VANGUARD WINDSOR(TM) FUND
April 30, 2000
semiannual
[SHIP GRAPHIC]
[A MEMBER OF THE VANGUARD GROUP LOGO]
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HAVE THE PRINCIPLES OF INVESTING CHANGED?
In a world of frenetic change in business, technology, and the financial
markets, it is natural to wonder whether the basic principles of investing have
changed.
We don't think so.
The most successful investors over the coming decade will be those who
began the new century with a fundamental understanding of risk and who had the
discipline to stick with long-term investment programs.
Certainly, investors today confront a challenging, even unprecedented,
environment. Valuations of market indexes are at or near historic highs. The
strength and duration of the bull market in U.S. stocks have inflated people's
expectations and diminished their recognition of the market's considerable
risks. And the incredible divergence in stock returns--many technology-related
stocks gained 100% or more in 1999, yet prices fell for more than half of all
stocks--has made some investors question the idea of diversification.
And then there is the Internet. Undeniably, it is a powerful medium for
communications and transacting business. For investors, the Internet is a vast
source of information about investments, and online trading has made it
inexpensive and convenient to trade stocks and invest in mutual funds.
However, new tools do not guarantee good workmanship. Information is not
the same as wisdom. Indeed, much of the information, opinion, and rumor that
swirl about financial markets each day amounts to "noise" of no lasting
significance. And the fact that rapid-fire trading is easy does not make it
beneficial. Frequent trading is almost always counterproductive because
costs--even at low commission rates--and taxes detract from the returns that the
markets provide. Sadly, many investors jump into a "hot" mutual fund just in
time to see it cool off. Meanwhile, long-term fund investors are hurt by
speculative trading activity because they bear part of the costs involved in
accommodating purchases and redemptions.
Vanguard believes that intelligent investors should resist short-term
thinking and focus instead on a few time-tested principles:
o Invest for the long term. Pursuing your long-term investment goals is more
like a marathon than a sprint.
o Diversify your investments with holdings in stocks, bonds, and cash
investments.
Remember that, at any moment, some part of a diversified portfolio will lag
other parts, and be wary of taking on more risk by "piling onto" the
best-performing part of your holdings. Today's leader could well be tomorrow's
laggard.
o Step back from the daily frenzy of the markets; focus on your overall asset
allocation.
o Capture as much of the market's return as possible by minimizing costs and
taxes.
Costs and taxes diminish long-term returns while doing nothing to reduce the
risks you incur as an investor.
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CONTENTS
Report From The Chairman .......... 1 Fund Profile ...................... 8
The Markets In Perspective ........ 4 Performance Summary ...............10
Adviser's Report .................. 6 Financial Statements ..............11
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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," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
Frank Russell Company is
the owner of trademarks and copyrights relating to the Russell Indexes.
"Wilshire 5000(R)" and "Wilshire 4500" are trademarks of Wilshire Associates
Incorporated.
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REPORT FROM THE CHAIRMAN
[PHOTO OF JOHN J. BRENNAN]
JOHN J. BRENNAN
The stock market displayed a split personality during the six months ended April
30, 2000, the first half of Vanguard Windsor Fund's fiscal year. For the first
four months, the market enthusiastically embraced technology-related stocks and
shunned value stocks. Then a 180-degree turn enabled Windsor Fund to erase a
decline of about 10% from November through February and to gain 2.6% for the
full period.
The table at right shows the half-year results for Windsor Fund, the
average multi-cap value fund, and two unmanaged benchmarks: the Russell 1000
Value Index (the value stocks within the 1,000 largest U.S. stocks) and the
large-capitalization Standard & Poor's 500 Index, which includes both growth and
value stocks.
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TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 2000
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Vanguard Windsor Fund 2.6%
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Average Multi-Cap Value Fund* 3.9%
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Russell 1000 Value Index -1.0%
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S&P 500 Index 7.2%
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*Derived from data provided by Lipper Inc.
Windsor 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 $15.25 per share on April 30, 2000. The return is adjusted for a $0.16
per share dividend from net investment income and a $1.90 per share distribution
from net realized capital gains.
THE PERIOD IN REVIEW
The U.S. economy displayed remarkable vigor during the six months. Its staying
power was impressive, too: April marked the 109th month of uninterrupted
expansion--more than nine years without a recession. Preliminary estimates for
the first quarter of 2000 indicated that the economy was growing at a 5.4%
annual rate, a strong follow-up to the previous quarter's astounding 7.3% rate.
A growing economy creates a good climate for stocks, and corporate profits
posted robust gains. The overall stock market, as measured by the Wilshire 5000
Total Market Index, rose 9.7% for the half-year. However, concerns about
inflation and the high valuations of many tech stocks led to frequent and
significant day-to-day swings in the market. The volatility was especially
evident among small-cap and technology issues. The small-cap Russell 2000 Index,
for example, saw a 35.2% gain from October 31 through February 29 followed by a
-12.2% return in March and April, resulting in a half-year return of 18.7%.
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TOTAL RETURNS
----------------------------------------
OCT. 31, 1999, FEB. 29, 2000,
STOCK INDEX TO FEB. 29, 2000 TO APR. 30, 2000
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Russell 1000 Growth 16.3% 2.1%
Russell 1000 Value -10.7 10.9
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Russell 2000 Growth 58.8% -19.5%
Russell 2000 Value 7.1 1.1
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MSCI EAFE Growth 18.9% -4.8%
MSCI EAFE Value -1.4 2.0
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Nasdaq Composite 58.8% -17.7%
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The table above shows the striking shift in leadership from growth stocks in the
first four months of the period to value stocks in the final two. The
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pattern was evident overseas, too, as indicated by results for the growth and
value segments of the Morgan Stanley Capital International Europe, Australasia,
Far East (EAFE) Index of international stocks.
The bull market in stocks continued despite three quarter-point (0.25%)
increases in short-term interest rates by the Federal Reserve Board, which
boosted its target federal-funds rate from 5.25% to 6.0%. The yield on Treasury
bills responded by climbing 74 basis points (0.74 percentage point) to 5.83% as
of April 30. However, long-term interest rates went the other way. The yield of
the benchmark 30-year Treasury bond fell 20 basis points, on balance, ending the
half-year at 5.96%. The yield for the 10-year Treasury note rose 19 basis points
during the period, to 6.21%, and the overall bond market, as measured by the
Lehman Brothers Aggregate Bond Index, recorded a 1.4% total return.
PERFORMANCE OVERVIEW
Thanks to its comeback in March and April, Windsor Fund achieved a 2.6% return
for the six months ended April 30. The fund outperformed the Russell 1000 Value
Index--a good yardstick for large- and mid-cap value stocks--by 3.6 percentage
points during the half-year. However, Windsor's return was behind the 3.9% gain
recorded by the average multi-cap value fund and the 7.2% return of the S&P 500
Index.
One sector--technology--explained much of the fund's shortfall versus both
the S&P 500 and the average peer fund. Windsor (and the Russell 1000 Value
Index) had an average weighting of about 6% in tech stocks during the half-year,
which was about one-half of the tech weighting for the average multi-cap value
fund and less than one-quarter the tech holdings of the S&P 500 Index. Given the
sector's gain of nearly 40% during the six months, a light weighting in tech
stocks was a definite handicap.
Another factor was the lagging performance of the financial-services
sector, where Windsor Fund, like the Russell 1000 Value Index, held more than
one-quarter of its assets--a heavier weighting than either the average peer fund
or the S&P 500 Index. Financial stocks posted an average decline of about -7%,
as investors anticipated that higher interest rates would crimp profits.
Windsor's financial-services holdings did a bit worse, returning -11%.
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TOTAL ASSETS MANAGED
AS OF APRIL 30, 2000
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$ MILLION PERCENTAGE
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Wellington Management Company, LLP $11,522 74%
Sanford C. Bernstein & Co., Inc. 3,643 24
Cash Reserve* 330 2
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Total $15,495 100%
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* This cash reserve is invested in equity index futures to simulate
investment in stocks; each adviser may also maintain a modest cash reserve.
Elsewhere, however, our advisers generally added value versus the indexes
with good stock selections in the consumer-discretionary, health-care, and
materials & processing sectors. The table above presents the share of assets
supervised by each adviser as of April 30.
IN SUMMARY
The spring turnabout in stocks, when downtrodden value issues suddenly rose and
technology-dominated growth indexes plummeted, served as a vivid reminder of the
stock market's short-term unpredictability and volatility.
Such sudden shifts in market leadership are certain to occur now and then,
but their timing and duration are extremely unpredictable. That is why we
advocate diversification
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and a long-term orientation. Investors who maintain exposure to the major asset
classes through balanced portfolios of well-diversified stock funds, bond funds,
and money market funds have generally found it easier to maintain equilibrium in
turbulent times. We urge you to base your investment plans on your own goals,
time horizon, and risk tolerance--and then to stick with those plans over the
long haul.
/S/
John J. Brennan
Chairman and Chief Executive Officer
May 12, 2000
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THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 2000
A surging economy, rising corporate profits, and enthusiasm for technology
stocks carried broad stock market indexes higher during the volatile but
generally rewarding six months ended April 30, 2000.
Stocks rose despite a modest pickup in inflation and a rise in interest
rates, both of which did some damage to bond prices. Through the first four
months of the period, the stock market was dominated by optimism about the
long-term outlook for technology, telecommunications, and media companies. But
sentiment then shifted and the tech and telecom groups fell sharply, giving back
some of the spectacular gains achieved over the previous year or so.
For both bond and stock investors, uncertainty centered mainly on how the
Federal Reserve Board would react to the surprising performance of the U.S.
economy, which grew at a 7.3% pace in the final three months of 1999 and at a
still-robust 5.4% during the first quarter of 2000. With U.S. unemployment at a
three-decade low of 3.9%, Fed policymakers grew increasingly concerned that
inflation was bound to worsen. The Fed raised short-term interest rates by 0.25
percentage point three times during the six-month period. These boosts,
following identical increases in June and August of 1999, took the Fed's target
for short-term rates to 6.0%. Yet the economy continued to soar--including even
the housing and automobile sectors, which often are the first to slow down in
response to higher interest rates.
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TOTAL RETURNS
PERIODS ENDED APRIL 30, 2000
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6 MONTHS 1 YEAR 5 YEARS*
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STOCKS
S&P 500 Index 7.2% 10.1% 25.3%
Russell 2000 Index 18.7 18.4 15.3
Wilshire 5000 Index 9.7 12.2 23.9
MSCI EAFE Index 6.8 14.2 10.7
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BONDS
Lehman Aggregate Bond Index 1.4% 1.3% 6.8%
Lehman 10 Year Municipal Bond Index 2.4 -0.3 6.1
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.7 5.1 5.2
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OTHER
Consumer Price Index 1.8% 3.0% 2.4%
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*Annualized.
Inflation gauges provided ambiguous readings. The Consumer Price Index
increased 1.8% and 3.0% for the 6- and 12-month periods ended April 30, but much
of the acceleration in inflation was due to higher energy and food prices. The
core inflation rate, which excludes those sectors, was up a less-ominous 2.2%
over the year.
U.S. STOCK MARKETS
The technology sector, which accounts for about one-quarter of the stock
market's total value, dominated the market during the half-year, despite
suffering a sharp setback late in the period. Even after a -34% fall from March
10 through mid-April, the tech-heavy Nasdaq Composite Index registered a 30.8%
return for the six months.
The overall stock market, as measured by the Wilshire 5000 Total Market
Index, gained 9.7%. There was a decided split in results from large- and
small-capitalization stocks.
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The large-cap S&P 500 Index returned 7.2%, while the rest of the U.S. stock
market gained 19.2%.
Top performers during the half-year were companies in computer software and
hardware, semiconductors, Internet-related businesses, and wireless
communications. Fully half of the 58 companies in the S&P 500's technology group
gained more than 50%, and the average return for tech stocks exceeded 39%. A
number of tech-related companies in the producer-durables sector also posted
impressive gains, and the sector as a whole returned 32%. A return of 34% was
achieved by the oil-drilling and services companies in the "other energy"
category, which benefited from higher oil and gas prices. The worst-performing
sector was consumer staples (-18%), a category that includes supermarket, food,
beverage, and tobacco stocks. Next in line were financial-services companies
(-7%), hurt by higher short-term interest rates, which tend to raise borrowing
costs for banks and can lead to increased loan defaults.
U.S. BOND MARKETS
The Federal Reserve Board's three rate increases succeeded in elevating other
short-term rates. For example, yields of 3-month U.S. Treasury bills rose during
the half-year to 5.83%, an increase of 0.74 percentage point (74 basis points)
that virtually matched the Fed's target. However, long-term rates didn't move
nearly as far. The 10-year Treasury note rose just 19 basis points, to 6.21%, as
of April 30. And yields actually fell a bit for very long-term Treasury bonds, a
result of shrinking supply. Because of the federal government's budget surplus,
the U.S. Treasury decided to reduce issuance of new bonds and to buy back some
of its existing long-term bonds. As investors reacted, the yield of the 30-year
Treasury declined 20 basis points--from 6.16% to 5.96%--during the half-year.
The result of higher short-term rates and relatively stable long-term rates
was an unusual inversion in the Treasury yield curve. Instead of the usual
upward-sloping curve--which shows yields increasing in tandem with
maturities--there was a pronounced drop-off. As of April 30, the yield of
30-year Treasuries was two-thirds of a percentage point below the 6.62% yield on
3-year Treasury notes.
A similar pattern emerged outside the Treasury market, although long-term
yields remained above yields for short-term corporate, municipal, and
mortgage-backed securities. The overall bond market, as measured by the Lehman
Aggregate Bond Index, provided a 1.4% return, as an average price decline of
-2.0% offset most of a 3.4% income return.
INTERNATIONAL STOCK MARKETS
Despite declines in March and April, stock markets in Europe, Asia, and many
emerging markets produced strong half-year gains as investors responded to
improving global economic growth and a rise in corporate merger-and-acquisition
activity. However, many of the gains were slashed for U.S. investors as the
dollar gained strength against most other currencies. (Conversely, when the
dollar falls in value, returns from abroad are enhanced for U.S. investors.)
In U.S.-dollar terms, the overall return from developed foreign markets was
a very solid 6.8%, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East Index. However, in local currencies, the EAFE
Index return was 16.4%.
In Europe, an average 21.1% gain in local-currency terms was reduced to
8.4% for U.S. investors because of the dollar's strength. Stocks in the Pacific
region, which is dominated by Japan, returned 3.6% in dollars, less than half
the 7.5% gain in local currencies. The Select Emerging Markets Free Index
returned 12.3% in U.S. dollars, with the biggest gains in Turkey (+148%), Russia
(+123%), and Israel (+50%).
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ADVISER'S REPORT
Until recently, the stock market had been narrowly focused on technology stocks.
From mid-1999 through April 2000, tech stocks, which constitute about 30% of the
S&P 500 Index, returned 46%, while the remainder of the market declined about
3%. Such narrowness is symptomatic of a market that is anxious and uncertain. In
this instance, the uncertainty concerns Federal Reserve Board policy. How much
will policymakers raise the federal funds rate, beyond the five
quarter-percentage-point increases so far, to achieve their objectives of
slowing the economy and keeping inflation in check? And will we wind up in a
recession as a result of this process?
Narrow markets often culminate in valuation extremes, and that happened
again this time. At their peak in March, technology stocks were clearly
overvalued, at 63 to 64 times estimates of this year's earnings. Even after
declining some 20% through April 30, they are still too high--at over 50 times
earnings--in relation to the 11% growth rate of information technology, broadly
defined. Further, we see a deceleration in growth rates for some important
technology subsectors in 2001, e.g., semiconductor shipments, PC sales, and
cellular telephone sales. Deceleration in growth is a traditional sell signal
for technology investors.
Non-technology stocks--which, of course, include most of the value stocks
that are Windsor's staple fare--bottomed in late February and have had a strong
recovery since then, both absolutely and relative to the market. Financials,
retailers, and industrial cyclicals have all enjoyed pops of 15% to 20% or more
from their lows. In part, this rebound is due to their having been oversold in
late February. Also, there has been some rotation of money out of technology
stocks into these stocks. And it may be that--Fed or no Fed--the market is
becoming less diffident about the sustainability of U.S. economic growth.
We think the odds favor the Fed being successful--as it was in 1994--in
slowing the economy to a more sustainable 4% real growth rate from the 6% pace
that we have seen over the last three quarters. The Fed's task is made easier by
the lack of inventory buildups or other imbalances in the economy at present and
by the fact that labor productivity continues to increase very strongly at an
annualized rate of about 3.5%. Wage pressures are building, but will probably
settle out at 4%-5%. With sustainable productivity growth on the order of 3%,
this should keep the increase in unit-labor costs--which has been running at
only about 0.5% year over year--to about 2%. That, in turn, should help keep
core inflation--now 2.2% year over year, as measured by the Consumer Price
Index--at 2.5%-3%. Inflation is restrained by the brutal competition that we see
in one end market after another, especially in the growing number of markets
that are globalizing. If all this plays out reasonably according to the script
and the economy continues on a sustainable growth track, we should
see--especially once an end is in sight to the Fed's rate increases--a broader
stock market than we've experienced since mid-1999. It is in such broad markets
that value stocks in general, and Windsor in particular, typically shine.
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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.
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If, instead, the United States winds up in a recession, common stocks in
general will suffer for a period, though we believe technology stocks will
suffer more than others because technology spending gets deferred during
recessions. With technology stocks still selling at 50 times earnings at the end
of April, and other sectors selling at a much less demanding 20 times, it is
hard to see how technology stocks would not be hit harder in an economic
downturn.
We continue to forage for truly undervalued stocks. In the last six months,
we made large additions, at opportunistic prices, to our holdings in Associates
First Capital, TJX Companies, Pharmacia, and MCI WorldCom. Each of these four
stocks is now among our ten largest holdings, and each has quite significant
upside potential from current levels. Our overall approach remains consistent
with that used by the Windsor Fund for more than three decades--an emphasis on
low-P/E stocks; a willingness to concentrate the portfolio where we have the
most conviction; price opportunism on the buy side and price discipline on the
sell side; plus a dash of imagination and a constant eye on the always-changing
world of business.
We admire and understand the "new economy" as much as the next guy, and
will give Windsor shareholders as much participation in it as possible. But
we'll do so on our terms; i.e., the stocks have to be undervalued relative to
their growth rate. Two recent examples of this approach were our purchases of
Alcatel and Arrow Electronics, made mostly last year when the stocks were
trading at low P/Es. We've doubled our money on these holdings. Our overall
portfolio trades at about 15-16 times estimated 2000 earnings, a 35% discount to
the market P/E. Yet our holdings offer about the same projected five-year
earnings growth rate as the market. This combination of below-market price and
at-market growth prospects is our value proposition. A closing of this P/E
discount would result in significant appreciation potential for Windsor Fund
shareholders.
Charles T. Freeman, Portfolio Manager
May 12, 2000
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FUND PROFILE
WINDSOR FUND
This Profile provides a snapshot of the fund's characteristics as of April 30,
2000, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
PORTFOLIO CHARACTERISTICS
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WINDSOR S&P 500
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Number of Stocks 176 500
Median Market Cap $8.1B $87.5B
Price/Earnings Ratio 14.6x 26.8x
Price/Book Ratio 2.2x 5.3x
Yield 1.6% 1.2%
Return on Equity 14.6% 24.1%
Earnings Growth Rate 9.9% 16.1%
Foreign Holdings 10.7% 1.2%
Turnover Rate 38%* --
Expense Ratio 0.31%* --
Cash Reserves 1.3% --
*Annualized.
INVESTMENT FOCUS
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[GRID]
STYLE................VALUE
MARKET CAP...........MEDIUM
VOLATILITY MEASURES
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WINDSOR S&P 500
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R-Squared 0.77 1.00
Beta 1.09 1.00
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
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AT&T Corp. 4.3%
Alcoa Inc. 4.0
Citigroup, Inc. 4.0
Associates First Capital Corp. 3.2
Pharmacia Corp. 2.8
Aventis SA 2.4
MCI WorldCom, Inc. 2.4
TJX Cos., Inc. 2.3
International Business
Machines Corp. 2.2
Washington Mutual, Inc. 2.2
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Top Ten 29.8%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
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APRIL 30, 1999 APRIL 30, 2000
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WINDSOR WINDSOR S&P 500
--------------------------------
Auto & Transportation .. 4.1% 7.1% 2.1%
Consumer Discretionary . 2.6 6.9 12.3
Consumer Staples ....... 0.0 1.0 5.3
Financial Services ..... 28.8 23.3 13.5
Health Care ............ 8.5 10.4 9.8
Integrated Oils ........ 4.0 4.4 4.4
Other Energy ........... 9.4 8.4 1.8
Materials & Processing . 20.9 17.1 2.5
Producer Durables ...... 6.8 3.1 4.2
Technology ............. 4.3 6.1 27.8
Utilities .............. 6.7 11.5 9.6
Other .................. 3.9 0.7 6.7
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BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH RESERVES. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
INVESTMENT FOCUS. This grid indicates the focus of a fund in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,
the more diversified it is and the more likely to perform in line with the
overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come from
each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 35%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
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PERFORMANCE SUMMARY
WINDSOR FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: OCTOBER 31, 1979-APRIL 30, 2000
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WINDSOR FUND S&P 500 WINDSOR FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN YEAR RETURN RETURN RETURN RETURN
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1980 17.2% 7.0% 24.2% 32.1% 1991 35.7% 9.0% 44.7% 33.5%
1981 11.1 6.9 18.0 0.6 1992 4.3 5.0 9.3 10.0
1982 14.2 7.0 21.2 16.3 1993 24.6 3.7 28.3 14.9
1983 25.3 7.3 32.6 27.8 1994 3.7 2.6 6.3 3.9
1984 9.6 6.9 16.5 6.3 1995 14.2 3.6 17.8 26.4
1985 16.6 6.7 23.3 19.4 1996 19.6 3.6 23.2 24.1
1986 22.8 6.5 29.3 33.2 1997 24.3 2.7 27.0 32.1
1987 2.7 1.9 4.6 6.4 1998 -2.0 1.2 -0.8 22.0
1988 18.9 8.1 27.0 14.8 1999 12.1 1.6 13.7 25.7
1989 11.9 5.2 17.1 26.4 2000* 1.7 0.9 2.6 7.2
1990 -31.8 3.9 -27.9 -7.5
--------------------------------------------------------------------------------
*Six months ended April 30, 2000.
See Financial Highlights table on page 16 for dividend and capital gains
information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 2000*
--------------------------------------------------------------------------------
10 YEARS
INCEPTION ---------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
--------------------------------------------------------------------------------
Windsor Fund 10/23/1958 7.74% 15.68% 9.86% 3.46% 13.32%
--------------------------------------------------------------------------------
* SEC rules require that we provide this average annual total return
information through the latest calendar quarter.
10
<PAGE>
FINANCIAL STATEMENTS
APRIL 30, 2000 (UNAUDITED)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, 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 (96.5%)+
--------------------------------------------------------------------------------
AUTO & TRANSPORTATION (6.8%)
Compagnie Generale des
Etablissements Michelin
Class B 6,000,586 199,584
Eaton Corp. 2,015,900 169,336
Canadian National
Railway Co. 5,692,100 159,735
Delta Air Lines, Inc. 2,298,722 121,258
Delphi Automotive
Systems Corp. 2,937,059 56,171
o(1)America West Holdings Corp.
Class B 3,484,500 50,961
Burlington Northern
Santa Fe Corp. 1,949,000 47,020
Southwest Airlines Co. 2,113,400 45,834
Union Pacific Corp. 1,072,300 45,171
Genuine Parts Co. 1,486,500 39,021
CSX Corp. 1,619,900 33,917
Norfolk Southern Corp. 1,923,600 33,903
Ford Motor Co. 578,800 31,653
Dana Corp. 886,200 26,918
---------------
1,060,482
---------------
CONSUMER DISCRETIONARY (6.7%)
(1)TJX Cos., Inc. 18,395,100 352,956
(1)Ross Stores, Inc. 8,625,000 178,969
May Department Stores Co. 5,180,600 142,466
o(1)Republic Services, Inc.
Class A 9,866,500 135,048
o Jones Apparel Group, Inc. 2,341,400 69,510
Whirlpool Corp. 619,800 40,364
o Federated Department
Stores, Inc. 1,100,300 37,410
Sears, Roebuck & Co. 841,800 30,831
VF Corp. 994,300 28,089
o Saks Inc. 1,239,100 14,172
Dillard's Inc. 616,900 8,598
---------------
1,038,413
---------------
CONSUMER STAPLES (1.0%)
Philip Morris Cos., Inc. 2,502,900 54,751
ConAgra, Inc. 2,395,800 45,221
SuperValu Inc. 942,100 19,490
Tyson Foods, Inc. 1,812,600 18,919
IBP, Inc. 736,500 12,152
---------------
150,533
---------------
FINANCIAL SERVICES (22.5%)
Citigroup, Inc. 10,505,300 624,409
Associates First Capital Corp. 22,028,700 488,762
Washington Mutual, Inc. 13,316,664 340,407
CIGNA Corp. 4,046,300 322,692
(1)Golden West Financial Corp. 8,995,800 306,982
(1)Dime Bancorp, Inc. 7,771,300 145,712
Bank of America Corp. 2,313,500 113,361
U.S. Bancorp 5,493,900 111,595
(1)Liberty Property Trust REIT 3,378,800 83,625
UnionBanCal Corp. 2,949,800 81,673
FleetBoston Financial Corp. 2,009,530 71,213
PartnerRe Ltd. 1,860,500 68,373
Bank One Corp. 2,220,900 67,737
TCF Financial Corp. 2,704,100 63,208
First Union Corp. 1,944,300 61,975
The Chubb Corp. 907,500 57,740
Charter One Financial 2,400,000 48,750
Allstate Corp. 2,025,200 47,845
American International
Group, Inc. 382,900 41,999
11
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
WINDSOR FUND SHARES (000)
--------------------------------------------------------------------------------
KeyCorp 2,167,600 40,101
MBIA, Inc. 803,800 39,738
National City Corp. 2,185,700 37,157
American General Corp. 637,000 35,672
AMBAC Financial Group Inc. 579,900 27,835
Torchmark Corp. 1,061,800 26,611
Summit Bancorp 873,700 22,170
Morgan Stanley
Dean Witter & Co. 276,000 21,183
(1)IPC Holdings Ltd. 1,649,800 21,035
Fannie Mae 344,600 20,784
The Chase Manhattan Corp. 197,800 14,254
J.P. Morgan & Co., Inc. 99,900 12,825
Regions Financial Corp. 509,450 10,412
Old Republic International Corp.383,800 5,469
Horace Mann Educators Corp. 257,300 3,747
---------------
3,487,051
---------------
HEALTH CARE (10.0%)
Pharmacia Corp. 8,632,904 431,106
Aventis SA ADR 6,586,550 370,493
Aetna Inc. 3,752,000 217,147
Tenet Healthcare Corp. 7,242,800 184,691
Columbia/HCA
Healthcare Corp. 5,019,200 142,733
o(1)Pacificare Health
Systems, Inc. 2,566,000 131,989
o Foundation Health Systems
Class A 6,028,660 60,663
Aventis SA Class A 99,671 5,495
Bergen Brunswig Corp.
Class A 1,017,100 5,085
---------------
1,549,402
---------------
INTEGRATED OILS (4.3%)
Exxon Mobil Corp. 1,863,461 144,768
USX-Marathon Group 5,397,700 125,834
Petro Canada 4,735,800 79,917
Shell Transport & Trading
Co. ADR 1,302,300 62,836
Occidental Petroleum Corp. 2,623,200 56,235
Texaco Inc. 1,060,700 52,505
Phillips Petroleum Co. 1,105,400 52,437
Conoco Inc. Class B 1,831,300 45,554
Amerada Hess Corp. 666,700 42,419
---------------
662,505
---------------
OTHER ENERGY (8.1%)
Burlington Resources, Inc. 8,251,700 324,395
o Anderson Exploration Ltd. 12,472,400 199,503
Union Pacific Resources
Group, Inc. 9,264,500 177,763
Anadarko Petroleum Corp. 2,636,300 114,514
(1)Ultramar Diamond
Shamrock Corp. 4,547,400 112,548
Valero Energy Corp. 2,701,300 78,338
o Santa Fe Snyder Corp. 8,142,300 74,807
Devon Energy Corp. 1,201,975 57,920
(1)Cabot Oil & Gas Corp.
Class A 2,409,500 44,726
Tosco Corp. 1,279,300 41,018
Ashland, Inc. 607,000 20,714
Alberta Energy Co. Ltd. 191,600 6,023
---------------
1,252,269
---------------
MATERIALS & PROCESSING (16.5%)
Alcoa Inc. 9,643,834 625,644
Air Products & Chemicals, Inc. 7,442,500 231,183
--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
(1)Engelhard Corp. 11,454,200 201,164
(1)Abitibi-Consolidated, Inc. 15,176,789 165,048
Jefferson Smurfit Group
PLC ADR 5,853,641 128,048
o Smurfit-Stone Container Corp. 6,081,950 92,750
Hercules, Inc. 5,314,000 82,699
Lyondell Chemical Co. 4,385,903 80,591
Pechiney SA ADR A 2,861,128 62,945
o Packaging Corp. of America 5,260,000 62,462
Dow Chemical Co. 543,300 61,393
Praxair, Inc. 1,108,200 49,246
Lafarge Corp. 1,938,300 48,942
Reynolds Metals Co. 700,000 46,550
International Paper Co. 1,248,300 45,875
Fort James Corp. 1,650,800 39,516
Archer-Daniels-Midland Co. 3,798,715 37,750
AK Steel Corp. 3,318,652 36,713
Willamette Industries, Inc. 909,600 34,735
Georgia Pacific Group 912,900 33,549
Champion International Corp. 493,400 32,441
Nucor Corp. 732,600 31,502
Phosphate Resources
Partners LP 4,018,800 30,894
(1)Century Aluminum Co. 2,000,000 28,000
Sonoco Products Co. 1,202,300 25,098
o(1)Kaiser Aluminum &
Chemical Corp. 5,789,334 24,605
o American Standard Cos., Inc. 591,400 24,247
Temple-Inland Inc. 467,800 23,448
Crown Cork & Seal Co., Inc. 1,398,300 22,722
Sherwin-Williams Co. 893,300 22,221
o Owens-Illinois, Inc. 1,303,800 17,601
o Albany International Corp. 1,092,455 16,592
Boise Cascade Corp. 473,900 15,431
Cabot Corp. 553,300 14,939
Great Lakes Chemical Corp. 485,000 13,065
Owens Corning 615,500 11,194
o Burlington Industries, Inc. 2,383,700 10,429
Mississippi Chemical Corp. 1,241,500 9,544
Ryerson Tull, Inc. 625,846 7,745
Armstrong World Industries Inc. 211,300 4,134
---------------
2,552,655
---------------
PRODUCER DURABLES (3.0%)
Alcatel SA ADR 3,994,600 181,505
o(1)Toll Brothers, Inc. 3,529,166 76,539
CNH Global NV 3,865,100 52,179
Northrop Grumman Corp. 552,300 39,144
(1)Kaufman & Broad Home Corp. 1,804,100 34,729
(1)MDC Holdings, Inc. 1,156,300 22,042
The BFGoodrich Co. 625,800 19,947
o(1)Beazer Homes USA, Inc. 860,464 16,456
Thomas & Betts Corp. 475,800 14,661
Centex Corp. 464,900 11,216
---------------
468,418
---------------
TECHNOLOGY (5.9%)
International Business
Machines Corp. 3,067,100 342,365
o(1)Arrow Electronics, Inc. 6,991,400 306,311
Avnet, Inc. 1,067,800 83,956
o(1)General Semiconductor, Inc. 3,468,600 69,372
o Ceridian Corp. 2,290,300 49,671
o Adaptec, Inc. 873,700 23,590
12
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
Motorola, Inc. 132,000 15,716
o Ingram Micro, Inc. 732,500 14,421
o Litton Industries, Inc. 279,900 12,158
---------------
917,560
---------------
UTILITIES (11.1%)
AT&T Corp. 14,416,016 673,048
o MCI WorldCom, Inc. 8,270,639 375,797
o Adelphia Communications
Corp. Class A 3,359,800 166,520
PG&E Corp. 1,919,100 49,777
Consolidated Edison Inc. 1,376,000 48,418
Ameren Corp. 1,272,300 46,677
New Century Energies, Inc. 1,365,300 44,543
FirstEnergy Corp. 1,704,100 43,348
Central & South West Corp. 1,778,500 38,571
SBC Communications Inc. 837,720 36,703
Cinergy Corp. 1,334,900 35,709
o MediaOne Group, Inc. 415,000 31,384
Allegheny Energy, Inc. 978,900 29,734
Bell Atlantic Corp. 491,100 29,098
GPU, Inc. 993,600 27,883
BellSouth Corp. 557,900 27,163
GTE Corp. 160,000 10,840
---------------
1,715,213
---------------
OTHER (0.6%)
Cooper Industries, Inc. 1,103,600 37,867
Minnesota Mining &
Manufacturing Co. 271,800 23,511
Miscellaneous (0.3%) 39,648
---------------
101,026
---------------
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $13,702,843) 14,955,527
--------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (0.1%)
--------------------------------------------------------------------------------
Kaufman & Broad Home Corp. 8.25% Cvt. Pfd.
(Cost $23,120) 3,163,700 20,762
--------------------------------------------------------------------------------
FACE
AMOUNT
(000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (4.5%)+
--------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
(2)5.86%, 5/11/2000 $5,000 4,992
(2)5.93%, 5/4/2000 3,000 2,998
Federal National Mortgage Assn.
(2)5.86%, 5/4/2000 3,500 3,498
(2)6.15%, 7/13/2000 7,000 6,915
Repurchase Agreements
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.75%, 5/1/2000 486,366 486,366
5.79%, 5/1/2000--Note G 191,275 191,275
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $696,044) 696,044
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.1%)
(COST $14,422,007) 15,672,333
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MARKET
VALUE*
(000)
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.1%)
--------------------------------------------------------------------------------
Other Assets--Note C 68,353
Liabilities--Note G (246,052)
---------------
(177,699)
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 1,016,116,677 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $15,494,634
================================================================================
NET ASSET VALUE PER SHARE $15.25
================================================================================
* See Note A in Notes to Financial Statements.
o Non-Income-Producing Security.
+ The fund invests a portion of its reserves in equity markets through the
use of index futures contracts. After giving effect to futures investments,
the fund's effective common stock and temporary cash investment positions
represent 98.6% and 2.4%, respectively of net assets. See Note F in Notes
to Financial Statements.
(1) Considered an affiliated company as the fund owns more than 5% of the
outstanding voting securities of such company. The total market value of
investments in affiliated companies was $2,508,817,000.
(2) Securities with an aggregate value of $18,403,000 have been segregated as
initial margin for open futures contracts.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
-----------------------------------------------------------
AT APRIL 30, 2000, NET ASSETS CONSISTED OF:
-----------------------------------------------------------
AMOUNT PER
(000) SHARE
-----------------------------------------------------------
Paid in Capital $13,139,077 $12.93
Undistributed Net
Investment Income 72,084 .07
Accumulated Net
Realized Gains 1,025,128 1.01
Unrealized Appreciation--
Note F
Investment Securities 1,250,326 1.23
Futures Contracts 8,019 .01
-----------------------------------------------------------
Net Assets $15,494,634 $15.25
===========================================================
13
<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
SIX MONTHS ENDED APRIL 30, 2000
(000)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Income
Dividends* $ 147,409
Interest 11,055
Security Lending 688
---------------
Total Income 159,152
---------------
Expenses
Investment Advisory Fees--Note B
Basic Fee 9,949
Performance Adjustment (5,773)
The Vanguard Group--Note C
Management and Administrative 18,936
Marketing and Distribution 968
Custodian Fees 138
Auditing Fees 10
Shareholders' Reports 204
Trustees' Fees and Expenses 10
---------------
Total Expenses 24,442
Expenses Paid Indirectly--Note D (1,272)
---------------
Net Expenses 23,170
--------------------------------------------------------------------------------
NET INVESTMENT INCOME 135,982
--------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold* 1,022,053
Futures Contracts 13,220
--------------------------------------------------------------------------------
REALIZED NET GAIN 1,035,273
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (812,793)
Futures Contracts 1,751
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (811,042)
================================================================================
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $360,213
================================================================================
*Dividend income and realized net loss from affiliated companies were
$22,782,000 and $(7,275,000), respectively.
14
<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
--------------------------------
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 2000 OCT. 31, 1999
(000) (000)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 135,982 $ 277,607
Realized Net Gain 1,035,273 1,940,531
Change in Unrealized Appreciation (Depreciation) (811,042) 42,819
Net Increase in Net Assets Resulting
from Operations 360,213 2,260,957
--------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (157,419) (255,285)
Realized Capital Gain (1,869,365) (1,341,486)
--------------------------------
Total Distributions (2,026,784) (1,596,771)
CAPITAL SHARE TRANSACTIONS1
Issued 527,072 1,402,297
Issued in Lieu of Cash Distributions 1,905,431 1,504,748
Redeemed (2,095,020) (5,102,907)
Net Increase (Decrease) from
Capital Share Transactions 337,483 (2,195,862)
--------------------------------------------------------------------------------
Total Decrease (1,329,088) (1,531,676)
--------------------------------------------------------------------------------
Net Assets
Beginning of Period 16,823,722 18,355,398
--------------------------
End of Period $15,494,634 $16,823,722
================================================================================
1Shares Issued (Redeemed)
Issued 35,206 82,191
Issued in Lieu of Cash Distributions 127,710 100,940
Redeemed (141,789) (311,166)
---------------------------
Net Increase (Decrease) in Shares Outstanding 21,127 (128,035)
================================================================================
15
<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,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -----------------------------------------------
THROUGHOUT EACH PERIOD APRIL 30, 2000 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $16.91 $16.34 $19.55 $16.99 $15.55 $14.55
-----------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .14 .27 .23 .36 .43 .44
Net Realized and Unrealized Gain (Loss)
on Investments .26 1.77 (.32) 3.942 .85 1.86
-----------------------------------------------------------------------------------------------------------------
Total from Investment Operations .40 2.04 (.09) 4.30 3.28 2.30
-----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.16) (.24) (.24) (.41) (.46) (.44)
Distributions from Realized Capital Gains (1.90) (1.23) (2.88) (1.33) (1.38) (.86)
-----------------------------------------------------------------------------------------------------------------
Total Distributions (2.06) (1.47) (3.12) (1.74) (1.84) (1.30)
=================================================================================================================
Net Asset Value, End of Period $15.25 $16.91 $16.34 $19.55 $16.99 $15.55
=================================================================================================================
Total Return 2.63% 13.74% -0.78% 27.04% 23.16% 17.80%
=================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period
(Millions) $15,495 $16,824 $18,355 $20,678 $15,841 $13,008
Ratio of Total Expenses to
Average Net Assets 0.31%* 0.28% 0.27% 0.27% 0.31% 0.45%
Ratio of Net Investment Income to
Average Net Assets 1.72%* 1.56% 1.31% 1.89% 2.75% 3.01%
Portfolio Turnover Rate 38%* 56% 48% 61% 34% 32%
=================================================================================================================
</TABLE>
*Annualized.
16
<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 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., Inc.,
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. For the
six months ended April 30, 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 $5,773,000 (0.07%) based on performance.
The Vanguard Group manages the cash reserves of the fund on an at-cost
basis.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the Board of Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At April 30, 2000, the fund had contributed capital of $2,973,000 to
Vanguard (included in Other Assets), representing 0.02% of net assets and 3.0%
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 six months ended
April 30, 2000, directed brokerage and custodian fee offset arrangements reduced
expenses by $1,238,000 and $34,000, respectively. The total expense reduction
represented an effective annual rate of 0.02% of the fund's average net assets.
E. During the six months ended April 30, 2000, the fund purchased $2,928,822,000
of investment securities and sold $4,620,624,000 of investment securities, other
than temporary cash investments.
F. At April 30, 2000, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $1,250,326,000,
consisting of unrealized gains of $3,188,465,000 on securities that had risen in
value since their purchase and $1,938,139,000 in unrealized losses on securities
that had fallen in value since their purchase.
At April 30, 2000, the aggregate settlement value of open futures contracts
expiring in June 2000 and the related unrealized appreciation were:
--------------------------------------------------------------------------------
(000)
-----------------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE APPRECIATION
--------------------------------------------------------------------------------
S&P 500 Index 848 $309,520 $7,735
S&P MidCap 400 Index 60 14,483 284
--------------------------------------------------------------------------------
G. The market value of securities on loan to broker/dealers at April 30, 2000,
was $184,926,000, for which the fund held cash collateral of $191,275,000. Cash
collateral received is invested in repurchase agreements.
18
<PAGE>
THE VANGUARD(R) FAMILY OF FUNDS
STOCK FUNDS
--------------------------------------------------------------------------------
500 Index Fund
Aggressive Growth Fund
Capital Opportunity Fund
Convertible Securities 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 Index Fund*
Health Care 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*
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
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
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
*Offers Institutional Shares.
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.
19
<PAGE>
[BLANK PAGE]
<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.
Seven of Vanguard's eight 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. Noted in parentheses is the year in which the Trustee joined the
Vanguard Board.
TRUSTEES
JOHN J. BRENNAN * (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN * (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck 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 Gestinova, Baker Fentress & Co., The Jeffrey Co., 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.
JOHN C. SAWHILL * (1991) President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co.,
Procter & Gamble Co., NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR. * (1971) Retired Chairman of Nabisco Brands, Inc.; retired
Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc., and
Kmart Corp.
J. LAWRENCE WILSON * (1985) Retired Chairman 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 * Individual Investor Group.
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.
<PAGE>
[SHIP LOGO]
[THE VANGUARD GROUP (R) LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a
reproduction of Leading the Way, a 1984 work created
and copyrighted by noted naval artist Tom Freeman,
of Forest Hill, Maryland.
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.
Q222-062000
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
<PAGE>
VANGUARD WINDSOR II (TM) FUND
April 30, 2000
semiannual
[SHIP GRAPHIC]
[A MEMBER OF THE VANGUARD GROUP LOGO]
<PAGE>
HAVE THE PRINCIPLES OF INVESTING CHANGED?
In a world of frenetic change in business, technology, and the financial
markets, it is natural to wonder whether the basic principles of investing have
changed.
We don't think so.
The most successful investors over the coming decade will be those who
began the new century with a fundamental understanding of risk and who had the
discipline to stick with long-term investment programs.
Certainly, investors today confront a challenging, even unprecedented,
environment. Valuations of market indexes are at or near historic highs. The
strength and duration of the bull market in U.S. stocks have inflated people's
expectations and diminished their recognition of the market's considerable
risks. And the incredible divergence in stock returns--many technology-related
stocks gained 100% or more in 1999, yet prices fell for more than half of all
stocks--has made some investors question the idea of diversification.
And then there is the Internet. Undeniably, it is a powerful medium for
communications and transacting business. For investors, the Internet is a vast
source of information about investments, and online trading has made it
inexpensive and convenient to trade stocks and invest in mutual funds.
However, new tools do not guarantee good workmanship. Information is not
the same as wisdom. Indeed, much of the information, opinion, and rumor that
swirl about financial markets each day amounts to "noise" of no lasting
significance. And the fact that rapid-fire trading is easy does not make it
beneficial. Frequent trading is almost always counterproductive because
costs--even at low commission rates--and taxes detract from the returns that the
markets provide. Sadly, many investors jump into a "hot" mutual fund just in
time to see it cool off. Meanwhile, long-term fund investors are hurt by
speculative trading activity because they bear part of the costs involved in
accommodating purchases and redemptions.
Vanguard believes that intelligent investors should resist short-term
thinking and focus instead on a few time-tested principles:
o Invest for the long term. Pursuing your long-term investment goals is more
like a marathon than a sprint.
o Diversify your investments with holdings in stocks, bonds, and cash
investments.
Remember that, at any moment, some part of a diversified portfolio will lag
other parts, and be wary of taking on more risk by "piling onto" the
best-performing part of your holdings. Today's leader could well be tomorrow's
laggard.
o Step back from the daily frenzy of the markets; focus on your overall asset
allocation.
o Capture as much of the market's return as possible by minimizing costs and
taxes.
Costs and taxes diminish long-term returns while doing nothing to reduce the
risks you incur as an investor.
--------------------------------------------------------------------------------
CONTENTS
Report From The Chairman .......... 1 Fund Profile ...................... 8
The Markets In Perspective ........ 4 Performance Summary ...............10
Adviser's Report .................. 6 Financial Statements ..............11
--------------------------------------------------------------------------------
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," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
Frank Russell Company is
the owner of trademarks and copyrights relating to the Russell Indexes.
"Wilshire 5000(R)" and "Wilshire 4500" are trademarks of Wilshire Associates
Incorporated.
<PAGE>
REPORT FROM THE CHAIRMAN
[PHOTO OF JOHN J. BRENNAN]
JOHN J. BRENNAN
Vanguard Windsor II Fund recorded a -3.4% return during the six months ended
April 30, 2000, lagging both the average total return of competing funds and the
results for the fund's unmanaged market indexes. There was a bright spot in this
disappointing period, however: Your fund rebounded strongly in the final seven
weeks, handily topping its comparative standards during that span.
The table at right presents the six-month total returns (capital change
plus reinvested dividends) for Windsor II, the average large-capitalization
value fund, the Russell 1000 Value Index (comprising the value issues among the
1,000 largest U.S. stocks), and the Standard & Poor's 500 Index. The fund's
return is based on a decline in net asset value from $29.03 per share on October
31, 1999, to $25.15 per share on April 30, 2000, with the latter figure adjusted
for a dividend of $0.38 per share paid from net investment income and a
distribution of $2.50 per share paid from net realized capital gains.
--------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 2000
--------------------------------------------
Vanguard Windsor II Fund -3.4%
--------------------------------------------
Average Large-Cap Value Fund* 3.6%
--------------------------------------------
Russell 1000 Value Index -1.0%
--------------------------------------------
S&P 500 Index 7.2%
--------------------------------------------
*Derived from data provided by Lipper Inc.
THE PERIOD IN REVIEW
The U.S. economy displayed remarkable vigor during the six months. Its staying
power was impressive, too: April marked the 109th month of uninterrupted
expansion--more than nine years without a recession. Preliminary estimates for
the first quarter of 2000 indicated that the economy was growing at a 5.4%
annual rate, a strong follow-up to the previous quarter's astounding 7.3% rate.
A growing economy creates a good climate for stocks, and corporate profits
posted robust gains as well. The overall stock market, as measured by the
Wilshire 5000 Total Market Index, rose 9.7% for the half-year. However, concerns
about inflation and the high valuations of many technology stocks led to
frequent market swings. The volatility was especially evident among small-cap
and tech issues. The small-cap Russell 2000 Index, for example, saw a 35.2% gain
from October 31 through February 29 followed by a -12.2% decline in March and
April, resulting in an 18.7% return for the half-year. The adjacent table shows
the striking shift in leadership from growth stocks in the first four months of
the period to value stocks in the final two. The pattern was
--------------------------------------------------------------
TOTAL RETURNS
-------------------------------------
OCT. 31, 1999, FEB. 29, 2000,
STOCK INDEX TO FEB. 29, 2000 TO APR. 30, 2000
--------------------------------------------------------------
Russell 1000 Growth 16.3% 2.1%
Russell 1000 Value -10.7 10.9
--------------------------------------------------------------
Russell 2000 Growth 58.8% -19.5%
Russell 2000 Value 7.1 1.1
--------------------------------------------------------------
MSCI EAFE Growth 18.9% -4.8%
MSCI EAFE Value -1.4 2.0
--------------------------------------------------------------
Nasdaq Composite 58.8% -17.7%
--------------------------------------------------------------
1
<PAGE>
evident overseas, too, as indicated by results for the growth and value segments
of the Morgan Stanley Capital International Europe, Australasia, Far East (EAFE)
Index of international stocks.
The bull market in stocks continued despite three quarter-point (0.25%)
increases in short-term interest rates by the Federal Reserve Board, which
boosted its target federal-funds rate from 5.25% to 6.00%. The yield on 3-month
Treasury bills responded by climbing 74 basis points (0.74 percentage point), to
5.83% as of April 30. However, long-term interest rates went the other way. The
yield of the 30-year Treasury bond fell 20 basis points, on balance, ending the
half-year at 5.96%. The yield for the 10-year Treasury note rose 19 basis points
during the period, to 6.21%, and the overall bond market, as measured by the
Lehman Brothers Aggregate Bond Index, recorded a 1.4% total return.
PERFORMANCE OVERVIEW
Vanguard Windsor II Fund's return of -3.4% lagged that of the Russell 1000 Value
Index--a good benchmark for the fund, given its focus on large-cap value
stocks--by 2.4 percentage points. We also trailed the average large-cap value
fund by 7.0 percentage points and the S&P 500 Index by 10.6 percentage points.
Compared with both competing funds and the indexes, we were hurt by our small
stake in technology. The high valuations of tech stocks and their lack of
dividends kept most of them off our advisers' buy lists, so your fund held only
about 5% of its equity assets in technology companies during the period. The
sector's hot performance has made it the largest weighting in the S&P 500 Index,
accounting for more than one-quarter of the benchmark as of April 30. Within the
tech sector, Windsor II's holdings gained about 10%--a solid result but well off
the 39% pace set by the overall sector in the index.
The fund's holdings of banks and other financial-services stocks also
proved detrimental, declining about -14% during the six months ended April 30.
By comparison, this sector dropped -7% within the S&P 500 Index. Our stock
selections also underperformed the indexes in the consumer-discretionary group.
On the positive side, the fund benefited from its heavily overweighted
position (about 10% of equities versus 1.5% for the S&P 500 Index) in "other
energy" stocks, which were among the market's strongest performers during the
half-year. Also, the fund was aided somewhat by holding a relatively small stake
in the health-care sector, a market laggard. (The health sector represented
about 10% of the S&P 500 during the period, but averaged about 2.5% of Windsor
II's equity assets.)
After a long and painful wait, Windsor II shareholders--and value investors
generally--finally got some good news in March and April, as the stock market
appeared to grow more conscious of valuations. This drove down the price of many
Internet and other technology stocks, while benefiting many of the value stocks
that are Windsor II's stock-in-trade. As noted on page 6 by Barrow, Hanley,
Mewhinney & Strauss, the fund's lead adviser, the sudden improvement did not
stem from any change in the fund's approach. What changed--and in a hurry--was
investor sentiment. From March 10 through April 30, the fund gained 12.0%,
outpacing both the S&P 500 Index (up 4.2%) and the Russell 1000 Value Index (up
9.5%). Of course, this is a very short period, but the sharp change in market
leadership reinforces the importance of maintaining a consistent investment
approach.
As you know, our philosophy of maintaining a diversified portfolio of value
stocks--typically out-of-favor issues with below-average price/earnings ratios
and above-average
2
<PAGE>
dividend yields--is carried out by four managers, each having full discretion in
managing a portion of the fund's assets. The adjacent table shows the allocation
to each adviser as of April 30.
--------------------------------------------------------------------------------
TOTAL ASSETS
MANAGED
AS OF APRIL 30, 2000
-----------------------------
$ MILLION PERCENTAGE
--------------------------------------------------------------------------------
Barrow, Hanley, Mewhinney & Strauss, Inc. $13,403 58%
Equinox Capital Management, Inc. 3,848 17
Tukman Capital Management, Inc. 3,163 14
Vanguard Quantitative Equity Group 1,418 6
Cash Reserve* 1,105 5
--------------------------------------------------------------------------------
Total $22,937 100%
--------------------------------------------------------------------------------
* This cash reserve is invested in equity index futures to simulate
investment in stocks; each adviser may also maintain a modest cash reserve.
IN SUMMARY
The spring turnabout in stocks, when downtrodden value issues suddenly rose and
technology-dominated growth indexes plummeted, served as a vivid reminder of the
stock market's short-term unpredictability and volatility.
Such sudden shifts in market leadership are certain to occur now and then,
but their timing and duration are extremely unpredictable. That is why we
advocate diversification and a long-term orientation. Investors who maintain
exposure to the major asset classes through balanced portfolios of stock funds,
bond funds, and money market funds have generally found it easier to maintain
equilibrium in turbulent times. We urge you to base your investment plans on
your own goals, time horizon, and risk tolerance--and then to stick with those
plans over the long haul.
/S/
John J. Brennan
Chairman and Chief Executive Officer
May 15, 2000
3
<PAGE>
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 2000
A surging economy, rising corporate profits, and enthusiasm for technology
stocks carried broad stock market indexes higher during the volatile but
generally rewarding six months ended April 30, 2000.
Stocks rose despite a modest pickup in inflation and a rise in interest
rates, both of which did some damage to bond prices. Through the first four
months of the period, the stock market was dominated by optimism about the
long-term outlook for technology, telecommunications, and media companies. But
sentiment then shifted and the tech and telecom groups fell sharply, giving back
some of the spectacular gains achieved over the previous year or so.
For both bond and stock investors, uncertainty centered mainly on how the
Federal Reserve Board would react to the surprising performance of the U.S.
economy, which grew at a 7.3% pace in the final three months of 1999 and at a
still-robust 5.4% during the first quarter of 2000. With U.S. unemployment at a
three-decade low of 3.9%, Fed policymakers grew increasingly concerned that
inflation was bound to worsen. The Fed raised short-term interest rates by 0.25
percentage point three times during the six-month period. These boosts,
following identical increases in June and August of 1999, took the Fed's target
for short-term rates to 6.0%. Yet the economy continued to soar--including even
the housing and automobile sectors, which often are the first to slow down in
response to higher interest rates.
--------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED APRIL 30, 2000
-------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
--------------------------------------------------------------------------------
STOCKS
S&P 500 Index 7.2% 10.1% 25.3%
Russell 2000 Index 18.7 18.4 15.3
Wilshire 5000 Index 9.7 12.2 23.9
MSCI EAFE Index 6.8 14.2 10.7
--------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 1.4% 1.3% 6.8%
Lehman 10 Year Municipal Bond Index 2.4 -0.3 6.1
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.7 5.1 5.2
--------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.8% 3.0% 2.4%
--------------------------------------------------------------------------------
*Annualized.
Inflation gauges provided ambiguous readings. The Consumer Price Index
increased 1.8% and 3.0% for the 6- and 12-month periods ended April 30, but much
of the acceleration in inflation was due to higher energy and food prices. The
core inflation rate, which excludes those sectors, was up a less-ominous 2.2%
over the year.
U.S. STOCK MARKETS
The technology sector, which accounts for about one-quarter of the stock
market's total value, dominated the market during the half-year, despite
suffering a sharp setback late in the period. Even after a -34% fall from March
10 through mid-April, the tech-heavy Nasdaq Composite Index registered a 30.8%
return for the six months.
The overall stock market, as measured by the Wilshire 5000 Total Market
Index, gained 9.7%. There was a decided split in results from large- and
small-capitalization stocks.
4
<PAGE>
The large-cap S&P 500 Index returned 7.2%, while the rest of the U.S. stock
market gained 19.2%.
Top performers during the half-year were companies in computer software and
hardware, semiconductors, Internet-related businesses, and wireless
communications. Fully half of the 58 companies in the S&P 500's technology group
gained more than 50%, and the average return for tech stocks exceeded 39%. A
number of tech-related companies in the producer-durables sector also posted
impressive gains, and the sector as a whole returned 32%. A return of 34% was
achieved by the oil-drilling and services companies in the "other energy"
category, which benefited from higher oil and gas prices. The worst-performing
sector was consumer staples (-18%), a category that includes supermarket, food,
beverage, and tobacco stocks. Next in line were financial-services companies
(-7%), hurt by higher short-term interest rates, which tend to raise borrowing
costs for banks and can lead to increased loan defaults.
U.S. BOND MARKETS
The Federal Reserve Board's three rate increases succeeded in elevating other
short-term rates. For example, yields of 3-month U.S. Treasury bills rose during
the half-year to 5.83%, an increase of 0.74 percentage point (74 basis points)
that virtually matched the Fed's target. However, long-term rates didn't move
nearly as far. The 10-year Treasury note rose just 19 basis points, to 6.21%, as
of April 30. And yields actually fell a bit for very long-term Treasury bonds, a
result of shrinking supply. Because of the federal government's budget surplus,
the U.S. Treasury decided to reduce issuance of new bonds and to buy back some
of its existing long-term bonds. As investors reacted, the yield of the 30-year
Treasury declined 20 basis points--from 6.16% to 5.96%--during the half-year.
The result of higher short-term rates and relatively stable long-term rates
was an unusual inversion in the Treasury yield curve. Instead of the usual
upward-sloping curve--which shows yields increasing in tandem with
maturities--there was a pronounced drop-off. As of April 30, the yield of
30-year Treasuries was two-thirds of a percentage point below the 6.62% yield on
3-year Treasury notes.
A similar pattern emerged outside the Treasury market, although long-term
yields remained above yields for short-term corporate, municipal, and
mortgage-backed securities. The overall bond market, as measured by the Lehman
Aggregate Bond Index, provided a 1.4% return, as an average price decline of
-2.0% offset most of a 3.4% income return.
INTERNATIONAL STOCK MARKETS
Despite declines in March and April, stock markets in Europe, Asia, and many
emerging markets produced strong half-year gains as investors responded to
improving global economic growth and a rise in corporate merger-and-acquisition
activity. However, many of the gains were slashed for U.S. investors as the
dollar gained strength against most other currencies. (Conversely, when the
dollar falls in value, returns from abroad are enhanced for U.S. investors.)
In U.S.-dollar terms, the overall return from developed foreign markets was
a very solid 6.8%, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East Index. However, in local currencies, the EAFE
Index return was 16.4%.
In Europe, an average 21.1% gain in local-currency terms was reduced to
8.4% for U.S. investors because of the dollar's strength. Stocks in the Pacific
region, which is dominated by Japan, returned 3.6% in dollars, less than half
the 7.5% gain in local currencies. The Select Emerging Markets Free Index
returned 12.3% in U.S. dollars, with the biggest gains in Turkey (+148%), Russia
(+123%), and Israel (+50%).
5
<PAGE>
ADVISER'S REPORT
During the past six months, Windsor II Fund declined -3.4% while the S&P 500
Index rose 7.2% and the value portion of the S&P 500 rose 2.7%. All of our
shortfall occurred in the first part of the period, when the market continued to
show disgust for value investments and to shower attention on the
high-technology, communications, and Internet issues. That trend seemed to
change after March 10, when stocks with higher price/earnings ratios experienced
a sharp reversal and value stocks seemed at last to capture the market's
attention. From March 10 through April 30, Windsor II's share price improved
12%, while the S&P 500 posted a 4% rise, and the value part of the S&P 500
registered a 6% gain. So far in May, the improvement relative to our benchmarks
is continuing.
In our letter to you six months ago, we mentioned that there was evidence
of inflation that the Federal Reserve appeared to be overlooking. Now these
signs can be seen without reading glasses. We expect that record low
unemployment, red-hot demand, and rising prices will evoke a stronger response
from the Fed later this month. Further actions by the Fed to raise short-term
interest rates will begin to slow economic activity, which will be a good thing
in the long run.
Corporate profits in the first quarter of 2000 have been quite strong. Our
fund's holdings generally have issued good earnings reports. We don't see many
sectors of weakness and, in fact, expect much-improved results from energy and
chemical companies.
The dollar has been quite strong versus most major currencies, even in
light of the nation's large negative balance of trade. The reason for the
strength is the significant inflow of investment funds into our markets. Over
the longer term, we would not be surprised to see these flows reverse and the
dollar decline.
The fund's P/E ratio is about half that of the S&P 500 Index; the
price/book ratio is less than half that of the index, and the dividend yield is
twice the yield on the S&P 500. We have never had a portfolio that sold at such
steep discounts to the market. What has caused this? Quite simply, investors
have been changing investments based on their short-term performance. In the
recent past, the two largest hedge funds in the country have reorganized and
sold the major portion of their assets. At the same time, the largest
value-oriented mutual funds have experienced significant redemptions, and
investors have put most of the proceeds into growth funds. All of this caused
the crescendo of high-tech performance and weighed down the prices of value
stocks.
Is the assault on value over? It certainly appears so. Windsor II is
performing better--not because we changed things but because the market itself
has changed. The major reason we have outperformed since mid-March is that we
did not own the overpriced issues. This is precisely the stance that contributed
to our lack of success last year.
Windsor II has a significant concentration in energy issues (about 19% of
equities) and in electric
--------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY
The fund reflects a belief that superior long-term investment results can be
achieved by holding a diversified portfolio of out-of-favor stocks with
below-average price/earnings ratios, above-average dividend yields, and the
prospect of above-average total return.
--------------------------------------------------------------------------------
6
<PAGE>
utilities (about 9%). These are not new holdings. We have allowed this buildup
because of rapidly improving fundamentals for these groups. These stocks are
less sensitive to the economic cycle and to more-restrictive Federal Reserve
policies that could have a significant impact on many businesses.
Barrow, Hanley, Mewhinney & Strauss, Inc.
May 10, 2000
7
<PAGE>
FUND PROFILE
WINDSOR II FUND
This Profile provides a snapshot of the fund's characteristics as of April 30,
2000, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
PORTFOLIO CHARACTERISTICS
--------------------------------------------------------
WINDSOR II S&P 500
--------------------------------------------------------
Number of Stocks 279 500
Median Market Cap $31.4B $87.5B
Price/Earnings Ratio 15.7x 26.8x
Price/Book Ratio 2.5x 5.3x
Yield 2.4% 1.2%
Return on Equity 18.5% 24.1%
Earnings Growth Rate 9.0% 16.1%
Foreign Holdings 4.1% 1.2%
Turnover Rate 23%* --
Expense Ratio 0.37%* --
Cash Reserves 1.8% --
*Annualized.
INVESTMENT FOCUS
--------------------------------------------------------
STYLE..................VALUE
MARKET CAP.............LARGE
VOLATILITY MEASURES
--------------------------------------------------------
WINDSOR II S&P 500
--------------------------------------------------------
R-Squared 0.77 1.00
Beta 0.90 1.00
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
--------------------------------------------------------
Citigroup, Inc. 2.8%
Baker Hughes, Inc. 2.5
BP Amoco PLC ADR 2.5
Schlumberger Ltd. 2.3
Phillips Petroleum Co. 2.3
The Chase Manhattan Corp. 2.2
GTE Corp. 2.1
Bank of America Corp. 2.1
Halliburton Co. 2.1
Sears, Roebuck & Co. 2.0
--------------------------------------------------------
Top Ten 22.9%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
--------------------------------------------------------------------
APRIL 30, 1999 APRIL 30, 2000
-----------------------------------------
WINDSOR II WINDSOR II S&P 500
-----------------------------------------
Auto & Transportation ..... 3.9% 2.4% 2.1%
Consumer Discretionary .... 12.9 13.4 12.3
Consumer Staples .......... 6.6 5.7 5.3
Financial Services ........ 28.0 24.8 13.5
Health Care ............... 2.3 3.7 9.8
Integrated Oils ........... 4.8 9.1 4.4
Other Energy .............. 7.6 10.3 1.8
Materials & Processing .... 4.3 4.9 2.5
Producer Durables ......... 9.7 0.2 4.2
Technology ................ 2.8 4.8 27.8
Utilities ................. 16.1 15.4 9.6
Other ..................... 1.0 5.3 6.7
--------------------------------------------------------------------
8
<PAGE>
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH RESERVES. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
INVESTMENT FOCUS. This grid indicates the focus of a fund in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,
the more diversified it is and the more likely to perform in line with the
overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come from
each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 35%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
9
<PAGE>
PERFORMANCE SUMMARY
WINDSOR II FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: JUNE 24, 1985-APRIL 30, 2000
--------------------------------------------------------------------------------
WINDSOR II FUND S&P 500 WINDSOR II FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN YEAR RETURN RETURN RETURN RETURN
--------------------------------------------------------------------------------
1985 -0.9% 1.1% 0.2% 1.8% 1993 15.8% 3.7% 19.5% 14.9%
1986 31.2 4.4 35.6 33.2 1994 -0.8 3.0 2.2 3.9
1987 -0.6 1.5 0.9 6.4 1995 19.2 3.9 23.1 26.4
1988 14.5 6.0 20.5 14.8 1996 23.8 3.4 27.2 24.1
1989 19.5 5.2 24.7 26.4 1997 28.1 3.2 31.3 32.1
1990 -21.5 4.0 -17.5 -7.5 1998 14.1 2.4 16.5 22.0
1991 29.4 7.2 36.6 33.5 1999 2.2 2.4 4.6 25.7
1992 7.9 4.6 12.5 10.0 2000* -4.7 1.3 -3.4 7.2
--------------------------------------------------------------------------------
*Six months ended April 30, 2000.
See Financial Highlights table on page 17 for dividend and capital gains
information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 2000*
--------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
--------------------------------------------------------------------------------
Windsor II Fund 6/24/1985 -7.76% 17.88% 10.78% 3.53% 14.31%
--------------------------------------------------------------------------------
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
10
<PAGE>
FINANCIAL STATEMENTS
APRIL 30, 2000 (UNAUDITED)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, 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 (93.4%)+
Auto & Transportation (2.3%)
General Motors Corp. 3,023,400 283,066
Ford Motor Co. 3,753,000 205,242
Delta Air Lines, Inc. 114,400 6,035
TRW, Inc. 96,700 5,657
PACCAR, Inc. 110,200 5,241
Burlington Northern Santa Fe Corp. 200,800 4,844
o UAL Corp. 79,600 4,607
Eaton Corp. 49,800 4,183
o Navistar International Corp. 117,300 4,106
Meritor Automotive, Inc. 57,400 861
-------------
523,842
-------------
CONSUMER DISCRETIONARY (12.5%)
Sears, Roebuck & Co. 12,741,900 466,672
Waste Management, Inc. 24,746,597 392,852
O(1) Kmart Corp. 39,991,300 324,929
Gannett Co., Inc. 3,987,300 254,689
Wal-Mart Stores, Inc. 4,507,500 249,603
The Walt Disney Co. 4,418,432 191,373
o Cendant Corp. 11,353,800 175,274
Time Warner, Inc. 1,561,000 140,392
Newell Rubbermaid, Inc. 5,479,200 138,007
O(1) Service Corp. International 25,287,900 129,600
Tribune Co. 3,005,500 116,839
Target Corp. 1,259,000 83,802
J.C. Penney Co., Inc. 5,646,800 77,996
Kimberly-Clark Corp. 931,200 54,068
o AT&T Corp.-Liberty Media Class A 251,200 12,544
--------------------------------------------------------------------------------
Eastman Kodak Co. 113,000 6,321
McDonald's Corp. 165,200 6,298
o Tricon Global Restaurants, Inc. 159,900 5,457
Darden Restaurants Inc. 270,500 4,987
o Toys R Us, Inc. 294,800 4,496
R.R. Donnelley & Sons Co. 204,200 4,339
Galileo International, Inc. 180,400 4,172
o CBS Corp. 64,600 3,795
Whirlpool Corp. 52,200 3,400
Wendy's International, Inc. 151,200 3,383
Reader's Digest Assn., Inc. Class A 103,900 3,325
The Limited, Inc. 66,200 2,991
o Viacom Inc. Class B 54,100 2,942
o Outback Steakhouse 85,300 2,794
The Warnaco Group, Inc. Class A 226,600 2,408
May Department Stores Co. 74,037 2,036
o The Neiman Marcus Group, Inc. Class A 60,600 1,560
Dillard's Inc. 68,800 959
o ACNielson Corp. 28,600 660
Hertz Corp. Class A 16,400 511
Harcourt General, Inc. 7,700 288
-------------
2,875,762
-------------
CONSUMER STAPLES (5.4%)
Anheuser-Busch Cos., Inc. 5,329,500 376,062
Philip Morris Cos., Inc. 14,143,800 309,395
PepsiCo, Inc. 5,464,200 200,468
Imperial Tobacco Group ADR 14,451,000 196,895
H.J. Heinz Co. 2,462,100 83,711
11
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
WINDSOR II FUND SHARES (000)
--------------------------------------------------------------------------------
Sara Lee Corp. 2,509,800 37,647
Bestfoods 100,000 5,025
IBP, Inc. 249,700 4,120
Ralston-Ralston Purina Group 213,400 3,775
SuperValu Inc. 157,000 3,248
Tyson Foods, Inc. 296,400 3,094
Nabisco Holdings Corp. Class A 74,400 2,795
McCormick & Co., Inc. 71,200 2,221
ConAgra, Inc. 50,000 944
Brown-Forman Corp. Class B 15,100 824
-------------
1,230,224
-------------
FINANCIAL SERVICES (23.2%)
Citigroup, Inc. 10,749,480 638,922
The Chase Manhattan Corp. 6,953,056 501,055
Bank of America Corp. 9,882,412 484,237
Washington Mutual, Inc. 17,255,230 441,086
First Union Corp. 13,279,402 423,281
American International Group, Inc. 3,697,161 405,532
Allstate Corp. 15,392,444 363,646
Wells Fargo Co. 7,616,300 312,744
Bank One Corp. 9,975,965 304,267
Fannie Mae 4,453,900 268,626
Morgan Stanley Dean Witter & Co. 2,488,900 191,023
PNC Financial Services Group 4,204,500 183,421
Aon Corp. 6,736,062 182,295
J.P. Morgan & Co., Inc. 1,102,200 141,495
o John Hancock Financial Services, Inc. 7,512,300 137,099
American General Corp. 1,996,800 111,821
Conseco Inc. 2,244,000 12,202
Merrill Lynch & Co., Inc. 114,200 11,641
FleetBoston Financial Corp. 246,184 8,724
Mellon Financial Corp. 271,000 8,706
CIGNA Corp. 104,600 8,342
The Bank of New York Co., Inc. 181,600 7,457
Marsh & McLennan Cos., Inc. 68,200 6,722
American Express Co. 41,600 6,243
Golden West Financial Corp. 164,900 5,627
Bear Stearns Co., Inc. 125,900 5,398
SouthTrust Corp. 216,600 5,171
A.G. Edwards & Sons, Inc. 136,850 5,149
First Data Corp. 104,200 5,073
Dime Bancorp, Inc. 266,500 4,997
Compass Bancshares Inc. 264,100 4,886
The PMI Group Inc. 98,450 4,769
Hartford Life, Inc. 95,900 4,723
Host Marriott Corp. REIT 434,300 4,642
First Virginia Banks, Inc. 126,700 4,625
o Golden State Bancorp Inc. 298,400 4,588
Ryder System, Inc. 203,400 4,513
Peoples Heritage Financial Group Inc. 337,800 4,413
Deluxe Corp. 174,500 4,395
St. Paul Cos., Inc. 122,200 4,353
Pacific Century Financial Corp. 206,000 4,236
Countrywide Credit Industries, Inc. 149,886 4,141
Dow Jones & Co., Inc. 63,000 4,087
MGIC Investment Corp. 79,700 3,811
Nationwide Financial Services, Inc. 134,400 3,738
UnionBanCal Corp. 129,391 3,583
Dun & Bradstreet Corp. 107,400 3,235
State Street Corp. 31,400 3,042
Equity Office Properties Trust REIT 110,900 3,015
Huntington Bancshares Inc. 161,800 2,953
Heller Financial, Inc. 138,800 2,698
Equity Residential Properties Trust REIT 59,000 2,685
City National Corp. 72,200 2,658
Provident Financial Group, Inc. 87,400 2,562
Cullen/Frost Bankers, Inc. 91,000 2,247
GATX Corp. 58,400 2,088
Astoria Financial Corp. 72,800 2,007
Freddie Mac 42,400 1,948
Spieker Properties, Inc. REIT 43,500 1,928
Associated Banc-Corp. 75,400 1,927
Duke Realty Investments, Inc. REIT 80,100 1,737
Firstar Corp. 69,200 1,721
Apartment Investment &
Management Co. Class A REIT 42,800 1,701
Hibernia Corp. Class A 147,900 1,571
CCB Financial Corp. 38,100 1,507
Archstone Communities Trust REIT 66,400 1,436
ProLogis Trust REIT 70,900 1,396
Public Storage, Inc. REIT 61,800 1,383
Lehman Brothers Holdings, Inc. 14,700 1,206
Commerce Bancshares, Inc. 36,603 1,130
Mercantile Bankshares Corp. 37,300 1,063
Simon Property Group, Inc. REIT 40,800 1,035
o DST Systems, Inc. 7,700 571
SunTrust Banks, Inc. 10,700 543
Household International, Inc. 10,500 438
U.S. Bancorp 12,800 260
American National Insurance Co. 4,700 243
Sovereign Bancorp, Inc. 28,017 193
WestAmerica Bancorporation 3,200 80
Charter One Financial 2,300 47
-------------
5,315,759
-------------
HEALTH CARE (3.4%)
American Home Products Corp. 4,296,500 241,410
Bristol-Myers Squibb Co. 4,406,200 231,050
Columbia/HCA Healthcare Corp. 5,515,900 156,858
Johnson & Johnson 1,462,100 120,623
Pharmacia Corp. 153,272 7,654
UnitedHealth Group Inc. 103,400 6,895
Abbott Laboratories 141,000 5,420
Tenet Healthcare Corp. 165,000 4,208
o IVAX Corp. 120,450 3,297
o Chiron Corp. 66,100 2,991
C.R. Bard, Inc. 48,500 2,113
12
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
Merck & Co., Inc. 29,500 2,050
DENTSPLY International Inc. 52,400 1,523
Mylan Laboratories, Inc. 23,000 653
Mallinckrodt, Inc. 17,600 473
-------------
787,218
-------------
INTEGRATED OILS (8.5%)
BP Amoco PLC ADR 11,098,572 566,026
Phillips Petroleum Co. 11,319,200 536,955
Occidental Petroleum Corp. 18,382,800 394,081
Exxon Mobil Corp. 3,167,428 246,070
Unocal Corp. 4,430,600 143,164
Conoco Inc. Class B 1,268,700 31,559
Chevron Corp. 188,900 16,080
Texaco Inc. 180,600 8,940
Amerada Hess Corp. 89,600 5,701
Kerr-McGee Corp. 77,600 4,016
-------------
1,952,592
-------------
OTHER ENERGY (9.6%)
(1) Baker Hughes, Inc. 18,052,000 574,279
Schlumberger Ltd. 7,025,600 537,898
Halliburton Co. 10,647,700 470,495
Williams Cos., Inc. 7,187,746 268,193
Enron Corp. 2,869,500 199,968
Transocean Sedco Forex Inc. 2,712,631 127,494
Tosco Corp. 170,200 5,457
Apache Corp. 104,500 5,062
Union Pacific Resources Group, Inc. 198,900 3,816
Ultramar Diamond Shamrock Corp. 145,700 3,606
EOG Resources, Inc. 81,700 2,032
Ashland, Inc. 26,600 908
-------------
2,199,208
-------------
MATERIALS & PROCESSING (4.5%)
(1) Fort James Corp. 13,072,100 312,913
(1) Millennium Chemicals, Inc. 7,368,142 146,902
Dow Chemical Co. 1,149,300 129,871
Hanson PLC ADR 3,291,850 120,358
O(1) Pactiv Corp. 13,054,000 106,880
Phelps Dodge Corp. 1,671,500 77,307
(1) CK Witco Corp. 6,238,569 73,303
E.I. du Pont de Nemours & Co. 265,087 12,575
Praxair, Inc. 148,600 6,603
Alcoa Inc. 81,300 5,274
o American Standard Cos., Inc. 121,400 4,977
USG Corp. 117,400 4,901
Boise Cascade Corp. 146,000 4,754
Lafarge Corp. 179,600 4,535
The Timber Co. 194,700 4,515
Willamette Industries, Inc. 106,500 4,067
Crown Cork & Seal Co., Inc. 244,100 3,967
Louisiana-Pacific Corp. 284,300 3,803
Engelhard Corp. 190,100 3,339
Lubrizol Corp. 91,800 2,352
Johns Manville Corp. 220,000 2,296
Avery Dennison Corp. 30,900 2,028
Armstrong World Industries Inc. 96,500 1,888
Westvaco Corp. 18,500 571
Owens Corning 30,800 560
International Paper Co. 9,600 353
-------------
1,040,892
-------------
--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
PRODUCER DURABLES (0.2%)
The Boeing Co. 256,300 10,172
Emerson Electric Co. 146,800 8,056
Northrop Grumman Corp. 73,300 5,195
Cummins Engine Co., Inc. 115,700 4,115
Pitney Bowes, Inc. 80,700 3,299
o Teradyne, Inc. 26,900 2,959
York International Corp. 109,000 2,630
Tecumseh Products Co. Class A 39,760 1,846
o Howmet International Inc. 77,100 1,634
United Technologies Corp. 4,896 304
-------------
40,210
TECHNOLOGY (4.5%)
International Business Machines Corp. 2,655,900 296,465
Electronic Data Systems Corp. 3,722,500 255,922
Intel Corp. 1,495,000 189,585
o Unisys Corp. 5,121,600 118,757
Lucent Technologies, Inc. 1,573,700 97,864
Motorola, Inc. 111,900 13,323
o Advanced Micro Devices, Inc. 94,100 8,257
Hewlett-Packard Co. 55,000 7,425
o Apple Computer, Inc. 52,300 6,488
o National Semiconductor Corp. 102,200 6,209
o Micron Technology, Inc. 38,700 5,389
o Seagate Technology Inc. 103,300 5,249
AVX Corp. 51,100 4,979
Compaq Computer Corp. 160,700 4,700
o NCR Corp. 119,600 4,620
Rockwell International Corp. 84,700 3,335
o 3Com Corp. 13,900 548
1,029,115
UTILITIES (14.3%)
GTE Corp. 7,166,900 485,557
(1) Entergy Corp. 18,238,400 463,939
SBC Communications Inc. 9,565,147 419,073
American Electric Power Co., Inc. 9,693,100 355,010
Reliant Energy, Inc. 10,442,100 278,021
FirstEnergy Corp. 10,612,877 269,965
(1) Central & South West Corp. 11,962,100 259,428
AT&T Corp. 4,178,117 195,066
Public Service Enterprise Group, Inc. 4,088,200 146,664
BellSouth Corp. 2,905,500 141,462
o MCI WorldCom, Inc. 3,071,372 139,555
Bell Atlantic Corp. 455,036 26,961
Sprint Corp. 215,580 13,258
o MediaOne Group, Inc. 130,800 9,892
Southern Co. 349,600 8,718
PG&E Corp. 275,900 7,156
Ameren Corp. 164,900 6,050
Telephone & Data Systems, Inc. 55,300 5,641
o Sprint PCS 101,600 5,588
DTE Energy Co. 168,400 5,494
PPL Corp. 222,288 5,307
Duke Energy Corp. 87,300 5,020
GPU, Inc. 177,800 4,990
Energy East Corp. 216,400 4,517
U S WEST, Inc. 60,100 4,278
13
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
WINDSOR II FUND SHARES (000)
--------------------------------------------------------------------------------
Unicom Corp. 98,100 3,899
o U.S. Cellular Corp. 50,500 3,033
Pinnacle West Capital Corp. 76,700 2,694
FPL Group, Inc. 59,500 2,689
o Citizens Utilities Co. Class B 147,600 2,371
ALLTEL Corp. 31,200 2,079
Edison International 102,100 1,946
Northeast Utilities 76,600 1,647
Allegheny Energy, Inc. 52,600 1,598
Cinergy Corp. 50,000 1,338
-------------
3,289,904
-------------
OTHER (5.0%)
General Electric Co. 2,559,200 402,434
Honeywell International Inc. 7,170,362 401,540
(1) ITT Industries, Inc. 8,916,800 281,437
(1) Tenneco Automotive, Inc. 2,610,760 23,171
Minnesota Mining & Manufacturing Co. 126,500 10,942
Johnson Controls, Inc. 89,800 5,685
Cooper Industries, Inc. 134,400 4,612
Fortune Brands, Inc. 160,000 4,000
Loews Corp. 63,000 3,473
o FMC Corp. 38,800 2,258
Brunswick Corp. 98,600 1,892
Lancaster Colony Corp. 39,500 1,037
-------------
1,142,481
-------------
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $18,411,277) 21,427,207
--------------------------------------------------------------------------------
FACE
AMOUNT
(000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (6.6%)+
--------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.
(2) 5.90%, 5/18/2000 $ 15,000 14,958
(2) 5.93%, 5/4/2000 8,800 8,796
FEDERAL NATIONAL MORTGAGE ASSN.
(2) 6.17%, 7/20/2000 38,000 37,495
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.75%, 5/1/2000 1,436,635 1,436,635
5.79%, 5/1/2000--Note G 9,525 9,525
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $1,507,401) 1,507,409
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(COST $19,918,678) 22,934,616
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MARKET
VALUE*
(000)
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
Other Assets--Note C 110,209
Liabilities--Note G (107,425)
-------------
2,784
-------------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 911,967,295 outstanding $.001 par value shares of beneficial
interest (unlimited authorization) $22,937,400
================================================================================
NET ASSET VALUE PER SHARE $25.15
================================================================================
* See Note A in Notes to Financial Statements.
o Non-Income-Producing Security.
+ The fund invests a portion of its reserves in equity markets through the
use of index futures contracts. After giving effect to futures investments,
the fund's effective common stock and temporary cash investment positions
represent 98.2% and 1.8%, respectively, of net assets. See Note F in Notes
to Financial Statements.
(1) Considered an affiliated company as the fund owns more than 5% of the
outstanding voting securities of such company. The total market value of
investments in affiliated companies was $2,696,781,000.
(2) Securities with an aggregate value of $61,249,000 have been segregated as
initial margin for open futures contracts.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
--------------------------------------------------------------------------------
AT APRIL 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------------------------------------------------------------------------------
Paid in Capital $18,924,497 $20.75
Undistributed NetInvestment Income 150,781 .17
Accumulated NetRealized Gains 816,990 .89
Unrealized Appreciation--Note F
Investment Securities 3,015,938 3.31
Futures Contracts 29,194 .03
--------------------------------------------------------------------------------
Net Assets $22,937,400 $25.15
================================================================================
14
<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
SIX MONTHS ENDED APRIL 30, 2000
(000)
--------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* $ 308,277
Interest 47,076
Security Lending 39
Total Income 355,392
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 15,374
Performance Adjustment (3,231)
The Vanguard Group--Note C
Management and Administrative 32,870
Marketing and Distribution 2,121
Custodian Fees 45
Auditing Fees 14
Shareholders' Reports 479
Trustees' Fees and Expenses 17
-------------
Total Expenses 47,689
Expenses Paid Indirectly--Note D (2,184)
-------------
Net Expenses 45,505
--------------------------------------------------------------------------------
NET INVESTMENT INCOME 309,887
--------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold* 799,117
Futures Contracts 34,214
--------------------------------------------------------------------------------
REALIZED NET GAIN 833,331
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (2,392,552)
Futures Contracts 10,100
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (2,382,452)
--------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(1,239,234)
================================================================================
*Dividend income and realized net loss from affiliated companies were
$64,245,000 and $(375,189,000), respectively.
15
<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
-----------------------------------
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 2000 OCT. 31, 1999
(000) (000)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income 309,887 670,002
Realized Net Gain 833,331 2,600,015
Change in Unrealized Appreciation
(Depreciation) (2,382,452) (1,931,112)
Net Increase (Decrease) in Net Assets ---------------------------------
Resulting from Operations (1,239,234) 1,338,905
DISTRIBUTIONS ---------------------------------
Net Investment Income (382,237) (741,695)
Realized Capital Gain (2,514,943) (2,559,664)
---------------------------------
Total Distributions (2,897,180) (3,301,359)
CAPITAL SHARE TRANSACTIONS1 ---------------------------------
Issued 1,784,950 6,123,676
Issued in Lieu of Cash Distributions 2,759,404 3,148,067
Redeemed (8,011,369) (6,407,121)
Net Increase (Decrease) from ---------------------------------
Capital Share Transactions (3,467,015) 2,864,622
--------------------------------------------------------------------------------
Total Increase (Decrease) (7,603,429) 902,168
--------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 30,540,829 29,638,661
---------------------------------
End of Period $22,937,400 $30,540,829
================================================================================
1Shares Issued (Redeemed)
Issued 72,334 198,010
Issued in Lieu of Cash Distributions 110,731 109,009
Redeemed (322,962) (209,049)
Net Increase (Decrease) in Shares ---------------------------------
Outstanding (139,897) 97,970
================================================================================
16
<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 II FUND
YEAR ENDED OCTOBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -------------------------------------------
THROUGHOUT EACH PERIOD APRIL 30, 2000 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $29.03 $31.07 $29.36 $24.04 $20.06 $17.33
-------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .34 .64 .65 .64 .62 .58
Net Realized and Unrealized Gain (Loss)
on Investments (1.34) .73 3.91 6.47 4.63 3.17
------------------------------------------------------------
Total from Investment Operations (1.00) 1.37 4.56 7.11 5.25 3.75
DISTRIBUTIONS ------------------------------------------------------------
Dividends from Net Investment Income (.38) (.74) (.66) (.63) (.58) (.55)
Distributions from Realized Capital Gains (2.50) (2.67) (2.19) (1.16) (.69) (.47)
------------------------------------------------------------
Total Distributions (2.88) (3.41) (2.85) (1.79) (1.27) (1.02)
NET ASSET VALUE, END OF PERIOD $25.15 $29.03 $31.07 $29.36 $24.04 $20.06
=======================================================================================================
TOTAL RETURN -3.35% 4.57% 16.51% 31.27% 27.17% 23.08%
=======================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $22,937 $30,541 $29,639 $22,568 $14,758 $10,272
Ratio of Total Expenses to
Average Net Assets 0.37%* 0.37% 0.41% 0.37% 0.39% 0.40%
Ratio of Net Investment Income to
Average Net Assets 2.43%* 2.08% 2.16% 2.49% 2.92% 3.27%
Portfolio Turnover Rate 23%* 26% 31% 30% 32% 30%
=======================================================================================================
*Annualized.
</TABLE>
17
<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 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 for Tukman Capital Management, Inc., are subject to quarterly
adjustments based on performance relative to the S&P 500 Index.
18
<PAGE>
The Vanguard Group provides investment advisory services to a portion
of the fund on an at-cost basis; the fund paid Vanguard advisory fees of
$238,000 for the six months endedApril 30, 2000.
For the six months ended April 30, 2000, the aggregate investment
advisory fee represented an effective annual basic rate of 0.12% of average net
assets before a decrease of $3,231,000 (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 April 30, 2000, the fund had contributed capital of $4,409,000 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 six
months ended April 30, 2000, these arrangements reduced the fund's expenses by
$2,184,000 (an annual rate of 0.02% of average net assets).
E. During the six months ended April 30, 2000, the fund purchased $2,769,793,000
of investment securities and sold $8,118,147,000 of investment securities, other
than temporary cash investments.
F. At April 30, 2000, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $3,015,938,000,
consisting of unrealized gains of $6,165,368,000 on securities that had risen in
value since their purchase and $3,149,430,000 in unrealized losses on securities
that had fallen in value since their purchase.
At April 30, 2000, the aggregate settlement value of open futures
contracts expiring in June 2000 and the related unrealized appreciation
(depreciation) were:
--------------------------------------------------------------------------------
(000)
----------------------------------------
Aggregate Unrealized
Number of Settlement Appreciation
Futures Contracts Long Contracts Value (Depreciation)
--------------------------------------------------------------------------------
S&P 500 Index 2,828 $1,032,220 $29,665
S&P MidCap 400 Index 289 69,757 (471)
--------------------------------------------------------------------------------
G. The market value of securities on loan to broker/dealers at April 30, 2000,
was $8,794,000 for which the fund held cash collateral of $9,525,000. Cash
collateral received is invested in repurchase agreements.
19
<PAGE>
THE VANGUARD(R) FAMILY OF FUNDS
STOCK FUNDS
--------------------------------------------------------------------------------
500 Index Fund
Aggressive Growth Fund
Capital Opportunity Fund
Convertible Securities 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 Index Fund*
Health Care 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*
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
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
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
*Offers Institutional Shares.
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.
20
<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.
Seven of Vanguard's eight 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. Noted in parentheses is the year in which the Trustee joined the
Vanguard Board.
TRUSTEES
JOHN J. BRENNAN * (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN * (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck 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 Gestinova, Baker Fentress & Co., The Jeffrey Co., 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.
JOHN C. SAWHILL * (1991) President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co.,
Procter & Gamble Co., NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR. * (1971) Retired Chairman of Nabisco Brands, Inc.; retired
Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc., and
Kmart Corp.
J. LAWRENCE WILSON * (1985) Retired Chairman 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 * Individual Investor Group.
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.
<PAGE>
[SHIP LOGO]
[THE VANGUARD GROUP (R) LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a
reproduction of Leading the Way, a 1984 work created
and copyrighted by noted naval artist Tom Freeman,
of Forest Hill, Maryland.
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.
Q732-062000
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
