
our two advisers.
LONG-TERM PERFORMANCE OVERVIEW
We're pleased by Windsor Fund's strong relative results during fiscal 2000, but
we believe that performance is best measured over the long haul. The table below
presents the average annual returns for your fund, the average multi-cap value
fund, and two market benchmarks over the past decade. It also presents the
results of hypothetical $10,000 investments made ten years ago in each.
Windsor Fund's edge over its average competitor amounted to more than
$5,000 over the decade. Our record versus the index benchmarks wasn't as good.
The Russell 1000 Value Index is a good yardstick for us, although not a precise
fit, since some of its constituent stocks are fairly pricey by Windsor
standards. The S&P 500 Index, of course, contains both value and growth
stocks--a big advantage during the 1990s, when growth stocks were the best
performers.
Our low operating costs explain much of our margin over our peer fund
group. Windsor Fund's expense ratio is a slender 0.31%, or
TOTAL RETURNS TEN YEARS ENDED
OCTOBER 31, 2000
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
--------------------------------------------------------------------------------
Vanguard Windsor Fund 17.5% $50,084
Average Multi-Cap Value Fund 16.2 44,732
Russell 1000 Value Index 18.3 53,805
S&P 500 Index 19.4 59,083
--------------------------------------------------------------------------------
4
<PAGE>
$3.10 per $1,000 of assets, versus the 1.39% ($13.90 per $1,000) charged by the
average multi-cap value fund, according to data from Lipper Inc. This cost
advantage gives our advisers a head start versus competitors, year after year,
in our quest to provide superior returns. (In comparison with indexes, all funds
are at a disadvantage, since indexes exist only on paper and incur no costs at
all.)
Of course, our goal is to provide long-term returns that beat those of both
our peer funds and our index benchmark. We hope to improve our relative returns
in future years, but stress that it's unlikely that we or the market will match
the absolute returns recorded during the past ten years. The stock market's
performance during the 1990-2000 decade was one of its best ever; returns were
far above the 11% to 12% annual average for stocks over the past 75 years or so.
We suggest that in making your investment plans, you assume no more than the
long-term average return of about 11%. After all, if you make modest assumptions
and the market exceeds them, the result is not bad: You'll merely get to your
objectives sooner.
IN SUMMARY
The financial markets during the past 12 months certainly reinforced the
importance of diversification. Just when it seemed that a single hot sector of
the stock market was the only place to be, technology-related stocks swooned and
value stocks came to the fore. And bonds--the asset class many investors forgot
in the excitement of the bull market in stocks--posted solid results.
Perhaps the one safe prediction for the next 12 months is that markets will
continue to be quite unpredictable. But uncertainty and volatility--risk, to use
a four-letter word--are constant companions for investors. A balanced investment
program--a mix of short-term investments, bonds, and both value and growth
stocks--can help you manage risk. Once you've built such a program in accordance
with your objectives, time horizon, financial situation, and tolerance for
market fluctuations, we recommend staying the course.
Sincerely,
/S/ JOHN J. BRENNAN
November 13, 2000
JOHN J. BRENNAN
Chairman and
Chief Executive Officer
5
<PAGE>
--------------------------------------------------------------------------------
NOTICE TO SHAREHOLDERS: CHANGE IN OWNERSHIP
FOR SANFORD C. BERNSTEIN & CO., INC.
On June 20, 2000, Alliance Capital Management L.P. (Alliance Capital) announced
that it had agreed to acquire Sanford C. Bernstein & Co., Inc. (Bernstein), one
of the advisers to Vanguard Windsor Fund. The change in ownership is not
expected to have any practical effect on the management or operations of your
fund. However, your fund's advisory contract with Bernstein automatically
terminated when the change in ownership occurred. This automatic termination is
required by the Investment Company Act of 1940.
Alliance Capital's acquisition of Bernstein became effective on October 2,
2000. Following the completion of that transaction, Bernstein's investment
professionals, including those responsible for the management of your fund's
assets, now provide investment management services through Sanford C. Bernstein
& Co., LLC (Bernstein LLC), a subsidiary of Alliance Capital and Alliance
Capital's Bernstein Investment Research and Management Unit. Accordingly, on
September 14, 2000, your fund's board of trustees approved a new investment
advisory contract with Bernstein LLC to take effect when the ownership change
was completed. All of the key terms of the new contract, except for its
commencement and termination dates, are the same as those in the previous
contract. Your board believes that, like the previous advisory contract, the new
advisory contract will enable the fund to obtain services of high quality at
reasonable cost and that it is in the best interests of the fund and its
shareholders. The board's unanimous vote to approve the new contract included
all of the trustees who are not "interested persons" of the fund or of Bernstein
LLC.
In 1993, the Windsor Fund received permission from the U.S. Securities and
Exchange Commission and the fund's shareholders for the trustees to enter into a
new advisory agreement without the delay and expense of a shareholder vote. This
special permission was made subject to several conditions, including the
requirement that shareholders be notified of changes to the fund's investment
advisory agreement.
Bernstein LLC is located at 767 Fifth Avenue, New York, NY 10153. Bernstein
LLC is registered as an investment adviser with the U.S. Securities and Exchange
Commission. Bernstein began providing private investment advisory services in
1967 and has provided such services to both domestic and international
investment portfolios for corporate, government, and union benefit plans; mutual
funds; individuals; endowments; and foundations. As of June 30, 2000, Bernstein
had total assets under management of approximately $82.7 billion.
6
<PAGE>
ADVISER'S
Report WELLINGTON MANAGEMENT COMPANY, LLP
After appreciating a staggering 245% from the end of 1997 through the first
quarter of 2000, the technology sector in the S&P 500 Index has finally
undergone some correction, dropping about 25% in the final seven months of
vanguard windsor fund's fiscal year ended October 31. Given our obvious
underweighting in these mostly high-P/E stocks, which at their peak represented
close to one-third of the market's value, this correction provided an improved
backdrop for Windsor-style investing in the second half of the year.
For the entire fiscal year, our outperformance of the S&P 500 Index was led
by three sectors--energy, financials, and health care. In each of these, we were
doubly blessed: Our portion of the fund was overweighted versus the index in a
sector that outperformed the market and our holdings outpaced the sector
average. And, believe it or not, our technology stocks--low-P/E tech stocks, to
be sure--were up 30%, outperforming both the market as a whole and the average
return from the tech sector.
--------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY
The fund reflects a belief 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 fund may concentrate a large portion of assets in those
securities or industries the advisers believe offer the best return potential.
--------------------------------------------------------------------------------
A notable event that contributed importantly to performance for the year
was the September announcement that Citigroup was acquiring Associates First
Capital--our second-largest holding at the time--at a 53% premium. On the
negative side of things, our long-distance telephone holdings--AT&T and
WorldCom--were very poor performers. We still hold these stocks and believe that
they have significant upside potential, although we've reduced our price targets
for them due to significantly reduced earnings forecasts.
The U.S. economy is transitioning from the too-high GDP growth rate of
about 5.5% that we saw in 1999 and in the first half of 2000 to a more
sustainable growth rate of 3.0% to 3.5% for the second half of the year and, we
expect, for the next two or three years. We think that the odds are against this
slowdown turning into a recession. The underlying productivity of the U.S.
economy is strong, which should keep inflation well contained, and there are no
broad inventory or other imbalances that might get us in trouble. When end
demand slows, as it has lately, you do get inventory imbalances in individual
sectors. However, in our modern economy such imbalances typically get recognized
and dealt with in two or three quarters.
7
<PAGE>
Importantly, we see real (inflation-adjusted) consumer spending growing
3.0% to 3.5% next year, about in line with real disposable income. And the
consumer is, after all, about two-thirds of the economy. The increase in oil's
price--from around $12 a barrel in early 1999 to around $35 now--has dampened
consumer spending, but we expect the price to retrace its steps to the low $20s
over the next 12 months, as OPEC's production now is clearly outstripping
annualized demand. The recent decline in mortgage rates is another positive
factor in the outlook for consumer spending, and we have already seen a bounce
in home buying from spring and summer levels.
While we see the economy in a positive light, the market is not so sure.
This has created good value opportunities in cyclical stocks. Accordingly, we
are somewhat overweighted in cyclical stocks--particularly Alcoa and other basic
materials producers, retailers, specialty chemicals, and transportation.
We are still considerably underweighted in both consumer nondurables and
technology. Consumer nondurables have been poor performers for a year or two,
and we don't see them outperforming the market given their still-high
valuations, their low unit-volume growth, and the lack of their once-vaunted
pricing power.
And despite a 25% drop in tech stocks since March, the S&P's tech sector
still sports a 32 price/earnings multiple based on estimates of next year's
earnings. This is a high price relative to the 11% long-term growth rate for the
information technology sector as a whole--especially if we are wrong about the
economy and we wind up in a recession. In recessions, technology spending gets
deferred, and tech stocks would be no fun at all. As it is, the group is being
buffeted by decelerating growth in a number of technology sub-sectors-- a
development that we envisioned in our report to you at midyear. Again, we do not
forecast a recession. If we have one, it will be short and shallow. In any
event, we think the prices of cyclicals, where we are overweighted, have
factored in such a possibility better than tech prices have.
We continue to invest your money in the longstanding Windsor
tradition--emphasizing low-P/E stocks, staying price opportunistic on the buy
side and price disciplined on the sell side, and being willing to sensibly
concentrate--while keeping an eye on the ever-changing world of business and
contemporary trends.
Indeed, as tech stocks have weakened, we've used the opportunity to take
starting positions in select tech stocks (Dell Computer and Hewlett-Packard, for
example) at our kind of prices. Even so, we're still way underweighted in tech
stocks overall. Other important new positions established in the latter half of
the fiscal year include Staples, Cox Communications, and Petrobras, the big
Brazilian oil company. We continue to forage--in our usual opportunistic and
entrepreneurial fashion--for undervalued stocks with significant (30% or better)
upside potential as we try to provide unusual returns to you, the shareholder.
Charles T. Freeman, Portfolio Manager November 17, 2000
8
<PAGE>
FUND PROFILE As of October 31, 2000
for Windsor Fund
This Profile provides a snapshot of the fund's characteristics, compared where
appropriate to both an unmanaged index that we consider a "best fit" for the
fund and a broad market index. Key terms are defined on page 10.
---------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
WILSHIRE
FUND BEST FIT* 5000
---------------------------------------------------------------
Number of Stocks 175 740 6,768
Median Market Cap $8.9B $41.6B $46.1B
Price/Earnings Ratio 15.0x 19.8x 29.8x
Price/Book Ratio 2.2x 3.3x 4.5x
Yield 1.6% 1.8% 1.1%
Return on Equity 15.3% 20.8% 22.8%
Earnings Growth Rate 12.2% 10.9% 16.8%
Foreign Holdings 7.3% 0.0% 0.0%
Turnover Rate 41% --- ---
Expense Ratio 0.31% --- ---
Cash Investments 0.6% --- ---
---------------------------------------------------------------
--------------------------------------------
TEN LARGEST HOLDINGS
(% of total net assets)
Associates First Capital Corp. 5.4%
(financial services)
Alcoa Inc. 4.4
(aluminum)
TJX Cos., Inc. 3.3
(retail)
WorldCom, Inc. 3.1
(telecommunications)
Citigroup, Inc. 2.9
(financial services)
Pharmacia Corp. 2.8
(pharmaceuticals)
Washington Mutual, Inc. 2.4
(savings & loan)
CIGNA Corp. 2.1
(insurance)
Air Products & Chemicals, Inc. 2.1
(chemicals)
Eaton Corp. 1.7
(auto parts)
--------------------------------------------
Top Ten 30.2%
--------------------------------------------
----------------------------------------------
VOLATILITY MEASURES
Wilshire
Fund Best Fit* Fund 5000
----------------------------------------------
R-Squared 0.89 1.00 0.53 1.00
Beta 1.15 1.00 0.88 1.00
----------------------------------------------
--------------------------------------------------------------------
SECTOR DIVERSIFICATION
(% OF COMMON STOCKS)
WILSHIRE
FUND BEST FIT* 5000
--------------------------------------------------------------------
Auto & Transportation 7.3% 3.1% 1.7%
Consumer Discretionary 9.4 9.2 12.0
Consumer Staples 1.1 7.8 5.3
Financial Services 25.1 31.3 17.0
Health Care 6.5 8.6 12.4
Integrated Oils 5.7 7.2 3.1
Other Energy 3.6 2.5 2.6
Materials & Processing 19.6 3.8 2.5
Producer Durables 3.0 3.5 3.3
Technology 6.1 4.7 26.4
Utilities 11.0 15.7 8.7
Other 1.6 2.6 5.0
--------------------------------------------------------------------
*Russell 1000 Value Index.
------------------------------
INVESTMENT FOCUS
MARKET CAP Medium
STYLE Value
------------------------------
[PICTURE OF COMPUTER]
VISIT OUR WEBSITE
WWW.VANGUARD.COM
FOR REGULARLY UPDATED
FUND INFORMATION.
9
<PAGE>
GLOSSARY
of Investment Terms
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the fund's "best fit" index benchmark and an
overall market index. Each index is assigned a beta of 1.00. Compared with a
given index, a fund with a beta of 1.20 would have seen its share price rise or
fall by 12% when the index rose or fell by 10%.
--------------------------------------------------------------------------------
CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing instruments. 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.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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 market in general, as measured by the fund's "best fit"
index benchmark and by an overall market index. If a fund's total returns were
precisely synchronized with an index's returns, its R-squared would be 1.00. If
the fund's returns bore no relationship to the index'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.
--------------------------------------------------------------------------------
TURNOVER RATE. An indication of trading activity during the past year. 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.
--------------------------------------------------------------------------------
10
<PAGE>
PERFORMANCE SUMMARY
for 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. An investor's shares, when
redeemed, could be worth more or less than their original cost.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) October 31, 1990-October 31, 2000
WINDSOR FUND RUSSELL 1000 VALUE INDEX
1991 44.7 32.9
1992 9.3 10.7
1993 28.3 25.2
1994 6.3 0.8
1995 17.8 24.7
1996 23.2 23.7
1997 27.0 33.2
1998 -0.8 14.8
1999 13.7 16.5
2000 11.6 5.5
--------------------------------------------------------------------------------
See Financial Highlights table on page 19 for dividend and capital gains
information for the past five years.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE OCTOBER 31, 1990-OCTOBER 31, 2000
WINDSOR AVERAGE RUSSELL 1000 WILSHIRE S&P 500
FUND MULTI-CAP VALUE 5000 INDEX INDEX
VALUE FUND* INDEX
199010 10000 10000 10000 10000 10000
199101 12228 11555 11459 11562 11420
199104 13564 12645 12494 12865 12562
199107 13938 13077 12933 13395 13087
199110 14469 13519 13289 13860 13350
199201 14962 14216 13685 14751 14011
199204 15840 14506 14412 14789 14325
199207 16390 14787 14949 15166 14760
199210 15815 14848 14706 15202 14679
199301 18001 15951 16002 16310 15493
199304 18469 16253 16835 16332 15648
199307 19393 16749 17749 16916 16049
199310 20288 17748 18406 17902 16872
199401 21581 18436 19064 18488 17488
199404 20134 17560 18067 17432 16480
199407 21294 17808 18394 17646 16877
199410 21576 18397 18549 18356 17524
199501 20711 18046 18559 18300 17581
199504 22857 19677 20339 20019 19359
199507 25482 21524 22230 22239 21283
199510 25417 22165 23128 23062 22158
199601 27194 24001 25686 25108 24378
199604 28922 25085 26421 26464 25208
199607 28171 24206 25762 25508 24810
199610 31304 26738 28617 28118 27497
199701 35471 29346 31769 31252 30800
199704 35551 29229 32382 31131 31543
199707 41597 34654 38340 37538 37745
199710 39767 34438 38113 36990 36327
199801 40712 35400 40381 39123 39089
199804 46782 39386 46041 44600 44497
199807 42618 37294 45129 43961 45024
199810 39455 36091 43764 42484 44315
199901 40961 38855 47740 49829 51788
199904 48136 41217 52528 52172 54207
199907 46842 41389 51893 52018 54120
199910 44878 40321 50997 53385 55691
200001 42738 39515 49185 56994 57146
200004 46060 41085 50491 58554 59697
200007 46306 40930 49300 57832 58978
200010 50084 44732 53805 57709 59083
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 2000 FINAL VALUE
------------------------------- OF A $10,000
1 YEAR 5 YEARS 10 YEARS INVESTMENT
--------------------------------------------------------------------------------
Windsor Fund 11.60% 14.53% 17.48% $50,084
Average Multi-Cap Value Fund* 10.94 15.08 16.16 44,732
Russell 1000 Value Index 5.52 18.40 18.33 53,805
Wilshire 5000 Index 8.10 20.14 19.16 57,709
S&P 500 Index 6.09 21.67 19.44 59,083
--------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------------------
11
<PAGE>
A REPORT
on Your Fund's After-Tax Returns
This table presents pre-tax and after-tax returns for your fund and an
appropriate peer group of mutual funds. The after-tax returns represent the
fund's past results only and cannot be used to predict future tax efficiency.
If you own the fund in a tax-deferred account such as an individual
retirement account or a 401(k), this information does not apply to you. Such
accounts are not subject to current taxes.
Income taxes can have a considerable impact on a fund's return--an
important consideration for investors who own mutual funds in taxable accounts.
While the pre-tax return is most often used to tally a fund's performance, the
fund's after-tax return, which accounts for taxes on distributions of capital
gains and income dividends, is an important measure of the return that many
investors actually received.
PRE-TAX AND AFTER-TAX PERIODS ENDED OCTOBER 31, 2000
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR FIVE YEARS TEN YEARS
-----------------------------------------------------
PRE-TAX AFTER-TAX PRE-TAX AFTER-TAX PRE-TAX AFTER-TAX
--------------------------------------------------------------------------------
Vanguard Windsor Fund 11.6% 7.8% 14.5% 10.7% 17.5% 13.8%
Average Mid-Cap Value Fund* 17.0 14.1 14.7 11.4 16.1 13.5
--------------------------------------------------------------------------------
*Based on data from Morningstar, Inc. Elsewhere in this report, returns for
comparable funds are derived from data provided by Lipper Inc., which may differ
somewhat.
The after-tax return calculations use the top federal income tax rates in
effect at the time of each distribution. The tax burden would be less, and the
after-tax return higher, for those in lower tax brackets.
We must stress that because many interrelated factors affect how
tax-friendly a fund may be, it's very difficult to predict tax efficiency. A
fund's tax efficiency can be influenced by its turnover rate, the types of
securities it holds, the accounting practices it uses when selling shares, and
the net cash flow it receives.
Finally, it's important to understand that our calculation does not reflect
the tax effect of your own investment activities. Specifically, you may incur
additional capital gains taxes--thereby lowering your after-tax return--if you
decide to sell all or some of your shares.
--------------------------------------------------------------------------------
A NOTE ABOUT OUR CALCULATIONS: Pre-tax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. State and local income taxes were not considered. The competitive
group returns provided by Morningstar are calculated in a manner consistent with
that used for Vanguard funds.
[PICTURE OF COMPUTER]
You can use Vanguard's online after-tax
return calculator at
www.vanguard.com/?aftertax
to customize the calculation
of your after-tax return.
12
<PAGE>
FINANCIAL STATEMENTS
October 31, 2000
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, but may differ because certain investments or
transactions may be treated differently for financial statement and tax
purposes. 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.
--------------------------------------------------------------------------------
MARKET
VALUE*
WINDSOR FUND SHARES (000)
--------------------------------------------------------------------------------
COMMON STOCKS (97.5%)(1)
--------------------------------------------------------------------------------
AUTO & TRANSPORTATION (7.1%)
(2) Eaton Corp. 4,026,800 274,074
Canadian National
Railway Co. 5,692,100 179,301
*(2) Continental Airlines, Inc.
Class B 2,560,800 134,442
Compagnie Generale des
Etablissements Michelin
Class B 4,000,586 115,636
Delta Air Lines, Inc. 1,498,722 70,815
Burlington Northern
Santa Fe Corp. 1,949,000 51,770
Union Pacific Corp. 1,072,300 50,264
Delphi Automotive
Systems Corp. 2,937,059 46,075
CSX Corp. 1,619,900 41,004
*(2) America West Holdings
Corp. Class B 3,484,500 34,627
Dana Corp. 1,550,200 34,395
Genuine Parts Co. 1,486,500 31,681
Norfolk Southern Corp. 1,923,600 27,171
Ford Motor Co. 1,011,843 26,434
Southwest Airlines Co. 307,000 8,750
---------
1,126,439
---------
--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
CONSUMER DISCRETIONARY (9.2%)
(2) TJX Cos., Inc. 19,511,200 531,680
* Staples, Inc. 14,076,300 200,587
*(2) Republic Services, Inc. 10,574,800 142,099
May Department Stores Co. 4,676,100 122,748
(2) Ross Stores, Inc. 8,625,000 113,742
Target Corp. 2,901,000 80,140
* Jones Apparel Group, Inc. 2,341,400 65,120
Newell Rubbermaid, Inc. 2,054,600 39,423
* Federated Department
Stores, Inc. 1,100,300 35,829
Gannett Co., Inc. 500,000 29,000
VF Corp. 994,300 27,157
Whirlpool Corp. 619,800 26,961
Sears, Roebuck & Co. 841,800 25,027
Leggett & Platt, Inc. 1,200,700 19,661
Dillard's Inc. 616,900 6,477
---------
1,465,651
---------
CONSUMER STAPLES (1.1%)
Philip Morris Cos., Inc. 2,502,900 91,669
ConAgra Foods, Inc. 2,395,800 51,210
Tyson Foods, Inc. 1,812,600 20,278
SuperValu Inc. 942,100 14,485
---------
177,642
---------
13
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
WINDSOR FUND SHARES (000)
--------------------------------------------------------------------------------
FINANCIAL SERVICES (24.4%)
Associates First Capital Corp.
Class A 22,995,700 853,715
Citigroup, Inc. 8,744,400 460,174
Washington Mutual, Inc. 8,743,864 384,730
CIGNA Corp. 2,782,500 339,326
Golden West Financial Corp. 4,745,300 266,033
(2) Dime Bancorp, Inc. 7,771,300 189,911
U.S. Bancorp 4,971,400 120,246
(2) Liberty Property Trust REIT 4,324,100 114,318
Bank of America Corp. 2,313,500 111,193
PartnerRe Ltd. 1,860,500 101,397
Bank One Corp. 2,220,900 81,063
The Chubb Corp. 907,500 76,627
FleetBoston Financial Corp. 2,009,530 76,362
UnionBanCal Corp. 3,292,900 69,151
First Union Corp. 1,944,300 58,937
MBIA, Inc. 803,800 58,426
American International
Group, Inc. 574,350 56,286
KeyCorp 2,167,600 53,513
Charter One Financial 2,266,740 51,993
American General Corp. 637,000 51,279
National City Corp. 2,185,700 46,719
AMBAC Financial Group Inc. 579,900 46,283
TCF Financial Corp. 1,104,100 44,647
(2) IPC Holdings Ltd. 2,006,000 40,904
Torchmark Corp. 1,061,800 35,371
Summit Bancorp 873,700 32,764
Fannie Mae 344,600 26,534
Morgan Stanley Dean
Witter & Co. 276,000 22,166
Regions Financial Corp. 509,450 12,004
Old Republic International Corp. 383,800 9,979
Horace Mann Educators Corp. 257,300 4,326
---------
3,896,377
---------
HEALTH CARE (6.3%)
Pharmacia Corp. 8,132,904 447,310
Aetna Inc. 3,752,000 216,913
Aventis SA ADR 1,919,550 138,328
* Foundation Health
Systems Class A 6,028,660 121,704
Johnson & Johnson 402,100 37,043
Merck & Co., Inc. 200,000 17,988
* Pacificare Health
Systems, Inc. 1,336,200 13,947
Bergen Brunswig Corp.
Class A 1,017,100 9,218
Aventis SA Class A 99,671 7,181
---------
1,009,632
---------
--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
INTEGRATED OILS (5.5%)
USX-Marathon Group 6,397,700 173,937
* Petroleo Brasileiro ADR 5,268,100 153,104
Exxon Mobil Corp. 1,647,104 146,901
Phillips Petroleum Co. 1,105,400 68,258
Shell Transport &
Trading Co. ADR 1,302,300 64,057
Texaco Inc. 1,060,700 62,648
Petro Canada 2,535,800 53,252
Occidental Petroleum Corp. 2,623,200 52,136
Conoco Inc. Class B 1,831,300 49,788
Amerada Hess Corp. 666,700 41,335
Repsol-YPF, SA ADR 1,000,000 15,938
---------
881,354
---------
OTHER ENERGY (3.6%)
Anadarko Petroleum Corp. 2,178,001 139,501
* Anderson Exploration Ltd. 6,774,134 124,196
(2) Ultramar Diamond
Shamrock Corp. 4,547,400 119,369
Devon Energy Corp. 1,658,426 83,585
Valero Energy Corp. 2,401,300 79,393
Ashland, Inc. 607,000 19,879
---------
565,923
---------
MATERIALS & PROCESSING (19.1%)
Alcoa Inc. 24,555,468 704,435
Air Products & Chemicals, Inc. 8,831,200 329,514
(2) Engelhard Corp. 11,454,200 239,106
E.I. du Pont de Nemours & Co. 3,200,000 145,200
Rohm & Haas Co. 4,805,400 144,462
Willamette Industries, Inc. 3,898,100 141,550
Abitibi-Consolidated, Inc. 15,176,789 132,797
Jefferson Smurfit Group
PLC ADR 6,918,641 125,400
* Smurfit-Stone Container Corp. 9,126,750 123,211
*(2) Packaging Corp. of America 5,406,500 79,408
Praxair, Inc. 2,008,200 74,805
Lyondell Chemical Co. 4,603,203 66,171
International Paper Co. 1,597,281 58,500
Dow Chemical Co. 1,854,900 56,806
Fort James Corp. 1,650,800 54,373
Pechiney SA ADR A 2,861,128 51,500
Lafarge Corp. 2,587,700 48,843
Georgia Pacific Group 1,502,900 40,390
Alcan Aluminium Ltd. 1,265,600 39,946
Sonoco Products Co. 1,942,300 37,511
The Mead Corp. 1,185,000 34,291
Sherwin-Williams Co. 1,543,300 33,470
AK Steel Corp. 3,318,652 30,698
14
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
*(2) Kaiser Aluminum &
Chemical Corp. 6,048,434 30,620
Nucor Corp. 863,400 29,949
Temple-Inland Inc. 607,800 27,199
* American Standard Cos., Inc. 591,400 27,131
(2) Century Aluminum Co. 2,000,000 17,500
Cabot Corp. 771,300 16,969
Great Lakes Chemical Corp. 485,000 16,187
Phosphate Resources
Partners LP 4,018,800 16,075
Boise Cascade Corp. 473,900 13,595
Crown Cork & Seal Co., Inc. 1,398,300 12,759
* Albany International Corp. 1,017,555 10,939
* Cabot Microelectronics Corp. 216,329 9,559
* Owens-Illinois, Inc. 1,303,800 7,741
Ryerson Tull, Inc. 969,446 7,271
* Burlington Industries, Inc. 2,383,700 2,980
Archer-Daniels-Midland Co. 189,935 2,089
Owens Corning 615,500 846
---------
3,041,796
---------
PRODUCER DURABLES (3.0%)
Alcatel SA ADR 1,681,551 104,887
*(2) Toll Brothers, Inc. 3,029,166 98,448
(2) Kaufman & Broad Home Corp. 2,098,600 62,433
CNH Global NV 4,362,600 42,263
Cooper Industries, Inc. 1,103,600 42,213
The BFGoodrich Co. 971,200 39,759
(2) MDC Holdings, Inc. 1,156,300 31,654
*(2) Beazer Homes USA, Inc. 860,464 23,985
Centex Corp. 464,900 17,201
Thomas & Betts Corp. 648,600 9,810
---------
472,653
---------
TECHNOLOGY (5.9%)
*(2) Arrow Electronics, Inc. 7,899,300 252,778
International Business
Machines Corp. 1,867,100 183,909
* Dell Computer Corp. 6,000,000 177,000
Hewlett-Packard Co. 3,300,000 153,244
Avnet, Inc. 2,027,000 54,476
*(2) General Semiconductor, Inc. 3,468,600 39,672
* Quantum Corp.-DLT &
Storage Systems 2,168,300 32,525
* Adaptec, Inc. 1,658,700 26,228
* Litton Industries, Inc. 279,900 14,537
* Ingram Micro, Inc. 732,500 12,498
---------
946,867
---------
UTILITIES (10.7%)
* WorldCom, Inc. 20,720,339 492,108
* Cox Communications, Inc.
Class A 5,709,300 251,566
--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
AT&T Corp. 8,253,116 191,369
* Adelphia Communications
Corp. Class A 5,252,400 174,314
* Comcast Corp. Special
Class A 2,592,500 105,644
Xcel Energy, Inc. 2,116,215 54,096
PG&E Corp. 1,919,100 51,696
Ameren Corp. 1,272,300 50,574
American Electric
Power Co., Inc. 1,213,400 50,356
Consolidated Edison Inc. 1,376,000 48,418
SBC Communications Inc. 837,720 48,326
FirstEnergy Corp. 1,704,100 44,094
Cinergy Corp. 1,334,900 40,881
GPU, Inc. 993,600 32,851
Verizon Communications 533,442 30,840
* Comcast Corp. Class A 705,500 28,308
BellSouth Corp. 174,300 8,421
---------
1,703,862
---------
MISCELLANEOUS (1.6%) 248,828
---------
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $14,084,858) 15,537,024
--------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (0.2%)
--------------------------------------------------------------------------------
Kaufman & Broad Home Corp.
8.25% Cvt. Pfd.
(COST $23,120) 3,163,700 28,473
--------------------------------------------------------------------------------
Face Amount
(000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (2.9%)(1)
--------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.
(3) 6.54%, 1/25/2001 15,000 14,769
FEDERAL NATIONAL MORTGAGE ASSN.
(3) 6.49%, 11/2/2000 3,000 2,999
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.56%, 11/1/2000 397,452 397,452
6.58%, 11/1/2000--Note G 45,758 45,758
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $460,982) 460,978
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.6%)
(Cost $14,568,960) 16,026,475
--------------------------------------------------------------------------------
15
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
WINDSOR FUND (000)
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.6%)
--------------------------------------------------------------------------------
Other Assets--Note C 84,624
Liabilities--Note G (176,314)
---------
(91,690)
---------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 969,289,774 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $15,934,785
================================================================================
NET ASSET VALUE PER SHARE $16.44
================================================================================
* See Note A in Notes to Financial Statements.
* Non-income-producing security.
(1) 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 99.2% and 1.2%, respectively, of net assets. See Note F in Notes
to Financial Statements.
(2) Considered an affiliated company as the fund owns more than 5% of the
outstanding voting securities of such company. The total market value of
investments in affiliated companies was $2,570,770,000.
(3) Securities with an aggregate value of $17,768,000 have been segregated as
initial margin for open futures contracts.
ADR --American Depositary Receipt.
REIT --Real Estate Investment Trust.
--------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------------------------------------------------------------------------------
AT OCTOBER 31, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Paid in Capital--Note E $12,624,337 $13.03
Undistributed Net
Investment Income 80,408 .08
Accumulated Net
Realized Gains--Note E 1,781,994 1.84
Unrealized Appreciation
(Depreciation)--Note F
Investment Securities 1,457,515 1.50
Futures Contracts (9,469) (.01)
--------------------------------------------------------------------------------
NET ASSETS $15,934,785 $16.44
================================================================================
16
<PAGE>
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.
--------------------------------------------------------------------------------
WINDSOR FUND
YEAR ENDED OCTOBER 31, 2000
(000)
--------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* $ 290,584
Interest 27,075
Security Lending 1,712
--------------------------------------------------------------------------------
Total Income 319,371
--------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 20,781
Performance Adjustment (12,827)
The Vanguard Group--Note C
Management and Administrative 37,757
Marketing and Distribution 1,633
Custodian Fees 275
Auditing Fees 19
Shareholders' Reports 346
Trustees' Fees and Expenses 20
--------------------------------------------------------------------------------
Total Expenses 48,004
Expenses Paid Indirectly--Note D (2,777)
--------------------------------------------------------------------------------
Net Expenses 45,227
--------------------------------------------------------------------------------
NET INVESTMENT INCOME 274,144
--------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold* 1,994,887
Futures Contracts 18,907
--------------------------------------------------------------------------------
REALIZED NET GAIN 2,013,794
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (605,604)
Futures Contracts (15,737)
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (621,341)
--------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,666,597
================================================================================
*Dividend income and realized net gain from affiliated companies were
$34,184,000 and $7,097,000, respectively.
17
<PAGE>
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.
--------------------------------------------------------------------------------
WINDSOR FUND
YEAR ENDED OCTOBER 31,
---------------------------
2000 1999
(000) (000)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 274,144 $ 277,607
Realized Net Gain 2,013,794 1,940,531
Change in Unrealized Appreciation (Depreciation) (621,341) 42,819
--------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 1,666,597 2,260,957
--------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (287,257) (255,285)
Realized Capital Gain (1,869,353) (1,341,486)
--------------------------------------------------------------------------------
Total Distributions (2,156,610) (1,596,771)
--------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 932,126 1,402,297
Issued in Lieu of Cash Distributions 2,025,871 1,504,748
Redeemed (3,356,921) (5,102,907)
--------------------------------------------------------------------------------
Net Decrease from Capital Share Transactions (398,924) (2,195,862)
--------------------------------------------------------------------------------
Total Decrease (888,937) (1,531,676)
--------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 16,823,722 18,355,398
--------------------------------------------------------------------------------
End of Year $15,934,785 $16,823,722
================================================================================
1Shares Issued (Redeemed)
Issued 61,020 82,191
Issued in Lieu of Cash Distributions 135,718 100,940
Redeemed (222,437) (311,166)
--------------------------------------------------------------------------------
Net Decrease in Shares Outstanding (25,699) (128,035)
================================================================================
18
<PAGE>
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,
------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $16.91 $16.34 $19.55 $16.99 $15.55
------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .28 .27 .23 .36 .43
Net Realized and Unrealized Gain (Loss)on Investments 1.44 1.77 (.32) 3.94 2.85
------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.72 2.04 (.09) 4.30 3.28
------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.29) (.24) (.24) (.41) (.46)
Distributions from Realized Capital Gains (1.90) (1.23) (2.88) (1.33) (1.38)
------------------------------------------------------------------------------------------------------------
Total Distributions (2.19) (1.47) (3.12) (1.74) (1.84)
------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $16.44 $16.91 $16.34 $19.55 $16.99
============================================================================================================
Total Return 11.60% 13.74% -0.78% 27.04% 23.16%
============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year (Millions) $15,935 $16,824 $18,355 $20,678 $15,841
Ratio of Total Expenses to Average Net Assets 0.31% 0.28% 0.27% 0.27% 0.31%
Ratio of Net Investment Income to Average Net Assets 1.75% 1.56% 1.31% 1.89% 2.75%
Portfolio Turnover Rate 41% 56% 48% 61% 34%
============================================================================================================
</TABLE>
19
<PAGE>
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 U.S. 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 CONTRACTS: 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 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, and Sanford C. Bernstein & Co., LLC,
provide investment advisory services to the fund for fees calculated at an
annual percentage rate of average net assets. The basic fee of Wellington
Management Company, llp, is subject to quarterly adjustments based on
performance relative to the S&P 500 Index for the preceding three years.
20
<PAGE>
The basic fee of Sanford C. Bernstein & Co., LLC, is subject to quarterly
adjustments based on performance relative to the Russell 1000 Value Index. For
the year ended October 31, 2000, the aggregate investment advisory fee
represented an effective annual basic rate of 0.13% of the fund's average net
assets before a decrease of $12,827,000 (0.08%) based on performance.
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 October 31, 2000, the fund had contributed capital of $2,914,000 to
Vanguard (included in Other Assets), representing 0.02% of net assets and 2.9%
of Vanguard's capitalization. The fund's trustees and officers are also
directors and officers of Vanguard.
D. The fund has asked its investment advisers to direct certain security 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 management and administrative expenses. The fund's
custodian bank has also agreed to reduce its fees when the fund maintains cash
on deposit in the non-interest-bearing custody account. For the year ended
October 31, 2000, directed brokerage and custodian fee offset arrangements
reduced expenses by $2,670,000 and $107,000, respectively. The total expense
reduction represented an effective annual rate of 0.02% of the fund's average
net assets.
E. During the year ended October 31, 2000, the fund purchased $6,269,347,000 of
investment securities and sold $8,552,278,000 of investment securities, other
than temporary cash investments.
The fund used a tax accounting practice to treat a portion of the price of
capital shares redeemed during the year as distributions from realized capital
gains. Accordingly, the fund has reclassified $221,667,000 from accumulated net
realized gains to paid in capital.
F. At October 31, 2000, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $1,457,515,000,
consisting of unrealized gains of $3,270,144,000 on securities that had risen in
value since their purchase and $1,812,629,000 in unrealized losses on securities
that had fallen in value since their purchase.
At October 31, 2000, the aggregate settlement value of open futures
contracts expiring in December 2000 and the related unrealized depreciation
were:
--------------------------------------------------------------------------------
(000)
----------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE DEPRECIATION
--------------------------------------------------------------------------------
S&P 500 Index 695 $250,235 $(8,475)
S&P MidCap 400 Index 104 27,105 (994)
--------------------------------------------------------------------------------
Unrealized depreciation on open futures contracts is required to be treated as
realized loss for tax purposes.
G. The market value of securities on loan to broker/dealers at October 31, 2000,
was $44,340,000, for which the fund held cash collateral of $45,758,000. The
fund invests cash collateral received in repurchase agreements, and records a
liability for the return of the collateral, during the period the securities are
on loan.
21
<PAGE>
REPORT
of Independent Accountants
To the Shareholders and Trustees of Vanguard Windsor Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Windsor Fund (the "Fund") at October 31, 2000, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at October 31, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 29, 2000
--------------------------------------------------------------------------------
SPECIAL 2000 TAX INFORMATION (UNAUDITED) FOR VANGUARD WINDSOR FUND
This information for the fiscal year ended October 31, 2000, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $1,687,633,000 as capital gain dividends (from net
long-term capital gains) to shareholders during the fiscal year, all of which is
designated as a 20% rate gain distribution.
For corporate shareholders, 86.4% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
22
<PAGE>
THE VANGUARD(R)
Family of Funds
STOCK FUNDS
500 Index Fund
Calvert Social Index(TM) Fund
Capital Opportunity Fund
Convertible Securities Fund
Developed Markets Index Fund
Emerging Markets Stock
Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer(TM) Fund
Extended Market Index Fund
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Equity Fund
Growth Index Fund
Health Care Fund
Institutional Developed Markets
Index Fund
Institutional Index Fund
International Growth Fund
International Value Fund
Mid-Cap Index Fund
Morgan(TM) Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund
Small-Cap Index Fund
Small-Cap Value Index Fund
Strategic Equity Fund
Tax-Managed Capital
Appreciation Fund
Tax-Managed Growth and
Income Fund
Tax-Managed International Fund
Tax-Managed Small-Cap Fund
Total International Stock
Index Fund
Total Stock Market Index Fund
U.S. Growth Fund
U.S. Value Fund
Utilities Income Fund
Value Index Fund
Windsor(TM) Fund
Windsor(TM) II Fund
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy(R) Conservative
Growth Fund
LifeStrategy(R) Growth Fund
LifeStrategy(R) Income Fund
LifeStrategy(R) Moderate
Growth Fund
STAR(TM) Fund
Tax-Managed Balanced Fund
Wellesley(R) Income Fund
Wellington(TM) Fund
BOND FUNDS
Admiral(TM) Intermediate-Term
Treasury Fund
Admiral(TM) Long-Term
Treasury Fund
Admiral(TM) Short-Term
Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Inflation-Protected Securities Fund
Insured Long-Term
Tax-Exempt Fund
Intermediate-Term Bond
Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term
Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds
(California, Florida,
Massachusetts, New Jersey,
New York, Ohio, Pennsylvania)
Total Bond Market Index Fund
MONEY MARKET FUNDS
Admiral(TM) Treasury Money
Market Fund
Federal Money Market Fund
Prime Money Market Fund
State Tax-Exempt Money Market Funds
(California, New Jersey,
New York, Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
For information about Vanguard funds and our variable annuity plan, including
charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box
2600, Valley Forge, PA 19482-2600. Read it carefully before you invest or send
money.
23
<PAGE>
THE PEOPLE
Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Six of Vanguard's seven board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new trustees/ directors; and electing
Vanguard officers.
The list below provides a brief description of each trustee's professional
affiliations. The year in which the trustee joined the Vanguard board is noted
in parentheses.
TRUSTEES
JOHN J. BRENNAN (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and of each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
Johnson*Merck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Argentaria, Gestion, BKF Capital, The Jeffrey Co., NeuVis, Inc., and
Select Sector SPDR Trust.
ALFRED M. RANKIN, Jr. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JAMES O. WELCH, JR. (1971) Retired Chairman of Nabisco Brands, Inc. (Food
Products); retired Vice Chairman and Director of RJR Nabisco (Food and Tobacco
Products); Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON (1985) Retired Chairman and Chief Executive Officer of Rohm &
Haas Co.; Director of AmeriSource Health Corporation, 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.
--------------------------------------------------------------------------------
VANGUARD MANAGING DIRECTORS.
GREGORY BARTON, Legal Department.
ROBERT A. DISTEFANO, Information Technology.
JAMES H. GATELY, Direct Investor Services.
KATHLEEN C. GUBANICH, Human Resources.
IAN A. MACKINNON, Fixed Income Group.
F. WILLIAM MCNABB, III, Institutional Investor Group.
MICHAEL S. MILLER, Planning and Development.
RALPH K. PACKARD, Chief Financial Officer.
GEORGE U. SAUTER, Quantitative Equity Group.
--------------------------------------------------------------------------------
JOHN C. BOGLE
Founder; Chairman and Chief Executive, 1974-1996.
<PAGE>
[SHIP]
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
ABOUT OUR COVER
Our cover art evokes both Vanguard's rich past and the course we've set for the
future--our determination to provide superior investment performance and
top-notch service. The image is based on two works: a painting titled The First
Journey of 'Victory,' by the English artist W.L. Wyllie (1851-1931), and a
sculpture of a compass rose on Vanguard's campus near Valley Forge,
Pennsylvania.
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500, 500, S&P MidCap
400, and S&P SmallCap 600 are trademarks of The McGraw-Hill Companies, Inc. All
other index names may contain trademarks and are the exclusive property of their
respective owners.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
(C)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
Q220 122000
<PAGE>
Vanguard Windsor(TM)II Fund
Annual Report October 31, 2000
OUR REPORTS TO
THE OWNERS
At Vanguard, we regard our investors not as mere customers but as owners of the
enterprise. For that's exactly what a mutual fund shareholder is--part owner of
an investment company.
In our reports to you on how the company is doing, we have tried to convey
information without hyperbole and in the context of broad market trends and
relevant benchmarks.
We've introduced several changes to this year's annual reports to make them even
more useful. Among the changes:
**Larger type and redesigned graphics to make the reports easier to read.
**An at-a-glance summary of key points about fund performance and the
financial markets.
**A table--included for many funds--in which the investment adviser
highlights significant changes in holdings.
**Comparisons of fund performance and characteristics against both a broad
market index and a "best fit" benchmark. We hope you'll find that these changes
make the reports even more accessible and informative.
SUMMARY
* Vanguard Windsor II Fund posted a 7.2% return, just ahead of its average peer.
* Value stocks outperformed growth stocks during the second half of fiscal 2000.
* Windsor II's concentration in the financial services, utilities, and "other
energy" sectors contributed to the fund's turnaround in performance.
CONTENTS
1 Letter from the Chairman
6 Notice to Shareholders
7 Adviser's Report
10 Fund Profile
11 Glossary of Investment Terms
12 Performance Summary
13 Report on After-Tax Returns
14 Financial Statements
24 Report of Independent Accountants
<PAGE>
LETTER
from the Chairman
Fellow Shareholders,
Long-neglected value stocks came back in favor during a volatile 12 months in
the financial markets, propelling vanguard windsor ii fund to a fiscal-year
return of 7.2%, which outpaced the returns of our two value-focused comparative
standards.
2000 TOTAL RETURNS FISCAL YEAR ENDED
OCTOBER 31
--------------------------------------------------------------
Vanguard Windsor II Fund 7.2%
Average Large-Cap Value Fund* 7.1
Russell 1000 Value Index 5.5
Wilshire 5000 Index 8.1
--------------------------------------------------------------
*Derived from data provided by Lipper Inc.
The adjacent table pre-sents the total returns (capital change plus
reinvested dividends) for the 12 months ended October 31, 2000, for the fund,
its average peer, and the unmanaged Russell 1000 Value Index, the benchmark we
consider the best fit for Windsor II, as well as the Wilshire 5000 Total Market
Index, a proxy for the overall U.S. stock market.
The fund's return is based on a change in net asset value from $29.03 per
share on October 31, 1999, to $27.58 per share on October 31, 2000, and is
adjusted for dividends totaling $0.67 per share paid from net investment income
and a distribution of $2.50 per share paid from net realized capital gains.
If you own Vanguard Windsor II Fund in a taxable account, you may wish to
review our report on the fund's after-tax returns on page 13.
FINANCIAL MARKETS IN REVIEW
The U.S. stock market began the fiscal year like a skyrocket, as investors
exhibited extreme enthusiasm for technology-related stocks. In the first two
months of the period, the broad market gained more than 11%. Fueling the
increase were favorable
MARKET BAROMETER Average Annual Total Returns
Periods Ended October 31, 2000
One Three Five
Year Years Years
----------------------------------------------------------------------------
STOCKS
S&P 500 Index (Large-caps) 6.1% 17.6% 21.7%
Russell 2000 Index (Small-caps) 17.4 5.9 12.4
Wilshire 5000 Index (Entire market) 8.1 16.0 20.1
MSCI EAFE Index (International) -2.7 9.7 8.9
----------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index (Entire market) 7.3% 5.7% 6.3%
Lehman 10 Year Municipal Bond Index 8.2 5.0 5.7
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.7 5.2 5.2
============================================================================
CPI
Consumer Price Index 3.4% 2.5% 2.5%
----------------------------------------------------------------------------
1
<PAGE>
economic data: Production rose rapidly, unemployment fell below 4% of the
workforce, long-term interest rates declined, and inflation was well-behaved,
save for a rise in energy prices.
But as the period progressed, the effects of higher short-term interest
rates--engineered by the Federal Reserve Board to slow the economy and forestall
inflation--began to show. Data suggested that the economy's expansion was
decelerating to a moderate pace. And, despite solid increases in corporate
earnings, doubts grew that companies could sustain the growth pace amid a
slowing economy.
Investors seemed to grow wary of the lofty prices of many tech stocks in
relation to their earnings and other fundamentals. Value stocks--those issues
characterized by relatively low prices in relation to earnings, book value, and
dividends-- generally benefited from the market's increased emphasis on current
earnings. The result was a significant split between first- and second-half
results for growth and value stocks, as the table above shows.
TOTAL RETURNS
OCT. 31, 1999, TO APR. 30, 2000 TO FISCAL
APR. 30, 2000 OCT. 31, 2000 2000
--------------------------------------------------------------------------
Russell 1000 Growth Index 18.7% -7.9% 9.3%
Russell 1000 Value Index -1.0 6.6 5.5
--------------------------------------------------------------------------
For the full 12 months, the overall market, as measured by the Wilshire
5000 Index, returned 8.1%--a decent result but one below the double-digit gains
investors have seen in recent years. For a change, small- and mid-
capitalization stocks outpaced their large-cap counterparts: The small-cap
Russell 2000 Index returned 17.4% for the 12 months, 11.3 percentage points
ahead of the return of the large-cap S&P 500 Index, which accounts for roughly
three-fourths of the market value of U.S. stocks.
The year saw huge variations in returns of various industry groups. Higher
oil and natural gas prices helped the oil exploration and services companies in
the "other energy" group to a 49% return, making this the top-performing sector
within the S&P 500 Index. Other strong sectors included producer durables
(+31%), health care (+16%), and financial services (+15%). Technology, a
standout during the first half of the year, fell during the second half but
still provided a 12-month return of 15%. The year's big losers were telephone
companies, which weighed down the utilities group (-15%), and retailers, apparel
makers, and other firms in the consumer discretionary sector (-13%).
THE FIXED INCOME MARKETS
Short-term interest rates rose substantially during the fiscal year, with the
yield of 3-month U.S. Treasury bills rising 1.3 percentage points. The
2
<PAGE>
increase essentially matched the 1.25-point increase in the federal funds rate,
accomplished in four steps by the Federal Reserve.
Yields were relatively flat, on balance, for most longer-term securities,
however. A rising federal budget surplus shrank the supply of U.S. Treasury
securities, and their yields declined slightly for the fiscal year: The 30-year
Treasury's yield fell from 6.16% to 5.79%. Yields on 10-year Treasuries fell by
about a quarter-point. In general, bonds turned in solid results during the 12
months. The Lehman Aggregate Bond Index, a proxy for taxable investment-grade
bonds, returned 7.3%, outpacing the S&P 500 Index. Mortgage-backed securities
and high-quality corporate bonds performed well, benefiting from investors'
shift toward high-quality bonds and away from speculative issues. The prices of
high-yield bonds fell by more than 10% on average, and the Lehman High Yield
Index returned -1.6%.
FISCAL 2000 PERFORMANCE OVERVIEW
What a difference a year makes. In fiscal 1999, the Windsor II Fund lagged its
benchmarks. The fund performed poorly in an environment that punished value
investing. Fiscal 2000 began in a similar fashion, but the trend reversed
suddenly during the spring. Windsor II earned 25.2% in the last eight months of
the period, regaining ground it lost early on and ending with a 12-month return
of 7.2%. Although our return was only slightly ahead of the result of our
average peer, we arrived at the same destination via very different routes. Our
average peer built a big lead early in the fiscal year, but returned 11.7% in
the last eight months, less than half of Windsor II's gain during the same
period.
--------------------------------------------------------------------------------
Windsor II gained 25.2% in the last eight months, making up for a poor beginning
to the fiscal year.
--------------------------------------------------------------------------------
Three sectors played major roles in the fund's turnaround. The fund had
more than one-quarter of its assets in financial services companies. While those
holdings fared poorly initially, they returned 27.8% in the fiscal second half.
In the "other energy" sector--the market's best performer during fiscal 2000 due
to rising oil and natural gas prices--Windsor II's stake of about 10% was more
than triple the sector weighting in the Russell 1000 Value Index. In the
utilities sector, our holdings of electric companies performed well even as
telephone companies slumped badly.
One notable shortcoming during the period was the fund's stock selections
in the consumer discretionary sector, which is home to many retailing and
restaurant stocks that were hurt by tough competition and concerns about a
possible slowdown in consumer spending.
We recognize that Windsor II Fund's strong performance over the past eight
months was overdue in the eyes of our shareholders, and we thank you for your
patience during the preceding months, when value stocks were decidedly out of
favor and our performance was well below par.
3
<PAGE>
We note that many individuals who gave in to the temptation to alter their
investment allocations in pursuit of hot growth stocks paid a heavy price.
Consider that the largest flows of cash into technology-related mutual funds and
the largest outflows of cash from value funds like Windsor II occurred in
February and March 2000. The timing of these flows couldn't have been worse.
TOTAL ASSETS MANAGED OCTOBER 31, 2000
$ MILLION PERCENTAGE
--------------------------------------------------------------------------
Barrow, Hanley, Mewhinney &
Strauss, Inc. $14,723 62%
Equinox Capital Management, Inc. 3,682 15
Tukman Capital Management, Inc. 3,233 13
Vanguard Quantitative Equity Group 1,442 6
Cash Investments* 990 4
--------------------------------------------------------------------------
Total $24,070 100%
--------------------------------------------------------------------------
*This cash is invested by The Vanguard Group in equity index futures to simulate
investment in stocks; each adviser also maintains a modest cash position.
That said, we don't pretend to know what the market has in store next, but
we continue to believe that long-term investors are well-advised to maintain
exposure to both value stocks and growth stocks. As fiscal 2000 demonstrated,
market leadership can switch suddenly and decisively from growth to value and
back again.
As you know, the fund's assets are divided among four managers. The table
at left shows the allocation among managers as of the end of the fiscal year.
For further details on the fund's performance and holdings, please see the
Adviser's Report on page 7.
LONG-TERM PERFORMANCE OVERVIEW
A single year's performance hardly provides an adequate picture of a fund's
merits. We've always believed a long-term view is important. The table below
shows that a hypothetical $10,000 investment a decade ago in Windsor II would
have grown to $50,395, or about $1,400 more than a similar investment in the
average large-cap value fund. However, during the past decade the fund lagged
both the Russell 1000 Value and the Wilshire 5000 Indexes. As a total market
benchmark, the Wilshire 5000 also includes growth stocks, which were the
market's leaders in recent years. Of course, indexes have a big advantage over
real-world funds because they are theoretical constructs that do not incur the
actual operating and transaction costs that funds must bear.
TOTAL RETURNS TEN YEARS ENDED
OCTOBER 31, 2000
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
-------------------------------------------------------------------------
Vanguard Windsor II Fund 17.6% $50,395
Average Large-Cap Value Fund 17.2 49,016
Russell 1000 Value Index 18.3 53,805
Wilshire 5000 Index 19.2 57,709
-------------------------------------------------------------------------
Nevertheless, our fund's expense
4
<PAGE>
ratio (average expenses as a percentage of average net assets) of 0.37% is a
fraction of the average peer's 1.28%, according to data from Lipper Inc. This
gap may seem inconsequential, but we assure you that over time it is extremely
important, giving our advisers a head start each year in their quest to provide
superior returns. Over time, costs matter, since operating expenses and
transaction costs reduce the returns that a fund passes on to its shareholders.
While we hope to improve our relative returns versus competitors and our
index benchmark in the future, we doubt that either the fund or the market will
be able to match the absolute returns seen during the past ten years. The stock
market's performance during the 1990-2000 decade was one of its best ever;
returns were far above the 11% to 12% annual average for stocks over the past 75
years or so. Therefore, we caution against extrapolating the remarkable returns
of the past decade into your investment plans. If you make modest assumptions
and the market exceeds them, you'll merely get to your objectives sooner.
IN SUMMARY
The financial markets during the past 12 months certainly reinforced the
importance of diversification. Just as it seemed that a single hot sector of the
stock market was the only place to be, technology-related stocks swooned and
value stocks came to the fore. And bonds--the asset class many investors forgot
in the excitement of the bull market in stocks--posted solid results.
Perhaps the one safe prediction for the next 12 months is that markets will
continue to be quite unpredictable. But uncertainty and volatility--risk, to use
a four-letter word--are constant companions for investors. A balanced investment
program--a mix of short-term investments, bonds, and both value and growth
stocks--can help you manage risk. Once you've built such a program in accordance
with your objectives, time horizon, financial situation, and tolerance for
market fluctuations, we recommend staying the course.
Sincerely,
/S/ JOHN J. BRENNAN
November 13, 2000
JOHN J. BRENNAN
Chairman and
Chief Executive Officer
5
<PAGE>
--------------------------------------------------------------------------------
NOTICE OF CHANGE IN OWNERSHIP FOR BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.
In July 2000, Old Mutual plc agreed to acquire United Asset Management
Corporation (UAM), the parent company of Barrow, Hanley, Mewhinney & Strauss,
Inc. (BHMS), an investment adviser for Vanguard Windsor II Fund. UAM will
continue to own BHMS, and the change in the parent company's ownership is not
expected to have any practical effect on the fund. There will be no change in
BHMS's role as the fund's investment adviser, in the personnel who advise the
fund, or in the fees charged to the fund. However, as is required by the
Investment Company Act of 1940, your fund's advisory contract with BHMS
automatically terminated with the change in ownership.
Accordingly, on September 14, 2000, your fund's board of trustees approved
a new investment advisory contract with BHMS that took effect when the ownership
of BHMS's parent company officially changed in early October. All of the terms
of the new contract, except for its commencement and termination dates, are the
same as those in the previous contract. Your board believes that, similar to the
previous contract, the new advisory contract will enable the fund to obtain
services of high quality at reasonable cost and that the new contract is in the
best interests of the fund and its shareholders. (In 1993, your fund received
permission from the U.S. Securities and Exchange Commission and from its
shareholders for the trustees to enter into a new advisory agreement without the
delay and expense of a shareholder vote. This special permission was made
subject to several conditions, including the requirement that shareholders be
notified of changes to the fund's investment advisory agreement.)
In July, Old Mutual plc announced the terms of a tender offer under which
it would acquire all of UAM's outstanding shares. The directors of UAM
recommended that its shareholders accept Old Mutual's offer, and UAM tendered
all of its shares. The acquisition became effective on October 5, 2000.
BHMS, which is registered as an investment adviser with the Securities and
Exchange Commission, is located at One McKinney Plaza, 3232 McKinney Avenue,
15th Floor, Dallas, Texas 75204. UAM began providing investment advisory
services in December 1980. Today the principal operating subsidiaries of UAM
manage both domestic and international investment portfolios for corporate,
government, and union benefit plans; mutual funds; individuals; endowments; and
foundations. Together with its subsidiaries, UAM manages or advises
approximately $195 billion in assets.
6
<PAGE>
ADVISER'S
Report BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.
VANGUARD WINDSOR II FUND had a 7.2% return for the fiscal year ended October 31,
consisting of a poor -3.4% return for the first half-year and an excellent 10.9%
gain for the second six months. These results were less a reflection of the
manager's competence than an illustration of the madness of the moment,
something whose equal we are unlikely to see again.
THE INVESTMENT ENVIRONMENT
The past fiscal year should be viewed as having two distinct and nearly equal
parts. Investors' attention, and the market's performance, were focused on one
sector--technology--to an extreme degree. A lack of tech stocks in the fund hurt
our performance through February; that same near-absence of tech names
dramatically helped performance thereafter. Even though shareholders were
clamoring for exposure to this area, most stocks were priced too high, given our
assessment of their growth potential. Rather than join the parade, we held our
ground. Although prices in the sector have fallen--dramatically, in many
cases--we still believe that most of the very large names are far too pricey to
justify purchase. Early in the fiscal year, talk about "new economy" and "old
economy" was in every newspaper and magazine article, and yet there is but one
economy. The real economy focuses on profit opportunities.
--------------------------------------------------------------------------------
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 returns.
--------------------------------------------------------------------------------
OUR SUCCESSES
Our electric utility holdings have been the fund's top contributors lately, with
names like Entergy, Reliant Energy, and American Electric Power providing
leadership. We believe the future for these and other electric utilities can be
bright despite the uncertainties of deregulation. During the second half of the
fiscal year, our better-performing stocks included Washington Mutual, Allstate,
and John Hancock. These stocks' returns were influenced to some degree by
declining interest rates, but even more by a significant improvement in
investors' assessments of their business prospects. We feel that these and other
holdings are underappreciated and continue to bear promise. Other top
contributors for the fiscal second half included Phillips Petroleum and Philip
Morris. Significant increases in Phillips Petroleum's revenues from oil and gas
pushed that stock up. Philip Morris benefited from a growing perception that
tobacco litigation was not a fatal threat.
7
<PAGE>
OUR SHORTFALLS
Retailers, including Kmart and Sears, were weak, reflecting disappointing sales.
It seems to us that inflation in energy prices must affect demand for consumer
products. These issues are quite cheap and should rebound. Newell Rubbermaid is
having problems passing along increased costs in its petroleum-based feedstocks.
Service Corp. International's stock has reacted to financial fears that we
regard as unfounded. The company is profitable and, although the funeral
business is changing, it is a necessary industry. Once tax-loss selling comes to
an end, the stock should rebound. In the oil-services sector, Halliburton has
been weak due to a very slow flow of new orders in its marine construction
division. This division probably will be sold, leaving the company much less
subject to the oil industry's ups and downs. We are confident that 2001 will be
a positive year for the entire energy industry.
THE FUND'S POSITIONING
Your fund is significantly overweighted, compared with any relevant market
index, in two sectors: energy and electric utilities. We believe that after a
long period of underinvestment on new production capacity in both areas,
meaningful price increases are in store. Eventually, we'll see a dramatic change
in infrastructure spending to increase supplies. Only then would we expect to
see excess capacity in these industries.
Windsor II continues to have very little exposure to the technology,
telecommunications, and media sectors, whereas many indexes and portfolios have
weightings of 10% to 30% in these industries. We see a real potential for excess
capacity in these areas of the economy, as they have had large increases in
investment in the past five years. If we are right, the very high relative and
absolute prices of these stocks could create an opportunity for capital loss.
The fund has a significant position in financial services, which is generally in
line with our benchmarks.
It is important to know that the fund's holdings have a weighted
price/earnings ratio of 19.8, based on trailing 12-month earnings, which is only
two-thirds of the P/E of the overall market, as measured by the Wilshire 5000
Index. At some point, investors will again care about dividends, and this fund
has a significant yield advantage over most equity portfolios.
James P. Barrow, Portfolio Manager
November 10, 2000
8
<PAGE>
PORTFOLIO CHANGES FISCAL YEAR ENDED OCTOBER 31, 2000
COMMENTS
--------------------------------------------------------------------------------
ADDITIONS
Conoco Class A* Bought this domestic oil stock with cash
from sales of some oil-services stocks.
--------------------------------------------------------------------------------
Emerson Electric Good company, cheap stock.
--------------------------------------------------------------------------------
Watson Pharmaceuticals* Dynamic company that had a falling
stock price.
--------------------------------------------------------------------------------
Bristol-Myers Squibb Stock became cheap due to worries about
expiring patents.
--------------------------------------------------------------------------------
Newell Rubbermaid Added to holdings after price fell on
earnings shortfall.
================================================================================
REDUCTIONS
Citigroup Stock seems ahead of itself.
--------------------------------------------------------------------------------
Ford Motor Earnings are peaking as autos are at the
top of their cycle.
--------------------------------------------------------------------------------
Washington Mutual Reduced a large holding.
--------------------------------------------------------------------------------
Baker Hughes Reduced a large holding.
--------------------------------------------------------------------------------
Phillips Petroleum Reduced a large holding.
--------------------------------------------------------------------------------
SBC Communications Reduced a large holding.
--------------------------------------------------------------------------------
*New holding in portfolio.
SEE PAGE 14
FOR A COMPLETE
LISTING OF THE
FUND'S HOLDINGS.
9
<PAGE>
FUND PROFILE As of October 31, 2000
for Windsor II Fund
This Profile provides a snapshot of the fund's characteristics, compared where
appropriate to both an unmanaged index that we consider a "best fit" for the
fund and a broad market index. Key terms are defined on page 11.
-------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
WILSHIRE
FUND BEST FIT* 5000
-------------------------------------------------------------------------
Number of Stocks 272 740 6,768
Median Market Cap $29.6B $41.6B $46.1B
Price/Earnings Ratio 19.8x 19.8x 29.8x
Price/Book Ratio 3.0x 3.3x 4.5x
Yield 2.1% 1.8% 1.1%
Return on Equity 19.6% 20.8% 22.8%
Earnings Growth Rate 9.7% 10.9% 16.8%
Foreign Holdings 4.3% 0.0% 0.0%
Turnover Rate 26% -- --
Expense Ratio 0.37% -- --
Cash Investments 2.6% -- --
-------------------------------------------------------------------------
--------------------------------------------
TEN LARGEST HOLDINGS
(% of total net assets)
Allstate Corp.
(insurance) 3.0%
Entergy Corp.
(electrical utilities) 2.6
Philip Morris Cos., Inc.
(tobacco) 2.6
American Electric Power Co., Inc.
(electrical utilities) 2.5
Phillips Petroleum Co.
(oil) 2.4
BP Amoco PLC ADR
(oil) 2.3
Washington Mutual, Inc.
(savings & loan) 2.3
SBC Communications Inc.
(telecommunications) 2.2
Schlumberger Ltd.
(oil) 2.1
Citigroup, Inc.
(financial services) 2.1
-------------------------------------------
Top Ten 24.1%
-------------------------------------------
----------------------------------------------------
VOLATILITY MEASURES
WILSHIRE
FUND BEST FIT* FUND 5000
R-Squared 0.93 1.00 0.41 1.00
Beta 0.99 1.00 0.66 1.00
----------------------------------------------------
----------------------------------------------------------
SECTOR DIVERSIFICATION
(% OF COMMON STOCKS)
WILSHIRE
FUND BEST FIT* 5000
Auto & Transportation 0.7% 3.1% 1.7%
Consumer Discretionary 11.8 9.2 12.0
Consumer Staples 8.9 7.8 5.3
Financial Services 26.5 31.3 17.0
Health Care 5.3 8.6 12.4
Integrated Oils 9.5 7.2 3.1
Other Energy 8.9 2.5 2.6
Materials & Processing 4.0 3.8 2.5
Producer Durables 1.5 3.5 3.3
Technology 3.1 4.7 26.4
Utilities 15.4 15.7 8.7
Other 4.4 2.6 5.0
----------------------------------------------------------
*Russell 1000 Value Index.
------------------------
INVESTMENT FOCUS
MARKET CAP Large
STYLE Value
------------------------
[PICTURE OF COMPUTER]
VISIT OUR WEBSITE
WWW.VANGUARD.COM
FOR REGULARLY UPDATED
FUND INFORMATION
10
<PAGE>
GLOSSARY
of Investment Terms
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the fund's "best fit" index benchmark and an
overall market index. Each index is assigned a beta of 1.00. Compared with a
given index, a fund with a beta of 1.20 would have seen its share price rise or
fall by 12% when the index rose or fell by 10%.
--------------------------------------------------------------------------------
CASH INVESTMENTS. 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.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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 market in general, as measured by the fund's "best fit"
index benchmark and by an overall market index. If a fund's total returns were
precisely synchronized with an index's returns, its R-squared would be 1.00. If
the fund's returns bore no relationship to the index'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.
--------------------------------------------------------------------------------
TURNOVER RATE. An indication of trading activity during the past year. 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.
--------------------------------------------------------------------------------
11
<PAGE>
PERFORMANCE SUMMARY
for 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. An investor's shares, when
redeemed, could be worth more or less than their original cost.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) October 31, 1990-October 31, 2000
WINDSOR FUND RUSSELL 1000 VALUE INDEX
1991 36.6 32.9
1992 12.5 10.7
1993 19.5 25.2
1994 2.2 0.8
1995 23.1 24.7
1996 27.2 23.7
1997 31.3 33.2
1998 16.5 14.8
1999 4.6 16.5
2000 7.2 5.5
--------------------------------------------------------------------------------
See Financial Highlights table on page 21 for dividend and capital gains
information for the past five years.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE OCTOBER 31, 1990-OCTOBER 31, 2000
WINDSOR AVERAGE RUSSELL WILSHIRE S&P 500
II FUND LARGE-CAP 1000 VALUE 5000 INDEX INDEX
VALUE FUND* INDEX
199010 10000 10000 10000 10000 10000
199101 11795 11629 11459 11562 11420
199104 13062 12665 12494 12865 12562
199107 13534 13105 12933 13395 13087
199110 13661 13504 13289 13860 13350
199201 14281 14185 13685 14751 14011
199204 14803 14446 14412 14789 14325
199207 15447 14683 14949 15166 14760
199210 15369 14644 14706 15202 14679
199301 16392 15592 16002 16310 15493
199304 16795 15906 16835 16332 15648
199307 17509 16288 17749 16916 16049
199310 18367 17271 18406 17902 16872
199401 18864 17906 19064 18488 17488
199404 17890 16969 18067 17432 16480
199407 18298 17212 18394 17646 16877
199410 18774 17754 18549 18356 17524
199501 18657 17655 18559 18300 17581
199504 20492 19299 20339 20019 19359
199507 22060 20921 22230 22239 21283
199510 23108 21666 23128 23062 22158
199601 25941 23704 25686 25108 24378
199604 27044 24587 26421 26464 25208
199607 26563 23965 25762 25508 24810
199610 29387 26482 28617 28118 27497
199701 32534 29303 31769 31252 30800
199704 32886 29671 32382 31131 31543
199707 38722 35022 38340 37538 37745
199710 38577 34021 38113 36990 36327
199801 40618 35910 40381 39123 39089
199804 47002 40160 46041 44600 44497
199807 45830 39341 45129 43961 45024
199810 44948 38910 43764 42484 44315
199901 48251 43577 47740 49829 51788
199904 52710 46092 52528 52172 54207
199907 50678 45557 51893 52018 54120
199910 47003 45762 50997 53385 55691
200001 43548 45634 49185 56994 57146
200004 45426 47212 50491 58554 59697
200007 45718 46267 49300 57832 58978
200010 50395 49016 53805 57709 59083
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 2000 FINAL VALUE
------------------------------- OF A $10,000
1 YEAR 5 YEARS 10 YEARS INVESTMENT
--------------------------------------------------------------------------------
Windsor II Fund 7.22% 16.88% 17.55% $50,395
Average Large-Cap Value Fund* 7.11 17.74 17.23 49,016
Russell 1000 Value Index 5.52 18.40 18.33 53,805
Wilshire 5000 Index 8.10 20.14 19.16 57,709
S&P 500 Index 6.09 21.67 19.44 59,083
--------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------------------
12
<PAGE>
A REPORT
on Your Fund's After-Tax Returns
This table presents pre-tax and after-tax returns for your fund and an
appropriate peer group of mutual funds. The after-tax returns represent the
fund's past results only and should not be used to predict future tax
efficiency.
If you own the fund in a tax-deferred account such as an individual
retirement account or a 401(k), this information does not apply to you. Such
accounts are not subject to current taxes.
Income taxes can have a considerable impact on a fund's return--an
important consideration for investors who own mutual funds in taxable accounts.
While the pre-tax return is most often used to tally a fund's performance, the
fund's after-tax return, which accounts for taxes on distributions of capital
gains and income dividends, is an important measure of the return that many
investors actually received.
PRE-TAX AND AFTER-TAX PERIODS ENDED OCTOBER 31, 2000
AVERAGE ANNUAL TOTAL RETURNS
ONE YEAR FIVE YEARS TEN YEARS
-----------------------------------------------------
PRE-TAX AFTER-TAX PRE-TAX AFTER-TAX PRE-TAX AFTER-TAX
--------------------------------------------------------------------------------
Vanguard Windsor II Fund 7.2% 3.9% 16.9% 13.8% 17.6% 14.9%
Average Large Value Fund* 7.6 5.5 15.4 12.6 16.0 13.3
--------------------------------------------------------------------------------
*Based on data from Morningstar, Inc. Elsewhere in this report, returns for
comparable funds are derived from data provided by Lipper Inc., which may differ
somewhat.
The after-tax return calculations use the top federal income tax rates in
effect at the time of each distribution. The tax burden would be less, and the
after-tax return higher, for those in lower tax brackets.
We must stress that because many interrelated factors affect how
tax-friendly a fund may be, it is very difficult to predict tax efficiency. A
fund's tax efficiency can be influenced by its turnover rate, the types of
securities it holds, the accounting practices it uses, and the net cash flow it
receives.
Finally, it's important to understand that our calculation does not reflect
the tax effect of your own investment activities. Specifically, you may incur
additional capital gains taxes--thereby lowering your after-tax return--if you
decide to sell all or some of your shares.
--------------------------------------------------------------------------------
A NOTE ABOUT OUR CALCULATIONS: Pre-tax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. State and local income taxes were not considered. The competitive
group returns provided by Morningstar are calculated in a manner consistent with
that used for Vanguard funds.
[PICTURE OF COMPUTER]
You can use Vanguard's online after-tax
return calculator at
www.vanguard.com/?aftertax
to customize the calculation
of your after-tax return.
13
<PAGE>
FINANCIAL STATEMENTS
October 31, 2000
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, but may differ because certain investments or
transactions may be treated differently for financial statement and tax
purposes. 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.
--------------------------------------------------------------------
MARKET
VALUE*
WINDSOR II FUND SHARES (000)
--------------------------------------------------------------------
COMMON STOCKS (93.1%)(1)
--------------------------------------------------------------------
AUTO & TRANSPORTATION (0.7%)
General Motors Corp. 1,963,068 $ 121,956
Ford Motor Co. 451,453 11,794
Delta Air Lines, Inc. 123,800 5,850
Burlington Northern
Santa Fe Corp. 200,800 5,334
PACCAR, Inc. 105,500 4,438
TRW, Inc. 96,700 4,061
* Navistar International Corp. 121,600 4,020
Union Pacific Corp. 71,000 3,328
* Continental Airlines, Inc.
Class B 19,800 1,040
Delphi Automotive
Systems Corp. 50,400 791
* Northwest Airlines Corp.
Class A 19,000 542
Kansas City Southern
Industries, Inc. 11,500 100
------------
$ 163,254
------------
CONSUMER DISCRETIONARY (11.0%)
Waste Management, Inc. 24,746,597 494,932
Sears, Roebuck & Co. 12,742,100 378,823
*(2)Kmart Corp. 39,811,200 236,379
Gannett Co., Inc. 3,791,100 219,884
Wal-Mart Stores, Inc. 4,314,800 195,784
* Cendant Corp. 13,650,200 163,802
Newell Rubbermaid, Inc. 8,479,200 162,695
The Walt Disney Co. 4,253,832 152,340
Target Corp. 5,090,000 140,611
Tribune Co. 3,105,500 115,098
* AT&T Corp.-Liberty Media
Class A 5,250,000 94,500
Kimberly-Clark Corp. 1,295,000 85,470
J.C. Penney Co., Inc. 5,646,800 65,997
*(2)Service Corp. International 24,745,700 57,224
McDonald's Corp. 254,800 7,899
Eastman Kodak Co. 132,800 5,959
Darden Restaurants Inc. 227,300 5,114
* Toys R Us, Inc. 274,500 4,718
* Convergys Corp. 105,000 4,574
R.R. Donnelley & Sons Co. 187,300 4,027
Reader's Digest Assn., Inc.
Class A 103,900 3,812
Hasbro, Inc. 349,700 3,759
* Viacom Inc. Class B 65,991 3,753
* Outback Steakhouse 128,300 3,657
Galileo International, Inc. 175,800 3,472
Wendy's International, Inc. 151,200 3,289
Whirlpool Corp. 74,000 3,219
* Mandalay Resort Group 146,300 3,045
* AutoNation, Inc. 447,100 3,018
* Clear Channel
Communications, Inc. 38,100 2,288
14
<PAGE>
----------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
----------------------------------------------------------------------
* AutoZone Inc. 81,400 $ 2,183
Time Warner, Inc. 28,500 2,163
May Department Stores Co. 74,037 1,943
* Jones Apparel Group, Inc. 62,300 1,733
Circuit City Stores, Inc. 121,900 1,615
* International Game Technology 31,000 1,135
Gillette Co. 19,400 677
* Tricon Global Restaurants, Inc. 21,300 639
Hertz Corp. Class A 16,400 539
Harcourt General, Inc. 7,700 432
VF Corp. 14,300 391
------------
$2,642,592
------------
CONSUMER STAPLES (8.3%)
Philip Morris Cos., Inc. 16,906,400 619,197
Anheuser-Busch Cos., Inc. 8,416,800 385,069
Procter & Gamble Co. 4,498,800 321,383
Imperial Tobacco Group ADR 14,840,000 289,380
PepsiCo, Inc. 3,643,300 176,472
H.J. Heinz Co. 2,536,900 106,391
Sara Lee Corp. 2,380,900 51,338
The Coca-Cola Co. 104,600 6,315
Ralston Purina Group 213,400 5,175
IBP, Inc. 249,700 5,134
R.J. Reynolds Tobacco
Holdings, Inc. 140,200 5,012
Brown-Forman Corp. Class B 80,700 4,913
Nabisco Holdings Corp. Class A 74,400 4,022
Nabisco Group Holdings Corp. 105,000 3,032
SuperValu Inc. 157,000 2,414
McCormick & Co., Inc. 71,200 2,256
Tyson Foods, Inc. 195,500 2,187
* Safeway, Inc. 30,800 1,684
------------
$1,991,374
------------
FINANCIAL SERVICES (24.7%)
Allstate Corp. 18,172,344 731,437
Washington Mutual, Inc. 12,397,230 545,478
Citigroup, Inc. 9,691,239 510,001
Bank of America Corp. 9,828,612 472,388
American International
Group, Inc. 4,676,241 458,272
Bank One Corp. 11,435,605 417,400
The Chase Manhattan Corp. 7,988,084 363,458
First Union Corp. 11,213,402 339,906
Wells Fargo & Co. 7,061,300 327,026
Fannie Mae 4,215,700 324,609
Aon Corp. 6,736,062 279,126
* John Hancock Financial
Services, Inc. 7,512,300 237,576
American General Corp. 2,128,600 171,352
PNC Financial Services Group 2,381,022 159,231
Morgan Stanley Dean
Witter & Co. 1,614,300 129,648
U.S. Bancorp 4,324,900 104,609
J.P. Morgan & Co., Inc. 614,100 101,634
National City Corp. 961,500 20,552
American Express Co. 236,700 14,202
Conseco Inc. 2,024,000 14,042
Merrill Lynch & Co., Inc. 189,800 13,286
The Bank of New York Co., Inc. 181,600 10,453
Mellon Financial Corp. 197,900 9,549
CIGNA Corp. 77,600 9,463
FleetBoston Financial Corp. 230,584 8,762
Freddie Mac 126,300 7,578
Marsh & McLennan Cos., Inc. 49,300 6,446
St. Paul Cos., Inc. 122,200 6,263
MGIC Investment Corp. 91,700 6,247
Golden West Financial Corp. 109,800 6,156
Nationwide Financial
Services, Inc. 118,600 5,767
Loews Corp. 63,000 5,729
Bear Stearns Co., Inc. 94,100 5,705
SouthTrust Corp. 173,300 5,611
Dime Bancorp, Inc. 218,400 5,337
First Data Corp. 104,200 5,223
The Hartford Financial Services
Group Inc. 69,400 5,166
Golden State Bancorp Inc. 196,700 5,139
Countrywide Credit
Industries, Inc. 135,555 5,075
A.G. Edwards & Sons, Inc. 97,950 4,971
The PMI Group Inc. 66,350 4,902
Hibernia Corp. Class A 365,800 4,367
Compass Bancshares Inc. 223,400 4,063
Heller Financial, Inc. 138,800 4,060
Deluxe Corp. 174,500 3,937
State Street Corp. 31,400 3,917
UnionBanCal Corp. 185,790 3,902
Dow Jones & Co., Inc. 66,000 3,886
Northern Trust Corp. 45,000 3,842
Huntington Bancshares Inc. 211,860 3,045
First Virginia Banks, Inc. 70,500 2,917
Equity Residential Properties
Trust REIT 59,000 2,777
The Goldman Sachs Group, Inc. 24,900 2,485
Associates First Capital Corp. 66,500 2,469
GATX Corp. 58,400 2,456
Stilwell Financial, Inc. 46,000 2,061
* CNA Financial Corp. 54,700 1,997
Associated Banc-Corp. 82,940 1,996
Duke Realty Investments,
Inc. REIT 80,100 1,897
Lehman Brothers Holdings, Inc. 29,400 1,896
Equity Office Properties
Trust REIT 61,900 1,865
Archstone Communities
Trust REIT 66,400 1,565
ProLogis Trust REIT 70,900 1,489
Mercantile Bankshares Corp. 37,300 1,403
15
<PAGE>
----------------------------------------------------------------------
MARKET
VALUE*
WINDSOR II FUND SHARES (000)
----------------------------------------------------------------------
Public Storage, Inc. REIT 61,800 $ 1,391
Commerce Bancshares, Inc. 36,603 1,315
Household International, Inc. 26,000 1,308
Automatic Data Processing, Inc. 17,800 1,163
* DST Systems, Inc. 15,400 949
Simon Property Group, Inc. REIT 40,800 910
SunTrust Banks, Inc. 16,700 815
Comdisco, Inc. 64,600 795
Spieker Properties, Inc. REIT 12,800 709
M & T Bank Corp. 14,000 703
MBNA Corp. 17,100 642
Firstar Corp. 23,600 465
Erie Indemnity Co. Class A 5,700 159
Charter One Financial 2,415 55
------------
$5,940,446
------------
HEALTH CARE (4.9%)
Bristol-Myers Squibb Co. 6,402,300 390,140
American Home
Products Corp. 4,129,500 262,223
* Watson Pharmaceuticals, Inc. 2,987,000 186,874
HCA-The Healthcare Co. 3,563,500 142,317
Johnson & Johnson 1,527,500 140,721
Merck & Co., Inc. 269,400 24,229
Abbott Laboratories 282,300 14,909
UnitedHealth Group Inc. 74,300 8,127
Tenet Healthcare Corp. 165,000 6,487
Baxter International, Inc. 45,000 3,698
* Chiron Corp. 69,100 2,993
C.R. Bard, Inc. 48,500 2,031
Pharmacia Corp. 35,272 1,940
DENTSPLY International Inc. 52,400 1,818
------------
$1,188,507
------------
INTEGRATED OILS (8.8%)
Phillips Petroleum Co. 9,484,400 585,662
BP Amoco PLC ADR 11,098,572 565,334
Occidental Petroleum Corp. 18,342,300 364,553
(2)Conoco Inc. Class A 9,900,000 255,544
Exxon Mobil Corp. 1,955,928 174,444
Unocal Corp. 4,222,600 144,096
Chevron Corp. 157,300 12,918
Texaco Inc. 145,200 8,576
Kerr-McGee Corp. 77,600 5,068
(2)Conoco Inc. Class B 135,900 3,695
Amerada Hess Corp. 53,700 3,329
------------
$2,123,219
------------
OTHER ENERGY (8.2%)
Schlumberger Ltd. 6,775,600 515,793
Baker Hughes, Inc. 14,796,000 508,612
Halliburton Co. 11,555,700 428,283
Williams Cos., Inc. 6,191,546 258,884
Enron Corp. 1,723,100 141,402
Transocean Sedco Forex Inc. 2,232,631 118,329
Apache Corp. 81,200 4,491
Ultramar Diamond
Shamrock Corp. 145,700 3,825
EOG Resources, Inc. 81,700 3,217
Anadarko Petroleum Corp. 15,424 988
------------
$1,983,824
------------
MATERIALS & PROCESSING (3.7%)
(2)Fort James Corp. 13,072,100 430,562
Dow Chemical Co. 4,372,400 133,905
(2)Millennium Chemicals, Inc. 7,368,142 118,811
Hanson PLC ADR 3,995,350 104,878
(2)Crompton Corp. 6,238,569 49,909
E.I. du Pont de Nemours & Co. 172,387 7,822
Archer-Daniels-Midland Co. 605,850 6,664
Praxair, Inc. 129,000 4,805
* American Standard Cos., Inc. 103,900 4,766
Boise Cascade Corp. 148,600 4,263
The Timber Co. 143,900 4,074
Engelhard Corp. 190,100 3,968
Lafarge Corp. 171,800 3,243
Eastman Chemical Co. 74,500 3,194
Fluor Corp. 77,200 2,702
Johns Manville Corp. 220,000 2,021
Alcoa Inc. 70,400 2,020
Temple-Inland Inc. 32,000 1,432
Westvaco Corp. 18,500 527
International Paper Co. 9,600 352
------------
$ 889,918
------------
PRODUCER DURABLES (1.4%)
Emerson Electric Co. 4,091,000 300,433
The Boeing Co. 205,500 13,935
Northrop Grumman Corp. 61,700 5,183
Cooper Industries, Inc. 134,400 5,141
United Technologies Corp. 72,396 5,054
Pitney Bowes, Inc. 121,300 3,601
Caterpillar, Inc. 49,200 1,725
------------
$ 335,072
------------
TECHNOLOGY (2.9%)
International Business
Machines Corp. 2,275,000 224,088
Electronic Data Systems Corp. 3,619,300 169,881
Intel Corp. 2,573,000 115,785
Compaq Computer Corp. 3,261,500 99,182
* Microsoft Corp. 527,000 36,297
Hewlett-Packard Co. 246,200 11,433
* Seagate Technology Inc. 92,700 6,477
Motorola, Inc. 227,000 5,661
* Intuit, Inc. 81,000 4,976
* KEMET Corp. 142,500 3,972
Rockwell International Corp. 84,700 3,330
AVX Corp. 102,200 2,925
* Advanced Micro Devices, Inc. 127,000 2,873
* Computer Sciences Corp. 41,100 2,589
* Apple Computer, Inc. 104,600 2,046
16
<PAGE>
----------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
----------------------------------------------------------------------
* American Management
Systems, Inc. 23,400 $ 506
* 3Com Corp. 13,900 247
------------
$ 692,268
------------
UTILITIES (14.3%)
(2)Entergy Corp. 16,284,200 623,888
American Electric Power
Co., Inc. 14,726,060 611,131
SBC Communications Inc. 9,130,047 526,690
Verizon Communications 7,702,654 445,310
Reliant Energy, Inc. 10,594,900 437,702
(2)FirstEnergy Corp. 12,083,777 312,668
Xcel Energy, Inc. 4,214,500 107,733
Public Service Enterprise
Group, Inc. 2,445,400 101,484
* WorldCom, Inc. 4,041,172 95,978
AT&T Corp. 4,010,745 92,999
BellSouth Corp. 439,800 21,248
* Comcast Corp. Special Class A 157,000 6,398
TXU Corp. 167,200 6,197
Exelon Corp. 100,450 6,040
PPL Corp. 132,688 5,465
GPU, Inc. 155,200 5,131
DTE Energy Co. 142,000 5,130
Telephone & Data Systems, Inc. 46,100 4,864
Sprint Corp. 177,180 4,518
* Qwest Communications
International Inc. 92,511 4,498
* XO Communications Inc. 119,500 4,031
Duke Energy Corp. 46,300 4,002
Cinergy Corp. 121,000 3,706
Pinnacle West Capital Corp. 76,700 3,332
* U.S. Cellular Corp. 50,500 3,232
Sempra Energy 154,900 3,204
Ameren Corp. 79,700 3,168
Edison International 102,100 2,438
CP&L, Inc. 50,600 2,040
PG&E Corp. 72,600 1,956
ALLTEL Corp. 30,200 1,946
Kinder Morgan, Inc. 30,000 1,157
Southern Co. 12,400 364
* Level 3 Communications, Inc. 3,300 157
------------
$3,459,805
------------
OTHER (4.2%)
General Electric Co. 6,569,200 360,074
Honeywell International Inc. 6,025,362 324,240
(2)ITT Industries, Inc. 8,916,800 290,353
Minnesota Mining &
Manufacturing Co. 101,600 9,817
Fortune Brands, Inc. 201,300 5,926
Johnson Controls, Inc. 89,800 5,354
* Thermo Electron Corp. 154,700 4,486
* FMC Corp. 38,800 2,949
Crane Co. 34,200 896
------------
$1,004,095
------------
----------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $17,799,055) $22,414,374
----------------------------------------------------------------------
Face
Amount
(000)
----------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (7.3%)(1)
----------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.
(3)6.54%, 1/25/2001 $ 25,000 $ 24,615
FEDERAL NATIONAL MORTGAGE ASSN.
(3)6.54%, 1/24/2001 35,000 $ 34,474
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.56%, 11/1/2000 1,698,345 $1,698,345
6.58%, 11/1/2000--Note G 4,120 4,120
----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $1,761,564) $1,761,554
----------------------------------------------------------------------
TOTAL INVESTMENTS (100.4%)
(Cost $19,560,619) $24,175,928
----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.4%)
----------------------------------------------------------------------
Other Assets--Note C 216,763
Liabilities--Note G (322,786)
------------
(106,023)
` ------------
----------------------------------------------------------------------
NET ASSETS (100%)
----------------------------------------------------------------------
Applicable to 872,618,430 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $24,069,905
======================================================================
NET ASSET VALUE PER SHARE $27.58
======================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
(1)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 97.4% and 3.0%, respectively, of net assets. See Note F in Notes
to Financial Statements.
(2)Considered an affiliated company as the fund owns more than 5% of the
outstanding voting securities of such company. The total market value of
investments in affiliated companies was $2,379,033,000.
(3)Securities with an aggregate value of $59,089,000 have been segregated as
initial margin for open futures contracts.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
17
<PAGE>
-----------------------------------------------------------------------
AMOUNT PER
WINDSOR II FUND (000) SHARE
-----------------------------------------------------------------------
AT OCTOBER 31, 2000, NET ASSETS CONSISTED OF:
-----------------------------------------------------------------------
Paid in Capital--Note E $18,212,531 $20.87
Undistributed Net
Investment Income 158,735 .18
Accumulated Net
Realized Gains--Note E 1,135,931 1.30
Unrealized Appreciation
(Depreciation)--Note F
Investment Securities 4,615,309 5.29
Futures Contracts (52,601) (.06)
-----------------------------------------------------------------------
NET ASSETS $24,069,905 $27.58
=======================================================================
18
<PAGE>
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.
-------------------------------------------------------------------------------
WINDSOR II FUND
YEAR ENDED OCTOBER 31, 2000
(000)
-------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* $ 563,303
Interest 99,399
Security Lending 1,786
-------------------------------------------------------------------------------
Total Income 664,488
-------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 30,354
Performance Adjustment (6,281)
The Vanguard Group--Note C
Management and Administrative 62,100
Marketing and Distribution 3,412
Custodian Fees 85
Auditing Fees 28
Shareholders' Reports 760
Trustees' Fees and Expenses 34
-------------------------------------------------------------------------------
Total Expenses 90,492
Expenses Paid Indirectly--Note D (3,825)
-------------------------------------------------------------------------------
Net Expenses 86,667
-------------------------------------------------------------------------------
NET INVESTMENT INCOME 577,821
-------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold* 1,389,813
Futures Contracts 84,282
-------------------------------------------------------------------------------
REALIZED NET GAIN 1,474,095
-------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (793,181)
Futures Contracts (71,695)
-------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (864,876)
-------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,187,040
===============================================================================
*Dividend income and realized net loss from affiliated companies were
$137,047,000 and $(802,507,000), respectively.
19
<PAGE>
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.
-------------------------------------------------------------------------------
WINDSOR II FUND
YEAR ENDED OCTOBER 31,
-------------------------
2000 1999
(000) (000)
-----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 577,821 $ 670,002
Realized Net Gain 1,474,095 2,600,015
Change in Unrealized Appreciation (Depreciation) (864,876) (1,931,112)
-----------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 1,187,040 1,338,905
-----------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (642,217) (741,695)
Realized Capital Gain (2,514,938) (2,559,664)
-----------------------------------------------------------------------------
Total Distributions (3,157,155) (3,301,359)
-----------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 2,976,235 6,123,676
Issued in Lieu of Cash Distributions 3,004,773 3,148,067
Redeemed (10,481,817) (6,407,121)
-----------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions (4,500,809) 2,864,622
-----------------------------------------------------------------------------
Total Increase (Decrease) (6,470,924) 902,168
-----------------------------------------------------------------------------
NET ASSETS
Beginning of Year 30,540,829 29,638,661
-----------------------------------------------------------------------------
End of Year $24,069,905 $30,540,829
=============================================================================
1Shares Issued (Redeemed)
Issued 118,060 198,010
Issued in Lieu of Cash Distributions 120,577 109,009
Redeemed (417,883) (209,049)
-----------------------------------------------------------------------------
Net Increase (Decrease) in Shares Outstanding (179,246) 97,970
=============================================================================
20
<PAGE>
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>
---------------------------------------------------------------------------------------------------------
Windsor II Fund
Year Ended October 31,
--------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $29.03 $31.07 $29.36 $24.04 $20.06
---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .64 .64 .65 .64 .62
Net Realized and Unrealized Gain (Loss) on Investments 1.08 .73 3.91 6.47 4.63
---------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.72 1.37 4.56 7.11 5.25
---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.67) (.74) (.66) (.63) (.58)
Distributions from Realized Capital Gains (2.50) (2.67) (2.19) (1.16) (.69)
---------------------------------------------------------------------------------------------------------
Total Distributions (3.17) (3.41) (2.85) (1.79) (1.27)
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $27.58 $29.03 $31.07 $29.36 $24.04
=========================================================================================================
TOTAL RETURN 7.22% 4.57% 16.51% 31.27% 27.17%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $24,070 $30,541 $29,639 $22,568 $14,758
Ratio of Total Expenses to Average Net Assets 0.37% 0.37% 0.41% 0.37% 0.39%
Ratio of Net Investment Income to Average Net Assets 2.36% 2.08% 2.16% 2.49% 2.92%
Portfolio Turnover Rate 26% 26% 31% 30% 32%
=========================================================================================================
</TABLE>
21
<PAGE>
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 U.S. 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 CONTRACTS: 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 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. 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
22
<PAGE>
for Tukman Capital Management, Inc., are subject to quarterly adjustments based
on performance relative to the S&P 500 Index.
The Vanguard Group provides investment advisory services to a portion of
the fund on an at-cost basis; the fund paid Vanguard advisory fees of $414,000
for the year ended October 31, 2000.
For the year ended October 31, 2000, the aggregate investment advisory fee
represented an effective annual basic rate of 0.12% of average net assets before
a decrease of $6,281,000 (0.03%) 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 October 31, 2000, the fund had contributed capital of $4,415,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 4.4% of Vanguard's capitalization. The fund's trustees and officers are also
directors and officers of Vanguard.
D. The fund has asked its investment advisers to direct certain security 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 management and administrative expenses. For the year
ended October 31, 2000, these arrangements reduced the fund's expenses by
$3,825,000 (an annual rate of 0.02% of average net assets).
E. During the year ended October 31, 2000, the fund purchased $5,822,673,000 of
investment securities and sold $12,599,936,000 of investment securities, other
than temporary cash investments.
The fund used a tax accounting practice to treat a portion of the price of
capital shares redeemed during the year as distributions from realized capital
gains. Accordingly, the fund has reclassified $321,828,000 from accumulated net
realized gains to paid in capital.
F. At October 31, 2000, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $4,615,309,000,
consisting of unrealized gains of $6,923,211,000 on securities that had risen in
value since their purchase and $2,307,902,000 in unrealized losses on securities
that had fallen in value since their purchase.
At October 31, 2000, the aggregate settlement value of open futures
contracts expiring in December 2000 and the related unrealized depreciation
were:
--------------------------------------------------------------------------------
(000)
-----------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE DEPRECIATION
--------------------------------------------------------------------------------
S&P 500 Index 2,686 $967,094 $(48,977)
S&P MidCap 400 Index 275 71,672 (3,624)
--------------------------------------------------------------------------------
Unrealized depreciation on open futures contracts is required to be treated as
realized loss for tax purposes.
G. The market value of securities on loan to broker/dealers at October 31, 2000,
was $3,999,000 for which the fund held cash collateral of $4,120,000. The fund
invests cash collateral received in repurchase agreements, and records a
liability for the return of the collateral, during the period the securities are
on loan.
23
<PAGE>
REPORT
of Independent Accountants
To the Shareholders and Trustees of Vanguard Windsor II Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Windsor II Fund (the "Fund") at October 31, 2000, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at October 31, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 29, 2000
--------------------------------------------------------------------------------
SPECIAL 2000 TAX INFORMATION (UNAUDITED) FOR VANGUARD WINDSOR II FUND
This information for the fiscal year ended October 31, 2000, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $2,439,406,000 as capital gain dividends (from net
long-term capital gains) to shareholders during the fiscal year, all of which is
designated as a 20% rate gain distribution.
For corporate shareholders, 92.8% of investment income (dividend income plus
short-term gains, if any) qualifies for the dividends-received deduction.
24
<PAGE>
THE PEOPLE
Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Six of Vanguard's seven board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new trustees/ directors; and electing
Vanguard officers.
The list below provides a brief description of each trustee's professional
affiliations. The year in which the trustee joined the Vanguard board is noted
in parentheses.
--------------------------------------------------------------------------------
TRUSTEES
JOHN J. BRENNAN (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and of each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
Johnson*Merck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Argentaria, Gestion, BKF Capital, The Jeffrey Co., NeuVis, Inc., and
Select Sector SPDR Trust.
ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JAMES O. WELCH, JR. (1971) Retired Chairman of Nabisco Brands, Inc. (Food
Products); retired Vice Chairman and Director of RJR Nabisco (Food and Tobacco
Products); Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON (1985) Retired Chairman and Chief Executive Officer of Rohm &
Haas Co.; Director of AmeriSource Health Corporation, 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.
--------------------------------------------------------------------------------
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON, Legal Department.
ROBERT A. DISTEFANO, Information Technology.
JAMES H. GATELY, Direct Investor Services.
KATHLEEN C. GUBANICH, Human Resources.
IAN A. MACKINNON, Fixed Income Group.
F. WILLIAM MCNABB, III, Institutional Investor Group.
MICHAEL S. MILLER, Planning and Development.
RALPH K. PACKARD, Chief Financial Officer.
GEORGE U. SAUTER, Quantitative Equity Group.
--------------------------------------------------------------------------------
JOHN C. BOGLE
Founder; Chairman and Chief Executive, 1974-1996.
<PAGE>
[SHIP]
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
ABOUT OUR COVER
Our cover art evokes both Vanguard's rich past and the course we've set for the
future--our determination to provide superior investment performance and
top-notch service. The image is based on two works: a painting titled The First
Journey of 'Victory,' by the English artist W.L. Wyllie (1851-1931), and a
sculpture of a compass rose on Vanguard's campus near Valley Forge,
Pennsylvania.
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500, 500, S&P MidCap
400, and S&P SmallCap 600 are trademarks of The McGraw-Hill Companies, Inc. All
other index names may contain trademarks and are the exclusive property of their
respective owners.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
(C)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
Q730 122000
