<PAGE> 1
VANGUARD
TRUSTEES'
EQUITY FUND
ANNUAL REPORT 1993
[PHOTO -- SEE EDGAR APPENDIX]
<PAGE> 2
A BRAVE NEW WORLD FOR INVESTING
With the clarity of hindsight, we can now see that the past two decades
composed one of the great cycles in the history of the financial markets, as
reflected in the chart below.
* During the 1973-1982 decade, the nominal total returns (capital change plus
income) of stocks and bonds averaged only about +6% per year; cash reserves
averaged more than +8% annually. However, high inflation rates, averaging
8.7% annually, devastated these nominal results. Real returns (nominal
returns less the inflation rate) for each of these three major asset
classes were actually negative.
* During the 1983-1992 decade, quite the opposite situation prevailed.
Nominal returns for stocks and bonds were close to their highest levels in
history and forged well into double-digit territory. To make a good
investment environment even better, inflation was tame (averaging 3.8%
annually), and real returns were solidly positive.
[A TALE OF TWO DECADES BAR GRAPH -- SEE EDGAR APPENDIX]
This sharp contrast provides us with perspective for the decade that will end
in the year 2002. Some investors will fear a recurrence of the returns of the
first decade, while others will hope for a recurrence of the second; most will
likely anticipate something in between. Whatever the case, there are two
essential elements involved in considering your investment program in the light
of today's circumstances.
First, the yield of each investment class at the start of a decade has
had an important relationship to its future return. Yields were low when 1973
began, high when 1983 began, and are again low today. In fact, current income
yields are remarkably close to the levels of 20 years ago, as shown in the
following table.
<TABLE>
<CAPTION>
INCOME YIELDS (January 1)
----------------------------------------------------------
1973 1983 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS 2.7% 4.9% 2.7%
BONDS 5.8 10.7 6.0
RESERVES 3.8 10.5 3.1
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
But there is a second important element to consider: inflation. It got
progressively worse during most of the first decade, but got progressively
better in the second.
<TABLE>
<CAPTION>
---------------------------------------------------------
1973 1981 1993
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
INFLATION 3.4% 12.4% 2.7%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Today's low yield levels suggest that more modest nominal returns are in
prospect for the coming decade than in the 1980s; indeed, returns could
gravitate
(Please turn to inside back cover)
VANGUARD/TRUSTEES' EQUITY FUND CONSISTS OF TWO BROADLY DIVERSIFIED PORTFOLIOS,
EACH OF WHICH SEEKS TO REALIZE MAXIMUM LONG-TERM RETURN FOR ITS SHAREHOLDERS,
CONSISTENT WITH REASONABLE RISK. THE UNITED STATES PORTFOLIO EMPLOYS A
QUANTITATIVE APPROACH TO IDENTIFY BOTH GROWTH AND VALUE STOCKS THAT THEY
CONSIDER TO BE UNDERVALUED. THE INTERNATIONAL PORTFOLIO USES A PROPRIETARY
SCORING SYSTEM FOR IDENTIFYING UNDERVALUED STOCKS IN OVER 20 INTERNATIONAL
MARKETS.
<PAGE> 3
CHAIRMAN'S LETTER
[PHOTO OF JOHN C. BOGLE -- SEE EDGAR APPENDIX]
FELLOW SHAREHOLDER:
Every major equity market in the world provided a double-digit return during
the year ended December 31, 1993. Amazingly, several of the world's so-called
emerging markets provided triple-digit returns. This pattern was a nice
reversal from one year ago, when the stock markets of many foreign countries
declined, often sharply.
In this frenetic environment for equity investors, the U.S. Portfolio
of Vanguard/Trustees' Equity Fund turned in a total return (capital change plus
income) of +17.2%. This performance was excellent in an absolute sense.
Achieved as it was in a year in which U.S. equity returns were good, but not
nearly as good as the Portfolio's, our return was excellent in a relative sense
as well.
Our International Portfolio provided a return of +30.5%, nearly double
that of the U.S. Portfolio. However, on a relative basis, the Portfolio's
results left something to be desired, as our return for the year fell short of
both of our measurement standards.
The following table shows the results of the two Portfolios relative
to their respective competitive benchmarks: for the U.S. Portfolio, the
unmanaged Standard & Poor's 500 Composite Stock Price Index and the average
growth and income mutual fund; for the International Portfolio, the unmanaged
Morgan Stanley Capital International Europe, Australia, and Far East ("EAFE")
Index and the average international fund.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Total Return
-----------------
Year Ended
December 31, 1993
- ---------------------------------------------------------------------------------------------
<S> <C>
TRUSTEES' U.S. PORTFOLIO +17.2%
- ---------------------------------------------------------------------------------------------
AVERAGE GROWTH AND INCOME FUND +11.2%
STANDARD & POOR'S 500 STOCK INDEX +10.1
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
TRUSTEES' INTERNATIONAL PORTFOLIO +30.5%
- ---------------------------------------------------------------------------------------------
AVERAGE INTERNATIONAL FUND +39.4%
MSCI EAFE INDEX +33.1
- ---------------------------------------------------------------------------------------------
</TABLE>
The total return of the U.S. Portfolio is based on net asset values of $28.43
per share on December 31, 1992, and $30.65 on December 31, 1993, with the
latter figure adjusted to take into account the reinvestment of our four
quarterly dividends totaling $.43 per share from net investment income, and two
distributions totaling $2.16 per share from net capital gains realized largely
during the past year. For the International Portfolio, the respective net asset
values were $24.44 and $31.04, and we distributed four quarterly dividends
totaling $.81 per share from net investment income.
* TRUSTEES' U.S. PORTFOLIO MARKET OVERVIEW
In all, 1993 was a pretty good year for U.S. stocks. Indeed, the +10.1% total
return of the Standard & Poor's 500 Index was virtually identical to its
long-term (since 1926) average annual total return of +10.3%. This 68-year
historical span is by far the longest of any diversified stock market index.
(continued)
1
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[CUMULATIVE PERFORMANCE GRAPH, 1989-1993 -- SEE EDGAR APPENDIX]
During the year, the U.S. market's returns accumulated gradually and
with relative consistency, inch-by-inch, step-by-step, month-by-month.
There were neither explosive rises nor plummeting declines. It is probably fair
to say that such a steady course is the exception rather than the rule in
market history. Indeed, it remains a virtual certainty that most years will
witness the kind of spasmodic market action--and hence the higher volatility
and risk--that has been typical of the stock market in the past.
The precipitating factor in the U.S. stock market's advance almost
certainly was the decline in long-term interest rates. The yield on the
long-term U.S. Treasury bond, which opened the year at 7.4%, fell to 6.4% by
year-end, engendering a price gain of about +14%. This sharp rate decline
seemed to be driven primarily by two factors: (1) a stubbornly weak U.S.
economic recovery that encouraged the Federal Reserve to make ample credit
available; and (2) continuing evidence that inflation remained under control.
The U.S. Consumer Price Index (CPI) increased 2.7% during 1993, down from 2.9%
during 1992. As a result, despite the decline in interest rates, "real" yields
(nominal yields less the inflation rate) on long-term bonds remain at healthy
levels.
Since one factor that investors consider in setting their asset
allocations is the relative yield of stocks versus bonds, falling bond yields
provided impetus to stock prices. During 1993, the dividend yield on stocks (as
measured by the Standard & Poor's 500 Index) declined from 2.8% to 2.7%,
enough, in and of itself, to add some +5% to the price of the stocks in the
Index. This upward revaluation, when added to a dividend yield that is
extremely low by historical standards, accounted for the lion's share of the
+10.1% total return achieved by the Standard & Poor's 500 Index.
What was most interesting about 1993 was the striking bias that the
market exhibited toward "value" stocks--usually defined as those with
above-average dividend yields and below-average price-earnings ratios--over
"growth" stocks--those that provide lower yields but presumably richer
prospects for sustainable earnings growth. The disparity between the two
groups' returns during 1993 was little short of astonishing: value stocks
provided a return of +18.6%, while growth stocks provided a return of but
+1.7%.
I should note that, based on the historical record, such dichotomies
are unlikely to persist. As shown in the chart to the left-- which contrasts
the cumulative returns of the Standard & Poor's/BARRA Growth Index and Value
Index over the past five years--growth stocks were favored during the first
three years, only to lag value stocks during the final two years. You can see
that, despite the leadership of the Value Index in 1992 and 1993, the Growth
Index (+102.0%) remains ahead of its Value counterpart (+88.7%) for the full
five years.
* THE U.S. PORTFOLIO IN 1993
During 1993, the first full year under the aegis of our new investment adviser,
Geewax, Terker & Company, our relative returns continued the favorable pattern
of the final nine months of 1992. (The adviser assumed responsibility for
managing
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the Fund's portfolio on March 31, 1992.) With this fine start, it is fair to
say, "so far, so good." In an environment that heavily favored value stocks
over growth stocks, the U.S. Portfolio achieved a total return more than
one-half again as high as the +10.1% return of the Standard & Poor's 500 Index.
We were equally successful against the average growth and income fund, which
achieved a total return of +11.2%.
Given the magnitude of our outperformance relative to these two tough
competitive standards, we thought you might be interested in the "behind the
scenes" reasons for our success. Three factors predominated:
* We maintained a heavy relative weighting in technology stocks
(18% of equities at year-end versus 9% for the Index and 11% for
our competitors). This sector was an outstanding performer during
the year, and the particular stocks selected by our investment
adviser provided even better returns.
* We held a below-average representation in consumer staples stocks
(9% of equities versus 21% for the Index and 16% for our
competitors), which provided many of the year's greatest
disappointments, as the prices of drug stocks and many "name
brand" stocks fell sharply.
* We held a substantial commitment in the stocks of companies with
small and medium market capitalizations. In fact, the average
market capitalization of the Portfolio was $3 billion, compared
to about $8 billion for our competitors and $13 billion for the
Index. During 1993, smaller stocks outpaced their larger cousins,
as evidenced by the +18.9% return for the unmanaged Russell 2000
Index--a good proxy for the small cap market.
The return of any given mutual fund during a one-year period is, of course, of
limited value in appraising its long-term record. So, the chart below presents
the U.S. Portfolio's record over the past
[CUMULATIVE PERFORMANCE: U.S PORTFOLIO GRAPH-DECEMBER 31, 1983 TO DECEMBER 31,
1993 -- SEE EDGAR APPENDIX]
3
<PAGE> 6
[CUMULATIVE PERFORMANCE GRAPH, 1989-1993 -- SEE EDGAR APPENDIX]
decade--a more reasonable period for evaluation--compared to the two standards
that we described earlier. This table summarizes the results:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Total Return
--------------------------------
Ten Years Ended
December 31, 1993
--------------------------------
Cumulative Annual Rate
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
TRUSTEES' U.S. PORTFOLIO +190% +11.2%
- --------------------------------------------------------------------------------------------------
AVERAGE GROWTH AND INCOME FUND +230% +12.7%
STANDARD & POOR'S 500 INDEX +300 +14.9
- --------------------------------------------------------------------------------------------------
</TABLE>
By any measure, the Portfolio's long-term results could be described as
disappointing. The Standard & Poor's 500 Index, of course, is a perennially
tough "bogey" since it exists only in a "paper world." Mutual funds operate in
the "real world," and must incur the frictional expenses of investing--largely
operating expenses and portfolio transaction costs. In combination, these costs
engender a significant reduction (perhaps 1.5% to 2.5% per year) in the returns
of most mutual funds investing in U.S. equities.
Nonetheless, our annual return over the past decade also fell short of
what we would regard as our more relevant performance benchmark, the average
growth and income mutual fund. In this regard, to quote Macbeth, "what's done
is done." We fully acknowledge our disappointing results over the past decade,
and hold out the hope that the change in advisers we implemented nearly two
years ago will gradually return the Portfolio's ten-year record to what it
should be. It goes without saying that 21 months is too brief a period in which
to make any judgment about the abilities of our new adviser, but the initial
results give us ample reason to be encouraged.
I should note that the performance comparisons give the average
growth and income mutual fund the benefit of a very large doubt. The figures in
the table compare fund net asset values plus any dividends and capital gains
distributions, and therefore completely ignore the sales "loads" charged by
many growth and income funds on purchases or redemptions. Investors incur these
loads in the ownership of some 133 of the 365 growth and income funds in
existence. On average, these sales charges would currently reduce the returns
of such funds by about 4.5% for the one-year investor. For the investor who
purchased one of these load funds ten years ago--when sales charges
approximated 8%--the reduction would have been about 1% annually.
* TRUSTEES' INTERNATIONAL PORTFOLIO MARKET OVERVIEW
During 1993, offshore equity markets were much stronger than U.S. equity
markets, following four years in which the U.S. market was the performance
leader by a wide margin. The 1993 returns to U.S. investors in the various
European bourses averaged about +32%, more than three times the +10.1% return
on U.S. stocks. The Japanese market performed exceptionally well during the
first half of 1993, but declined on balance during the second half. For the
full year, Japanese stocks gained +26%. When all is said and done, 1993 may
come to be known as the year of
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<PAGE> 7
the "emerging markets"--including such countries as Malaysia, Hong Kong,
Mexico, and Brazil--which earned returns, on average, in excess of +70%. These
markets now represent about 10% of the total stock market capitalization of the
world, compared to but 4% just five years ago.
As shown in the chart on page 4, despite the strong performance from
the overseas markets in 1993, the EAFE Index rose by a mere +14% for the past
five years combined. In contrast, the outstanding performance of U.S. equities
from 1989 through 1992 rendered the U.S. market the champion by a wide margin,
as the Standard & Poor's 500 Index rose by +97% over the same period.
I would remind you that the foreign market returns shown in this
Annual Report are presented on a "U.S. dollar" basis. That is, they reflect the
investment returns to a U.S. investor. On a "local currency" basis, the market
returns may be substantially different, particularly over the short term. The
simple--and unvarying--rule is that when the dollar strengthens relative to the
currency of a given nation, the return to U.S. investors in that nation's
financial markets is reduced (since it takes a higher number of, say, British
pounds to convert into one U.S. dollar). Conversely, a weakening dollar
increases the return to U.S. investors.
During 1993, the strengthening of the U.S. dollar relative to
virtually every European currency reduced the returns to U.S. investors in
European markets. On the other hand, the dollar weakened considerably against
the Japanese yen, converting a good Japanese market return measured in local
currency into an exceptional return measured in U.S. dollars. This table shows
the results of the returns of the major markets of the world, both on a local
currency basis and a dollar basis:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Year Ended December 31, 1993
---------------------------------------------------
Local Currency Currency U.S. Dollar
Stock Market* Return Impact Return
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
UNITED STATES +10.1% -- +10.1%
- ---------------------------------------------------------------------------
INTERNATIONAL
EUROPE +37.2% - 7.9% +29.3%
PACIFIC +23.2 +12.4 +35.6
- ---------------------------------------------------------------------------
</TABLE>
*MSCI Indexes for international markets; Standard & Poor's 500 Index for U.S.
market.
(continued)
[CUMULATIVE PERFORMANCE: INTERNATIONAL PORTFOLIO GRAPH-DECEMBER 31, 1983 TO
DECEMBER 31, 1993 GRAPH -- SEE EDGAR APPENDIX]
5
<PAGE> 8
The strengthening of the U.S. dollar actually was far less negative a
factor in Europe during 1993 than it was in 1992. In the Pacific region, a
relatively neutral dollar impact in 1992 was followed by a nicely positive
impact during 1993. Interestingly, when measured in local currency terms, the
European markets outpaced the Pacific markets by fully 14 percentage points
during the past year; however, when measured in dollar terms, the European
markets lagged the Pacific markets by more than six percentage points.
This difference emphasizes the fact that, while the risk assumed by
U.S. investors in U.S. stocks is based solely on the performance of the stock
market, there are two incremental risks assumed by U.S. investors in world
markets: (1) the risk in the stock market of each particular nation; and (2)
the risk of fluctuations in the value of the U.S. dollar. This analysis does
not take into account the potential impact (and cost) of completely "hedging"
the dollar, so as to, in effect, provide U.S. investors with identical returns
(i.e., not impacted by fluctuations in the dollar) to those earned by local
investors in offshore markets.
* THE INTERNATIONAL PORTFOLIO IN 1993
The International Portfolio provided an excellent absolute return of +30.5% for
the year. However, when measured against our two performance benchmarks--the
unmanaged EAFE Index and the average international fund--our 1993 result loses
some of its luster.
Over the past twelve months, the International Portfolio maintained
country allocations that were fairly consistent with those of the EAFE Index.
The only disparities of note were: (1) our relatively smaller position in
Japanese stocks (37% of net assets on average for the Portfolio versus 46% for
the Index); and (2) our relatively larger position in the emerging markets (9%
for the Portfolio versus 5% for the Index). Both of these distinctions modestly
benefited the Portfolio "at the margin." As a result, our shortfall of 2.6
percentage points to the EAFE Index (+30.5% for the Portfolio versus +33.1% for
the Index) was in part the result of our operating expenses and portfolio
transaction costs (the Index, as noted earlier, incurs neither), with our
investment adviser's individual stock selections also detracting marginally
from our Portfolio's relative performance.
Our +30.5% return was also well behind the +39.4% return of the
average international fund. Here, two factors accounted for virtually all of
our shortfall: (1) We held a weighting in Japan that was nearly double that of
our average competitor (30% of net assets at year-end versus 19% for the
competitors), during a period in which Japanese stocks lagged the world
markets. (2) We held a relatively smaller position in the emerging markets of
the Pacific region and Latin America (9% versus 30%). As noted above, these
markets earned outstanding returns in 1993.
Looking at the International Portfolio's long-term record--we have now
completed our tenth full year of operations--the comparison of our results is
more favorable. The chart on page 5 presents the returns of the Portfolio and
our two competitive benchmarks over the past decade. This table summarizes the
results:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Total Return
----------------------------
Ten Years Ended
December 31, 1993
----------------------------
Cumulative Annual Rate
- -----------------------------------------------------------------------------
<S> <C> <C>
TRUSTEES' INTERNATIONAL PORTFOLIO +347% +16.2%
- -----------------------------------------------------------------------------
AVERAGE INTERNATIONAL FUND +337% +15.9%
- -----------------------------------------------------------------------------
MSCI EAFE INDEX +430% +18.1%
- -----------------------------------------------------------------------------
</TABLE>
You can see that, in spite of our substantial shortfall to the average
international fund in 1993, we still hold a marginal long-term advantage over
the competitors.
Considering that each year we bring to the table an expense ratio
advantage of 1.2% (0.4% for the Portfolio versus 1.6% for the competitors), we
should be able to extend our advantage in the ensuing years. As before, I
remind you that the figures in the table compare fund net asset values plus any
dividends and capital gains, and completely ignore the sales loads charged on
purchases or
6
<PAGE> 9
redemptions by many international funds. Investors incur these loads in the
ownership of some 58 of the 161 international funds in existence.
The chart also shows that the EAFE Index has proved to be tough
competition for all international mutual funds, including our Portfolio. Of
course, the Index advantage is even greater in international markets, since
mutual fund operating expenses and portfolio transaction costs are generally
quite high, totaling perhaps as much as 3% or more annually. It is quite a
handicap. Some of this cost "drag," of course, was offset over the past decade
by the relatively smaller position that most international mutual funds held in
Japanese stocks, which underperformed their European cousins by some two
percentage points annually.
* IN SUMMARY
The past year was a banner period for foreign markets--whether measured in
local currencies or in U.S. dollar terms--and a good year for U.S. markets. In
our view, however, to simply extrapolate these results into the future would be
unwise, inviting excessive expectations and ultimately disappointment. In too
many cases, the disappointment would be followed by liquidation at precisely
the wrong time. I recommend that you accept the proposition that "the financial
markets giveth and the financial markets taketh away"--to express a
biblical-like but blunt statement of what we all know to be a fact--and invest
accordingly.
As always, we recommend that the Portfolios of Vanguard/Trustees'
Equity Fund represent just a portion of your total investment account, which
should be prudently balanced among stocks, bonds, and short-term reserves in
proportions that fit your own financial circumstances and risk profile.
Assuming that you have maintained this balance, the best advice is nearly
always to "stay the course," and focus not on annual fluctuations in absolute
and relative performance, but on the long term.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
January 28, 1994
Note: Mutual fund data from Lipper Analytical Services, Inc.
7
<PAGE> 10
AVERAGE ANNUAL TOTAL RETURNS
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE
PORTFOLIOS (PERIODS ENDED DECEMBER 31, 1993) ARE AS FOLLOWS:
<TABLE>
PORTFOLIO (INCEPTION DATE) 1 YEAR 5 YEARS 10 YEARS
-------------------------------- ------ ------- --------
<S> <C> <C> <C>
U.S. PORTFOLIO (1/31/80) +17.24% +11.16% +11.24%
INTERNATIONAL PORTFOLIO (5/16/83) +30.49 + 7.68 +16.16
</TABLE>
EACH PORTFOLIO'S TEN-YEAR AVERAGE ANNUAL TOTAL RETURN INCLUDES A CAPITAL RETURN
AND AN INCOME RETURN. FOR THE U.S. PORTFOLIO, THE CAPITAL RETURN IS +7.70% AND
THE INCOME RETURN IS +3.54%. FOR THE INTERNATIONAL PORTFOLIO, THE CAPITAL
RETURN IS +12.86% AND THE INCOME RETURN IS +3.30%. ALL OF THESE DATA REPRESENT
PAST PERFORMANCE. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST.
8
<PAGE> 11
REPORT FROM GEEWAX, TERKER & COMPANY
We are pleased to report that the U.S. Portfolio of Vanguard/Trustees' Equity
Fund returned +17.2% for 1993, surpassing the +10.1% return achieved by the
unmanaged Standard & Poor's 500 Index. Most of our outperformance came during
the first half of the year; the Fund's +5.0% return for the second half was
only marginally above that of the market (+4.9% for the S&P 500). All in all,
returns for the year were quite satisfactory. (Please see Chairman's letter for
details on performance.)
The market environment during the second half of the year was extremely
hostile for the types of stocks in which we invest, namely, stocks that (1)
have been reporting good earnings, (2) possess a high degree of financial
quality, and (3) are experiencing increases in estimates of future earnings. In
addition to a hostile market environment, we entered the last part of 1993 with
some "tired" names, were overweighted in financial stocks, and had just started
a rotation of our holdings in the Portfolio. This shift involved an increase in
our growth stock holdings along with a change in the complexion of our value
holdings, from utilities and financials to consumer durables and cyclicals.
With an unaccommodating market, a tired portfolio, and a slow rotation, we were
happy to even be near the broad market, let alone add a little outperformance,
in the latter part of 1993.
We are continuing the above-mentioned strategy changes for your
Portfolio. Growth stocks currently compose approximately 40% of net assets, and
most are medium and small capitalization stocks. The financial sector is only
13% of net assets--down from 22% at the beginning of the year; utilities
compose approximately 3.5% of net assets. The catalyst for excess returns in
these two sectors--namely, falling interest rates--has disappeared, and the
risk-reward relationship is no longer favorable.
We have a big bet on technology and capital equipment (our productivity
and competitiveness theme), and we are increasing our consumer bet (our
stabilized profit margin and low valuation theme). This rotation will continue
for the foreseeable future, and we are confident that the changes being made
are positioning us well for the upcoming investment climate.
The current market environment--while not hostile to our style of
investing--is not as rewarding as it was during the first half of 1993. Still,
the Fund continues to move ahead of the S&P 500 Index. We are finding good
growth prospects and reasonable valuations, and we hope to continue avoiding
the ever-increasing "minefields" that accompany a steadily increasing market.
If this trend continues, we expect 1994 to be a successful year as well.
Respectfully,
Geewax, Terker & Company
January 21, 1994
9
<PAGE> 12
REPORT FROM BATTERYMARCH FINANCIAL MANAGEMENT
* PERFORMANCE
The total return for the International Portfolio in 1993 was +30.5%, compared
with +33.1% for our performance benchmark, the unmanaged MSCI Europe,
Australia, and Far East ("EAFE") Index.
The U.S. economy is enjoying a continued mild recovery. In most other
developed economies, however, the recession emerged later and still continues.
In Japan, the last to enter into recession, economic activity is shrinking.
Your Portfolio continues to hold a significant position in the Japanese market,
which we believe includes many attractively priced companies in this period of
economic recession.
The shortage of outstanding growth opportunities in the developed world
encouraged considerable foreign investment in developing markets, particularly
in Asia. A market-weighted index of MSCI country returns in the Pacific,
excluding Japan, was up a spectacular +53% during the second half of 1993. Our
lower exposure to this area largely explains our unfavorable comparison with
the results of the average international fund.
* CURRENT STRATEGIC THEMES
Corporate Value--Focuses on companies with high ratios of capitalized
net cash flow-to-price, ranked within their industries and worldwide.
Early Database--Identifies stocks where increasing amounts of
fundamental and pricing data are available to permit quantitative screening for
value. Standard global data services are supplemented by information supplied
by brokers. These companies are in the more advanced developing markets of
Greece, Korea, Malaysia, Mexico, Portugal, Thailand, and Turkey.
Global Competitors--Identifies companies with good profitability and
strong balance sheets within their industries worldwide, and includes a number
of medium-sized companies. A buy/hold/sell discipline combines value and
earnings momentum indicators.
Regional Relative Score--Focuses on stocks with low multiples of
price-to-cash flow, earnings, sales, and other measures of value, ranked within
economic sector and geographic region.
Traditional Value--Identifies smaller capitalization stocks with
attractive combinations of low price-to-book ratios, low price-to-earnings
ratios, and high dividend yields, ranked within country and economic sector.
* STRATEGY REVIEW
Your Portfolio began 1993 with a balance of strategic themes, each of which
sought to profit from inefficiencies in specific market environments. We had
observed a developing preference for financial strength as a safe haven from
uncertainty--in a world we viewed as near economic depression, and facing
financial crisis and political instability.
We held out-of-favor, low price-to-book stocks in our Traditional Value
strategy. Global Competitors was typified by large, successful companies in the
drug, food, and electronics industries. Corporate Value and Regional Relative
Score fell between these extremes. Early Database strategy focused on companies
in the more advanced developing markets.
As events turned out, our most successful strategic themes were
Traditional Value and Early Database. Global Competitors, which focused on
competitively successful companies in developed markets, had unexciting returns
in this environment.
Although 1993 was a year of continued recession in the developed
countries, falling interest rates worldwide helped spark strong stock markets.
At the same time, many developing countries enjoyed high sustained growth. In
effect, they excelled by combining modern market- oriented capitalism with
radically lower wage structures.
We believe the continued surprises caused by industrial restructuring,
together with growing relief from expected financial crisis and the beginning
of recovery, will work in favor of small stock, value-oriented investing during
1994.
Respectfully,
Batterymarch Financial Management
January 21, 1994
10
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TOTAL INVESTMENT RETURN
The table below illustrates the results of a single share investment in the
U.S. PORTFOLIO for the period from January 31, 1980, to December 31, 1993.
During this period, stock prices fluctuated and were higher at the end than at
the beginning. These results should not be considered a representation of the
dividend income or capital gain or loss which may be realized from an
investment made in the Portfolio today.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN
- -----------------------------------------------------------------------------------------------------------------
Annual Percentage Change*
Value with Income --------------------------
Year Ended Net Asset Income Capital Gains Dividends & Capital U.S. S&P 500
December 31 Value Dividends Distributions Gains Reinvested Portfolio Index
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INITIAL (1/80) $25.00 -- -- $ 25.00 -- --
- -----------------------------------------------------------------------------------------------------------------
1980 26.95 $ 1.49 $ .84 29.35 + 17.4% + 24.6%
- -----------------------------------------------------------------------------------------------------------------
1981 27.05 1.80 .87 32.37 + 10.3 - 4.9
- -----------------------------------------------------------------------------------------------------------------
1982 30.56 1.75 1.19 40.42 + 24.9 + 21.5
- -----------------------------------------------------------------------------------------------------------------
1983 35.72 1.52 2.15 52.19 + 29.1 + 22.5
- -----------------------------------------------------------------------------------------------------------------
1984 30.56 1.57 2.51 50.68 - 2.9 + 6.2
- -----------------------------------------------------------------------------------------------------------------
1985 31.15 1.45 4.10 61.09 + 20.5 + 31.6
- -----------------------------------------------------------------------------------------------------------------
1986 28.69 1.16 6.15 70.41 + 15.3 + 18.6
- -----------------------------------------------------------------------------------------------------------------
1987 22.77 .72 5.88 71.59 + 1.7 + 5.2
- -----------------------------------------------------------------------------------------------------------------
1988 26.35 .97 1.00 89.23 + 24.6 + 16.5
- -----------------------------------------------------------------------------------------------------------------
1989 26.15 .88 3.81 104.61 + 17.2 + 31.6
- -----------------------------------------------------------------------------------------------------------------
1990 22.90 1.08 -- 95.90 - 8.3 - 3.1
- -----------------------------------------------------------------------------------------------------------------
1991 28.20 .71 -- 121.38 + 26.6 + 30.4
- -----------------------------------------------------------------------------------------------------------------
1992 28.43 .67 .86 129.21 + 6.5 + 7.6
- -----------------------------------------------------------------------------------------------------------------
1993 30.65 .43 2.16 151.49 + 17.2 + 10.1
- -----------------------------------------------------------------------------------------------------------------
LIFETIME $16.20 $31.52 + 506.0% + 605.7%
- -----------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN + 13.8% + 15.1%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
*Adjusted to include reinvestment of income dividends and any capital gains
distributions both for the Portfolio and the Index.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
11
<PAGE> 14
TOTAL INVESTMENT RETURN (continued)
The table below illustrates the results of a single share investment in the
INTERNATIONAL PORTFOLIO for the period from May 31, 1983, to December 31, 1993.
During this period, stock prices fluctuated and were higher at the end than at
the beginning. These results should not be considered a representation of the
dividend income or capital gain or loss which may be realized from an
investment made in the Portfolio today.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Period Per Share Data Total Investment Return
- -----------------------------------------------------------------------------------------------------------------
Annual Percentage Change*
Value with Income -----------------------------
Year Ended Net Asset Income Capital Gains Dividends & Capital International EAFE
December 31 Value Dividends Distributions Gains Reinvested Portfolio Index
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INITIAL (5/83) $25.00 -- -- $ 25.00 -- --
- -----------------------------------------------------------------------------------------------------------------
1983 25.98 $ .44 $ .02 26.46 + 6.6% + 11.9%
- -----------------------------------------------------------------------------------------------------------------
1984 24.59 1.09 .11 26.25 - 0.8 + 8.0
- -----------------------------------------------------------------------------------------------------------------
1985 30.91 .93 2.54 36.85 + 40.3 + 56.9
- -----------------------------------------------------------------------------------------------------------------
1986 38.68 1.03 6.55 55.53 + 50.7 + 70.2
- -----------------------------------------------------------------------------------------------------------------
1987 28.66 .75 18.32 68.79 + 23.9 + 25.3
- -----------------------------------------------------------------------------------------------------------------
1988 28.27 .99 4.58 81.71 + 18.8 + 28.9
- -----------------------------------------------------------------------------------------------------------------
1989 32.44 .79 2.08 102.93 + 26.0 + 11.0
- -----------------------------------------------------------------------------------------------------------------
1990 26.58 .95 1.01 90.31 - 12.3 - 23.0
- -----------------------------------------------------------------------------------------------------------------
1991 27.78 .77 .61 99.30 + 10.0 + 12.9
- -----------------------------------------------------------------------------------------------------------------
1992 24.44 .67 .28 90.64 - 8.7 - 11.5
- -----------------------------------------------------------------------------------------------------------------
1993 31.04 .81 -- 118.28 + 30.5 + 33.1
- -----------------------------------------------------------------------------------------------------------------
LIFETIME $9.22 $36.10 + 376.8% + 492.8%
- -----------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN + 15.9% + 18.3%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
*Adjusted to include reinvestment of income dividends and any capital gains
distributions both for the Portfolio and the Index.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
12
<PAGE> 15
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS
December 31, 1993
<TABLE>
<CAPTION>
Market
Value
U.S. PORTFOLIO Shares (000)+
- -----------------------------------------------------------------------------------------
COMMON STOCKS (96.7%)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ADC Telecommunications, Inc. 7,000 $ 248
AGCO Corp. 7,000 236
* ALC Communications 18,600 535
Acclaim Entertainment Inc. 5,400 114
Aflac, Inc. 20,500 584
Air Express International Corp. 5,000 99
Alleghany Corp. 300 43
Allegheny Power System, Inc. 6,000 159
Allstate Corp. 24,000 708
American Barrick Resources 29,500 841
American Brands, Inc. 17,500 582
American Express Co. 28,200 871
* American Healthcare 6,000 55
American National Insurance Co. 5,500 282
American Power Conversion Corp. 14,500 341
American Telephone &
Telegraph Co. 3,800 200
Ameritech Corp. 12,200 936
* Amgen, Inc. 12,600 624
Applied Materials, Inc. 22,300 864
* Arbor National Holdings, Inc. 5,000 90
Armstrong World Industries Inc. 15,000 799
* Arrow Electronics, Inc. 15,400 643
Ashland Oil, Inc. 3,500 119
Atlantic Energy, Inc. 2,600 57
* Atmel Corp. 5,000 172
Autodesk, Inc. 2,000 90
Avnet, Inc. 20,500 800
* BMC Software, Inc. 2,900 138
The Bank of New York Co., Inc. 5,200 296
Bankers Life Holding Corp. 20,100 432
Barnett Banks of Florida, Inc. 5,100 212
Baroid Corp. 4,000 33
Bear Stearns Co., Inc. 12,925 283
Beckman Instruments 17,000 465
Bell Atlantic Corp. 13,000 767
BellSouth Corp. 11,800 683
* Biogen, Inc. 4,500 179
Black & Decker Corp. 600 12
Blockbuster Entertainment Corp. 26,800 821
Boatmen's Bancshares, Inc. 18,000 538
Bombay Co. 6,500 292
Brinker International, Inc. 9,100 419
Brunswick Corp. 24,800 446
Burlington Coat Factory
Warehouse Corp. 19,600 448
CBS, Inc. 3,500 1,010
CML Group, Inc. 10,500 248
* Cabletron Systems, Inc. 6,300 709
Callaway Golf Co. 6,000 320
Canadian Pacific Ltd. 12,000 196
Cardinal Distribution, Inc. 5,800 273
Caterpillar, Inc. 14,000 1,246
Centex Corp. 5,000 210
* Central Sprinkler Corp. 7,000 96
* Champion Enterprises, Inc. 2,200 38
The Chase Manhattan Corp. 3,001 102
Chevron Corp. 29,500 2,570
Cheyenne Software, Inc. 10,000 276
Chrysler Corp. 27,200 1,448
Cincinnati Bell, Inc. 16,900 304
Cincinnati Gas & Electric Co. 8,000 220
* Cirrus Logic 11,500 424
Cisco Systems, Inc. 5,500 355
* Citicorp 6,300 232
* Clark Equipment Co. 12,000 629
Clayton Homes Inc. 13,750 333
Coca-Cola Bottling Co. 6,000 219
Coca-Cola Enterprises, Inc. 28,600 436
* Coleman Inc. 8,000 224
* Coltec Inc. 9,400 176
Columbia Healthcare Corp. 5,900 196
* Compaq Computer Corp. 20,000 1,480
Computer Associates
International, Inc. 33,400 1,336
Comsat Corp. 100 3
Consolidated Edison Co.
of New York, Inc. 18,900 607
* Consolidated Freightways, Inc. 22,500 532
Consolidated Natural Gas Co. 3,000 141
Copley Pharmaceutical, Inc. 838 33
CoreStates Financial Corp. 15,200 397
* Creative Technology 23,400 731
Crestar Financial Corp. 5,000 209
Culp, Inc. 10,000 248
Cummins Engine Co., Inc. 18,200 978
Cyprus Amax 17,400 450
DQE Inc. 28,000 966
* DSC Communications Corp. 14,000 859
Danaher Corp. 6,500 247
Danka Business Systems PLC ADR 2,400 95
Dean Witter Discover and Co. 4,500 156
Deere & Co. 6,000 444
Devon Energy Corp. 4,000 83
Diamond Shamrock, Inc. 18,000 437
Dollar General Corp. 3,125 94
* Dr. Pepper/Seven Up Cos., Inc. 5,000 120
ECI Telecom Ltd. 3,000 76
EMC Corp. 26,000 429
E-Systems, Inc. 9,900 429
Ecolab, Inc. 12,600 567
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------------------
<C> <C> <C>
Elco Industries Inc. 5,000 $ 99
Enron Oil & Gas Co. 6,200 242
Entergy Corp. 3,000 108
Ethyl Corp. 6,000 105
Exxon Corp. 4,800 302
* Federal Express Corp. 8,500 602
Federal National Mortgage Assn. 2,400 188
Fingerhut Co. 18,000 506
First Data Corp. 9,500 387
First Interstate Bancorp. 4,400 282
First USA Inc. 6,000 214
Fleet Financial Group, Inc. 3,100 103
Fleming Cos., Inc. 8,300 205
Ford Motor Co. 14,000 903
* Foundation Health Co. 16,000 496
GATX Corp. 11,500 469
* Genentech Inc. 8,100 409
* General Instrument 11,000 617
General Motors Corp. 37,100 2,036
General Motors Corp. Class H 8,400 327
General Nutrition Cos., Inc. 3,000 84
General Public Utilities Corp. 2,200 68
Gentex Corp. 2,000 70
Giant Food, Inc. Class A 24,300 626
* Giant Industries, Inc. 6,000 62
* Gibraltar Packaging 20,000 160
P.H. Glatfelter Co. 2,000 37
Glenayre Technologies, Inc. 10,000 428
The B.F. Goodrich Co. 6,900 278
The Goodyear Tire & Rubber Co. 6,100 279
Grumman Corp. 24,300 960
GTE Corp. 4,000 140
* GTECH Holdings Corp. 7,000 229
* Guest Supply, Inc. 10,000 138
* Gundle Environmental
Systems, Inc. 24,000 177
Heilig-Meyers Co. 11,925 465
Hillenbrand Industries, Inc. 7,000 291
Homestake Mining Co. 15,600 343
Horace Mann Educators Corp. 2,000 50
Humana, Inc. 20,000 353
IDB Communications Group, Inc. 4,100 223
IES Industries, Inc. 3,900 122
IMCERA Group, Inc. 7,000 235
Informix Corp. 7,500 156
Integra Financial Corp. 5,200 224
Intel Corp. 34,900 2,164
Intelligent Electronics Inc. 12,000 329
Interface, Inc. 5,000 75
International Game Technology 7,500 221
Johnson Controls, Inc. 9,400 499
Kansas City Southern Industries, Inc. 5,000 258
* Kendall International Inc. 11,600 531
* Kohls Corp. 6,000 302
LAM Research Corp. 12,000 387
* LSI Logic Corp. 7,000 112
Lands' End, Inc. 12,400 570
Leggett & Platt, Inc. 10,000 500
Liberty Media Corp. Class A 2,000 58
Lincoln National Corp. 3,200 139
Linear Technology Corp. 14,900 577
Lockheed Corp. 8,300 566
Loctite Corp. 6,700 248
* Lone Star Technologies, Inc. 3,000 23
Longview Fiber Co. 12,700 287
* Lotus Development Corp. 6,500 356
Lowes Cos., Inc. 11,300 670
MBIA, Inc. 9,000 566
MCI Communications Corp. 7,400 208
MCN Corp. 13,100 455
Mapco Inc. 9,700 593
Marion Merrell Dow, Inc. 27,200 490
Marvel Entertainment Group 9,000 245
Mascotech Inc. 14,000 390
Mattel, Inc. 18,500 511
May Department Stores Co. 23,000 906
* McCaw Cellular
Communications, Inc. 7,000 352
McDermott International, Inc. 9,400 249
McDonnell Douglas Corp. 6,300 674
Mercantile Bancorp, Inc. 6,000 271
Merck & Co., Inc. 7,252 249
Mercury Finance Co. 4,500 86
Mercury General Corp. 3,500 105
Merrill Lynch & Co., Inc. 31,200 1,310
Micron Technology Inc. 8,300 385
* Midlantic Corp. 14,500 370
Midwest Grain Products 6,250 180
Mobil Corp. 19,800 1,564
Molex, Inc. 10,000 355
Monsanto Co. 6,000 440
J.P. Morgan & Co., Inc. 7,700 534
Morgan Stanley Group, Inc. 8,600 608
Motorola, Inc. 17,800 1,644
* Multimedia, Inc. 500 17
Murphy Oil Corp. 26,900 1,076
* Nabors Industries, Inc. 7,000 55
Nalco Chemical, Inc. 10,300 386
Nashua Corp. 10,000 275
National Fuel & Gas Co. 4,800 163
National Medical Enterprises, Inc. 9,500 133
* National Semiconductor Corp. 36,200 584
New England Electric System 19,700 771
Newbridge Networks Corp. 16,000 874
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------------------
<S> <C> <C>
* Nine West Group, Inc. 13,500 $ 398
Office Depot, Inc. 13,000 437
Ogden Corp. 9,500 216
Oracle Systems Corp. 43,000 1,236
* Owens-Illinois, Inc. 32,400 401
Oxford Health Plan 6,500 345
PNC Bank Corp. 3,300 96
PaineWebber Group, Inc. 23,300 629
Panhandle Eastern Corp. 35,100 829
J.C. Penney Co., Inc. 15,700 822
Pennzoil Co. 4,400 234
Potash Corp. of Saskatchewan, Inc. 35,200 902
Premark International, Inc. 6,700 538
President Riverboat Casinos, Inc. 1,500 33
Primerica Corp. 14,966 582
Promus Co., Inc. 19,500 892
Pulte Corp. 10,800 392
* Pyxis Corp. 7,700 576
* Qualcomm, Inc. 8,000 424
Ralston Continental Baking 1,920 16
Republic New York Corp. 5,800 271
* Revco Drug Stores, Inc. 34,400 499
Reynolds & Reynolds Class A 3,100 141
Rochester Telephone Corp. 12,100 546
Rockwell International Corp. 6,000 223
Rouse Co. 7,300 130
Royal Caribbean Cruises, Ltd. 22,500 602
Rubbermaid, Inc. 3,000 104
* SPS Transaction Services 1,000 60
* Safeway, Inc. 43,500 924
Scana Corp. 1,000 50
Schering-Plough Corp. 7,000 480
Charles Schwab Corp. 10,000 324
Seagull Energy Corp. 11,900 302
Sears, Roebuck & Co. 10,000 528
Shaw Industries, Inc. 4,000 102
Shawmut National Corp. 9,000 196
Silicon Graphics, Inc. 32,000 792
Snapple Beverage Corp. 1,200 32
* Sofamor/Danek Group Inc. 17,200 572
Sonat, Inc. 24,600 710
Southern New England
Telecom Corp. 20,200 730
Southtrust Corp. 10,000 186
Southwestern Bell Corp. 10,000 415
Standard Federal Bank 13,400 402
Sun Co., Inc. 6,100 179
Superior Industries International, Inc. 6,300 271
SuperValu, Inc. 6,700 243
* Swift Energy Co. 4,000 38
Sybase, Inc. 2,000 84
TJX Cos., Inc. 3,200 93
Tellabs, Inc. 4,500 $ 210
Texaco, Inc. 17,000 1,099
Texas Instruments, Inc. 6,900 438
* 3 Com Corp 14,000 656
Transamerica Corp. 1,000 57
Ultramar Corp. 17,000 431
Union Carbide Corp. 12,300 275
United Healthcare Corp. 15,000 1,138
U.S. Healthcare, Inc. 14,200 813
Unocal Corp. 10,000 279
Upjohn Co. 22,300 649
USLIFE Corp. 15,000 576
Valspar Corp. 2,800 106
* Value Health, Inc. 4,000 126
Seattle (WA) Mutual Savings Bank 12,150 290
Wellfleet Communications 7,500 482
Wells Fargo & Co. 3,100 401
Western Gas Resources, Inc. 5,500 180
Whirlpool Corp. 21,600 1,436
Wisconsin Public Service Corp. 7,500 252
Woolworth Corp. 14,000 355
* Xilinx, Inc. 8,200 387
- -----------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $101,968) 114,800
- -----------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.6%)
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 3.26%, 1/3/94
(Cost $4,305) $4,305 4,305
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(Cost $106,273) 119,105
- -----------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.3%)
Other Assets--Notes C and E 960
Liabilities--Note E (1,321)
----------
(361)
- -----------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------
Applicable to 3,874,011 outstanding
shares of beneficial interest
(unlimited authorization) $118,744
- -----------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $30.65
=========================================================================================
+See Note A to Financial Statements.
*Non-Income Producing Security.
</TABLE>
15
<PAGE> 18
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
AT DECEMBER 31, 1993,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------
Amount Per
(000) Share
-------- -------
<S> <C> <C>
Paid in Capital--Note F $105,771 $27.30
Undistributed Net
Investment Income--Note F 6 --
Accumulated Net
Realized Gains--Note F 135 .04
Unrealized Appreciation
of Investments 12,832 3.31
- -----------------------------------------------------------------------------------------
NET ASSETS $118,744 $30.65
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
INTERNATIONAL PORTFOLIO Shares (000)+
- -----------------------------------------------------------------------------------------
COMMON STOCKS (96.7%)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
AUSTRALIA (3.5%)
Broken Hill Proprietary Ltd. 179,800 $ 2,145
Coles Myer Ltd. 1,209,150 4,588
CSR Ltd. 1,334,700 4,403
Gio Australia Holdings Ltd. 525,000 1,219
Lend Lease Corp. 102,300 1,233
Mayne Nickless Ltd. 190,400 1,079
Pacific Dunlop Ltd. 763,900 2,805
Santos Ltd. 2,195,600 5,752
Howard Smith Ltd. 845,610 3,558
Stockland Trust Group 2,607,300 6,371
Westfield Trust (Units) 610,300 1,156
------------
GROUP TOTAL 34,309
------------
- -----------------------------------------------------------------------------------------
AUSTRIA (.3%)
* Austrian Airlines 10,000 1,448
Constantia Industrie
Holdings AG 9,000 748
Weinerberger
Baustoffindustrie AG 1,525 518
------------
GROUP TOTAL 2,714
------------
- -----------------------------------------------------------------------------------------
BELGIUM
Kon Bijenkorf 5,000 270
------------
- -----------------------------------------------------------------------------------------
CANADA (3.4%)
American Barrick Resources 38,000 1,083
* Atcor Resources Ltd. 10,000 34
Bank of Montreal 58,400 1,218
Bank of Nova Scotia Halifax 49,500 1,145
BCE, Inc. 38,900 1,357
* B.C. Pacific Capital Corp. Class A 29,000 4
* B.C. Pacific Capital Corp. Class B 52,840 8
Canadian Imperial
Bank of Commerce 58,000 1,446
Canadian Marconi Co. 30,700 315
Canadian Natural Resources Ltd. 21,300 289
Canadian Pacific Ltd. 18,900 309
Canbra Foods 10% Pfd. 262 1
Celanese 8,700 411
Chum Ltd. Class B 48,200 737
Conwest Exploration Co. 18,000 287
Corporate Foods Ltd. 26,900 371
Dofasco Inc. 56,700 996
Dupont Canada 20,400 759
Greenalls 199,000 1,398
Harrowston Inc. 377 1
Hayes Dana Ltd. 26,900 366
Hemlo Gold Mining 90,900 995
Imperial Oil Ltd. 48,127 1,627
Jean Couto Group Inc. Class A 48,200 400
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Lac Minerals Ltd. 116,100 $ 1,016
Lafarge Canada Inc. Pfd. 26,400 588
* Loblaw Cos. Ltd. Class A 43,300 748
London Insurance Group Inc. 25,000 479
Magna International Inc. Class A 15,800 786
Maple Leaf Foods Inc. 106,400 1,035
Moore Corp. Ltd. 49,800 952
Newbridge Networks Corp. 19,500 1,065
* Northstar Energy Corp. 16,200 318
Nowsco Well Services Ltd. 29,200 419
Oshawa Group Ltd. 30,800 494
Pancanadian Petroleum Ltd. 21,400 616
Pegasus Gold 31,600 695
Petro Canada 75,000 680
Placer Dome Group, Inc. 72,900 1,813
* Poco Petes Ltd. 91,700 615
Potash Corp. of Saskatchewan, Inc. 30,000 769
Power Corp. 58,300 936
* Prairie Oil Royalties 33,900 301
* Premdor Inc. 25,000 285
Royal Bank Of Canada 84,500 1,843
Shaw Industries Class A 34,800 328
Transalta Corp. 92,000 1,060
Winpak Ltd. 17,100 333
------------
GROUP TOTAL 33,731
------------
- -----------------------------------------------------------------------------------------
DENMARK (.9%)
ISS (International Service Systems) 191,400 6,394
* Jyske Bank 33,400 1,868
------------
GROUP TOTAL 8,262
------------
- -----------------------------------------------------------------------------------------
FRANCE (6.4%)
Alcatel Alsthom 16,865 2,405
BIC 20,300 4,538
Cie. Generale des Eaux 8,900 4,406
Comptoirs Modernes 16,000 4,796
Eridania Beghin Say 3,900 600
Finextel 81,500 2,208
Fromageries Bel 12,300 10,322
Navigation Mixte 21,100 3,845
Nord Est SA 52,400 1,482
Sagem 27,200 13,359
Saint Gobain 58,600 5,836
Sovac-Credit Mobilier 9,100 3,027
Total SA 103,500 5,657
------------
GROUP TOTAL 62,481
------------
- -----------------------------------------------------------------------------------------
GERMANY (7.7%)
Altana Ind. AG 16,900 6,375
Bayer Vereins Bank 20,500 6,883
Bayerische Hypotheken &
Wechsel Bank 19,200 5,816
Berliner Handels &
Frankfurter Bank 18,900 5,714
Cassella AG 200 271
Commerzbank AG 31,400 6,998
Douglas Holding 9,800 3,132
Hoechst AG 34,100 6,088
Ikb-AG (Deut. Industriebank) 7,600 1,383
Industrie-Werke Karlsruhe
Augsburg AG 18,400 3,931
Man AG 30,300 7,294
Rheinisch-Westfaelisches
Elektrizitats Werk AG 25,700 7,918
Rheinmetall Berlin 12,700 2,399
Varta AG 16,200 2,939
Veba AG 22,100 6,643
Wurtt Metallwaren 6,900 1,657
------------
GROUP TOTAL 75,441
------------
- -----------------------------------------------------------------------------------------
GREECE (1.2%)
Alpha Leasing 45,870 1,343
Delta Dairy 55,390 1,969
* Etva Leasing 15,770 443
Ergo Bank 33,210 1,212
Elais Oleaginous 17,905 1,307
Hellenic Bottling Co. (Bearer) 57,700 2,024
Michaniki 33,480 2,081
* Titan Cement 47,680 1,531
------------
GROUP TOTAL 11,910
------------
- -----------------------------------------------------------------------------------------
HONG KONG (4.7%)
Cheung Kong Holdings 612,000 3,742
China Light and Power 600,000 4,387
Cross-Harbor Tunnel Co. 1,215,000 2,877
Hang Seng Bank 717,770 7,013
Hong Kong Aircraft 100,000 621
Hong Kong Realty & Trust
Class A 2,465,000 8,613
Hong Kong
Telecommunication Ltd. 3,418,400 7,211
Johnson Electric Holdings 830,000 2,127
Mandarin Oriental
International Ltd. 500,000 712
Orient Overseas International Ltd. 627,641 246
Peregrine 514,000 1,264
Swire Pacific Ltd. Class A 622,000 5,594
Tai Cheung Properties 706,200 1,488
Wharf Holdings Ltd. 800 4
------------
GROUP TOTAL 45,899
------------
- -----------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------------------
<S> <C> <C>
INDONESIA
Astra International 36,500 $ 386
Ayala Corp. Class B 125,000 255
Kalbe Farma 32,000 250
-----------
GROUP TOTAL 891
-----------
- -----------------------------------------------------------------------------------------
IRELAND (1.0%)
Allied Irish Bank 276,264 1,199
Bank of Ireland 135,200 587
Clondalkin Group 209,600 827
CRH PLC 263,600 1,393
Greencore 249,000 1,228
Irish Life 373,300 1,173
Jefferson Smurfit Group 439,900 1,909
Waterford Foods Class A 687,700 1,085
-----------
GROUP TOTAL 9,401
-----------
- -----------------------------------------------------------------------------------------
Italy (2.5%)
Banca Pop Novara 100,000 701
Banca Toscana 1,447,000 2,749
Banco Lariano 1,301,180 3,762
* Breda Ernesto Finanziaria 3,759,600 198
Caffaro SPA 542,500 503
Cementir SPA 443,333 391
Credito Fondiario 265,000 860
Finmeccanica SPA 1,133,940 1,020
Franco Tosi SPA 70,000 876
Gilardini 1,922,300 3,327
Italcable 1,163,600 6,410
Sirti SPA 589,500 3,354
-----------
GROUP TOTAL 24,151
-----------
- -----------------------------------------------------------------------------------------
JAPAN (30.1%)
AIDA Engineering 431,000 2,518
Aisin Seiki Co. 29,000 268
Aoki Construction Co. 202,000 742
Brother Industries Ltd. 1,204,000 4,477
Chubu Electric Power 133,600 3,400
Chugoku Electric Power Co. 216,500 5,082
Citizen Watch Co. 262,000 1,925
Dai Nippon Printing Co. Ltd. 408,000 5,813
Daido Steel Co. 362,000 1,317
Daikyo Inc. 240,000 1,763
Daiwa House Industries 279,000 3,750
Daiwa Securities Ltd. 418,000 4,682
Danto Corp. 40,000 459
Eisai Co., Ltd. 94,000 1,508
Fuji Photo Film Co. Ltd. 213,000 4,714
Gakken Co. 2,000 15
Hitachi Cable Ltd. 317,000 2,051
Hitachi Credit Corp. 480,000 7,526
Hokkaido Electric Power 191,800 4,623
Hokuriku Electric Power Co. 111,000 2,586
House Foods Inc. 497,000 10,643
Hoya Corp. 19,000 305
Itoham Food Co., Ltd. 166,000 1,297
Ito-Yokado Co. 149,000 6,809
Izumiya Co 3,000 47
Kajima Corp. 260,000 1,927
Kanegafuchi Chemical
Industry Co. Ltd. 20,000 95
Katakura Industries Co. 10,000 81
Kawasaki Heavy Industries Ltd. 422,000 1,320
Kinden Corp. 24,000 376
Kokuyo Co., Ltd. 40,000 788
Konica 200,000 1,127
Kyocera Corp. 42,000 2,220
Kyushu Electric Power 209,000 5,000
Maeda Corp. 269,000 2,410
Maeda Road Construction Co. Ltd. 187,000 3,535
Makita Electric Works 344,000 6,010
Marubeni Corp. 468,000 1,858
Marudai Food Co. 603,000 4,079
Marui 124,000 1,589
Matsushita Electric
Industries Co. Ltd. 25,000 334
Matsushita Electric Works Ltd. 173,000 1,566
Matsushita-Kotobuki Electric 98,000 2,406
Mitsubishi Material 397,000 1,412
Murata Manufacturing Co. Ltd. 52,000 1,784
New Japan Securities Co. Ltd. 1,554,000 6,892
Nicherei 180,000 1,143
Nichicon Corp. 510,000 5,575
Nintendo Co. 49,000 3,152
Nippon Denso Co. Ltd. 361,000 5,305
Nippon Express Co., Ltd. 372,000 3,200
Nippon Shokubai 93,000 654
Nippon Steel Corp. 1,526,000 4,198
Nippon Yakin Kogyo 285,000 955
Nisshin Steel Co. 243,000 708
Nisshinbo Industries 96,000 705
Nitto Denko Corp. 178,000 1,946
Nomura Securities Co. Ltd. 344,000 5,517
NTN Tokyo-Bearing Co. 264,000 1,223
Okumura Corp. 575,000 4,446
Ono Pharmaceutical Co. Ltd. 48,000 2,086
Onward Kashiyama Co. 1,557,000 14,788
Orient Corp. 201,000 1,219
Ricoh Co. 805,000 5,186
Royal Co. Ltd. 245,000 2,415
Seino Transportation Co. Ltd. 258,000 3,699
Sekisui Chemical Co. 427,000 3,826
Sekisui House Ltd. 234,000 2,705
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Shikoku Electric Power 49,200 $ 1,181
Shimizu Construction Corp. 85,000 591
Showa Shell Sekiyu 241,000 2,483
Sony Corp. 259,600 12,817
Stanley Electric Co. Ltd. 68,000 378
Sumitomo Electric Co. 322,000 3,751
Sumitomo Metal Industries 921,000 2,179
Sumitomo Rubber Industries 72,000 526
Sumitomo Warehouse Co. Ltd. 228,000 1,377
Suzuki Motor 50,000 470
Taisei Construction Corp. 1,066,000 6,056
Taisho Pharmaceuticals 223,000 4,296
Taiyo Yuden Co. 95,000 726
Takashimaya Co. 72,000 716
TDK Corp. 111,000 3,760
Teijin Ltd. 173,000 628
Teikoku Oil Co., Ltd. 266,000 1,497
Toho Co., Ltd. 9,000 1,403
Tokyo Style Co. 411,000 5,929
Tokyu Construction 196,000 890
Tonen Corp. 115,000 1,597
Toyo Trust & Banking 3,000 27
Toyota Motor Corp. 760,000 12,121
Ube Industries Ltd. 395,000 1,041
UNY Corp. 285,000 3,243
Wacoal Corp. 1,126,000 13,015
Yamanouchi Pharmaceuticals Ltd. 273,000 4,917
Yamatake-Honeywell Co. 415,000 5,131
Yasuda Trust and Banking Co. Ltd. 504,000 3,297
-------------
GROUP TOTAL 295,823
-------------
- -----------------------------------------------------------------------------------------
MALAYSIA (1.5%)
AMMB Holdings Bhd. 278,000 2,559
Ekran Bhd. 193,200 1,219
Genting Bhd. 153,000 2,130
Genting International 3,800 10
Hong Leong Industries Bhd. 193,000 1,118
IJM Corp. Bhd. 208,000 826
Malaysian International Shipping 398,000 1,477
Nestle Malaysia Bhd. 177,000 1,117
Sime Darby Bhd. 512,000 1,435
Telekom Malaysian Bhd. 83,000 681
Tenaga Nasional Bhd. 49,000 351
Uniphone Telecommunications 243,000 1,533
-------------
GROUP TOTAL 14,456
-------------
- -----------------------------------------------------------------------------------------
MEXICO (1.4%)
Bimbo 2 198,000 1,906
Cementos Mexicanos SA Class B 63,100 1,881
Cifra SA de CV 524,000 1,572
Empresas ICA 58,800 1,650
* Grupo Carso 103,000 1,124
* Grupo Financiero Bancomer
SA de CV Class C 692,000 1,457
* Grupo Posadas SA Series L 1,422,500 1,374
Kimberly Clark de Mexico
SA Class A 91,000 1,705
Telefonos de Mexico 430,200 1,447
-------------
GROUP TOTAL 14,116
-------------
- -----------------------------------------------------------------------------------------
NETHERLANDS (5.1%)
ABN Amro Holding NV 188,900 6,954
AEGON NV 120,500 6,545
Akzo NV 33,000 3,194
Amev NV 161,600 7,155
Bolswessanen 62,500 1,480
Grolsch NV 56,000 1,254
Hollandsche Beton Groep NV 7,600 1,056
Innovest 35,900 1,347
Royal Dutch Petroleum 53,700 5,643
Telegraaf Holdings 59,600 4,882
Unilever NV 50,900 5,896
Volmac Software 70,000 750
Wereldhave 68,400 4,173
-------------
GROUP TOTAL 50,329
-------------
- -----------------------------------------------------------------------------------------
NEW ZEALAND (.2%)
Telecom Corp. of New Zealand 671,400 1,675
Wilson & Horton Ltd. 121,500 639
-------------
GROUP TOTAL 2,314
-------------
- -----------------------------------------------------------------------------------------
PHILIPPINES (.1%)
Philippines National Bank Class B 12,000 269
Philippine Long Distance Telephone 3,000 251
Radio Marconi 9,100 267
San Miquel Corp. Class B 28,000 257
-------------
GROUP TOTAL 1,044
-------------
- -----------------------------------------------------------------------------------------
PORTUGAL (.8%)
Banco Commercial Portuguese 88,920 1,338
Banco Espirito Santo e Commercial 79,100 1,246
* Banco Totta e Acores Class B 10,960 203
Efacec-Emp 31,100 1,006
Jeronimo Martins 26,580 1,519
Soares Da Costa 59,000 1,305
Unicer-Uniao 42,000 1,262
-------------
GROUP TOTAL 7,879
-------------
- -----------------------------------------------------------------------------------------
SINGAPORE (.9%)
* Berjuntai Tin 199,000 2,253
Inchcape Bhd. 136,000 507
Malaysia Mining Corp. Bhd. 1,460,000 2,831
Malaysian Tobacco 754,000 1,593
Tractors Malaysia Holding 1,120,000 1,935
-------------
GROUP TOTAL 9,119
-------------
- -----------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------------------
<S> <C> <C>
SPAIN (2.6%)
Autopistas Del Mare
Nostrum Sanom 332,000 $ 4,019
Banco de Santander 122,300 5,682
Banco Bilbao Vizcaya 84,400 1,869
Empresa Nacional de
Electricidad SA 30,000 1,427
Sevillana de Electricidad Cia 1,169,600 5,737
Union Electrica Fenosa 1,613,500 6,785
-----------
GROUP TOTAL 25,519
-----------
- -----------------------------------------------------------------------------------------
SWEDEN (.5%)
Asea AB Series A 70,700 5,004
-----------
- -----------------------------------------------------------------------------------------
SWITZERLAND (8.2%)
Baer Holdings 2,610 3,164
Baloise Holdings 250 463
* BBC Brown Boveri (Bearer) 8,650 6,326
CS Holdings (Bearer) 5,915 2,936
CS Holdings (Registered) 75,875 7,511
Elektrowatt AG 2,292 6,452
Holderbank Financiere
Glarus AG (Bearer) 14,000 8,768
Leu Holding (Bearer) 2 1
Magazine Zum Globus Inhaber 1,500 1,222
Nestle SA (Registered) 12,770 11,033
Sandoz AG (Ptg. Ctf.) 1,800 5,285
* SBSI Holding SA 600 889
Schindler Holdings AG 200 1,064
Schweiz Bankverein 27,000 8,655
* SMH (Bearer) 2,455 1,719
Societe Generale de Surveillance
Holdings SA (Bearer) 5,000 6,296
Swissair (Registered) 5,200 2,731
Winterthur 9,500 5,502
-----------
GROUP TOTAL 80,017
-----------
- -----------------------------------------------------------------------------------------
THAILAND (1.2%)
American Standard (Foreign) 32,150 1,582
Bangkok Bank 208,000 2,054
Dhana Siam 56,500 1,700
Phatra Thanakit Co. Ltd. (Foreign) 68,000 2,558
Phatra Thanakit Co. Ltd. (Local) 23,400 873
Siam Pulp & Paper (Alien) 31,200 487
Sri Thai Superware 67,000 604
Thai-German Ceramics 389,000 1,059
TPI Polene Ltd. 225,500 1,246
-----------
GROUP TOTAL 12,163
-----------
- -----------------------------------------------------------------------------------------
TURKEY (1.2%)
Akbank Turker 2,913,664 1,956
Arcelik 1,854,460 2,397
Cimsa Cemento 282,400 986
Cukurova Electrik 974,000 1,275
Cukurova Elektrik (yeni) RFD 470,500 616
EGE Biracilik Ve Malt Sanay 332,400 960
Koc Holding AS 787,570 1,824
Tofas Turk Otomobil Fabrikasi AS 255,300 1,337
-----------
GROUP TOTAL 11,351
-----------
- -----------------------------------------------------------------------------------------
UNITED KINGDOM (11.3%)
Amersham International PLC 175,400 2,660
Associated British Foods PLC 210,800 1,756
Bank of Ireland 132,901 572
Boots Co. PLC 612,400 5,418
British Telcommunications PLC 732,100 5,118
BTR PLC 897,333 4,952
BTR PLC Warrants Exp. 11/26/98 27,191 20
Bunzl 638,200 1,379
Carlton Communications PLC 134,200 1,882
Charter Consolidated (Registered) 343,600 3,706
Cookson Group 919,500 3,251
Electrocomponents PLC 252,500 1,965
FR Group PLC 225,000 782
General Electric Co. PLC 1,312,700 6,632
Hazlewood Foods PLC 1,092,500 2,408
Hillsdown Holdings 809,200 1,904
Legal & General Group PLC 151,800 1,130
Lex Services 187,100 1,243
Lloyds Bank Group PLC 748,100 7,294
Lonrho 497,000 949
Mai 472,300 1,845
Manweb PLC 108,200 1,212
MB Group 268,000 1,642
Midlands Electric 126,800 1,349
North West Water Group 225,800 1,958
Northumbrian Water Group PLC 100,000 1,074
Norweb 110,500 1,234
Pentland Group 359,800 543
Powell Duffryn PLC 75,000 700
Powergen 556,300 4,482
Prudential Corp. 471,200 2,517
RIT Capital Partners PLC 372,250 1,019
* Rothmans International Class B 312,300 2,213
Sears PLC 878,600 1,657
Seeboard PLC 136,300 1,494
Slough Estates PLC 341,500 1,389
Smith (W.H.) Group 142,400 1,074
Smiths Industries PLC 75,000 509
South Wales Electricity 108,100 1,219
South West Water 244,400 2,453
Southern Electric PLC 152,900 1,602
* St. James Growth Trust Unit 1,406,400 2,559
St. James Place 1,504,800 2,939
Tate & Lyle 315,900 1,870
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Tesco PLC 784,400 $ 2,478
Unigate PLC 495,000 2,680
* Vendome Luxury Group Units 156,150 894
Welsh Water 125,000 1,295
Williams Holdings PLC 454,000 2,512
Wolseley PLC 387,900 4,849
Yorkshire Water 107,000 961
------------
GROUP TOTAL 111,243
------------
- -----------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $771,955) 949,837
- -----------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (4.0%)
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
-------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 3.26%, 1/3/94
(Cost $39,112) $39,112 39,112
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.7%)
(Cost $811,067) 988,949
- -----------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.7%)
- -----------------------------------------------------------------------------------------
Other Assets--Notes C and E 144,815
Liabilities--Note E (151,429)
------------
(6,614)
- -----------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------
Applicable to 31,643,851 outstanding
shares of beneficial interest
(unlimited authorization) $982,335
- -----------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $31.04
- -----------------------------------------------------------------------------------------
See Note A to Financial Statements.
*Non-Income Producing Security.
- -----------------------------------------------------------------------------------------
AT DECEMBER 31, 1993,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Amount Per
(000) Share
-------- -------
<S> <C> <C>
Paid in Capital--Note F $822,706 $25.99
Overdistributed Net
Investment Income--Note F (5,822) (.18)
Accumulated Net
Realized Losses--Note F (12,431) (.39)
Unrealized Appreciation
of Investments--Note D 177,882 5.62
- -----------------------------------------------------------------------------------------
NET ASSETS $982,335 $31.04
- -----------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 24
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
U.S. INTERNATIONAL
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1993 December 31, 1993
(000) (000)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends(1) . . . . . . . . . . . . . . . . . . $ 1,894 $ 16,641
Interest . . . . . . . . . . . . . . . . . . . . 98 1,438
- -------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . 1,992 18,079
- -------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B . . . . . . . . 507 1,326
The Vanguard Group--Note C . . . . . . . . . . .
Management and Administrative . . . . . . . . $195 $1,119
Marketing and Distribution . . . . . . . . . . 17 212 185 1,304
---- -----
Taxes (other than income taxes)--Note A . . . . 5 52
Custodians' Fees . . . . . . . . . . . . . . . . 32 621
Auditing Fees . . . . . . . . . . . . . . . . . 8 10
Shareholders' Reports . . . . . . . . . . . . . 3 46
Annual Meeting and Proxy Costs . . . . . . . . . 1 9
Trustees' Fees and Expenses . . . . . . . . . . -- 3
- -------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . 768 3,371
- -------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . 1,224 14,708
- -------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON
INVESTMENT SECURITIES SOLD--Note D . . . . . . . . 5,818 7,616
- -------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT
SECURITIES--Note D . . . . . . . . . . . . . . . . 5,947 187,176
- -------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . $12,989 $209,500
=======================================================================================================
</TABLE>
(1) Dividends for the International Portfolio are net of foreign witholding
taxes of $3,296,000.
22
<PAGE> 25
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
U.S. PORTFOLIO INTERNATIONAL PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
DECEMBER 31, 1993 December 31, 1992 DECEMBER 31, 1993 December 31, 1992
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . $ 1,224 $ 2,181 $ 14,708 $ 20,039
Realized Net Gain (Loss)--Note D . . . . . 5,818 10,182 7,616 (12,341)
Change in Unrealized
Appreciation (Depreciation)--Note D . . 5,947 (7,722) 187,176 (85,085)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Net Assets Resulting
from Operations . . . . . . . . . 12,989 4,641 209,500 (77,387)
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . (1,229) (2,163) (24,484) (20,418)
Realized Net Gain . . . . . . . . . . . . (7,223) (2,488) -- (8,370)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . (8,452) (4,651) (24,484) (28,788)
- ----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . 23,118 10,843 173,380 143,111
-- In Lieu of
Cash Distributions . . . . . . 7,922 4,312 22,676 27,416
-- Exchange . . . . . . . . . . . 51,318 9,388 197,436 77,675
Redeemed -- Regular . . . . . . . . . . . (8,342) (54,792) (152,955) (232,670)
-- Exchange . . . . . . . . . . . (28,191) (16,306) (121,635) (109,016)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions . . . . . 45,825 (46,555) 118,902 (93,484)
- ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . 50,362 (46,565) 303,918 (199,659)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . 68,382 114,947 678,417 878,076
- ----------------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . $118,744 $ 68,382 $982,335 $678,417
============================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . $ .43 $ .67 $ .81 $ .67
Realized Net Gain . . . . . . . . . $ 2.16 $ .86 -- $ .28
- ----------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . 2,388 731 12,809 8,354
Issued in Lieu of Cash Distributions 261 156 761 1,067
Redeemed . . . . . . . . . . . . . . (1,180) (2,558) (9,687) (13,266)
- ----------------------------------------------------------------------------------------------------------------------------
1,469 (1,671) 3,883 (3,845)
- ----------------------------------------------------------------------------------------------------------------------------
(3) Undistributed (Overdistributed)
Net Investment Income--Note F . . . $ 6 $ (273) $ (5,822) $ 2,253
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 26
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
U.S. PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . $28.43 $28.20 $22.90 $26.15 $26.35
INVESTMENT ACTIVITIES ------- ------- ------- ------- -------
Net Investment Income . . . . . . . . . . . . . . . . . .43 .68 .71 1.02 .87
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . . 4.38 1.08 5.30 (3.19) 3.62
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . 4.81 1.76 6.01 (2.17) 4.49
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.43) (.67) (.71) (1.08) (.88)
Distributions from Realized Capital Gains . . . . . . (2.16) (.86) -- -- (3.81)
------- ------- ------- ------- -------
Total Distributions . . . . . . . . . . . . . . (2.59) (1.53) (.71) (1.08) (4.69)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . $30.65 $28.43 $28.20 $22.90 $26.15
============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . +17.24% +6.45% +26.57% -8.33% +17.23%
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . $119 $68 $115 $100 $121
Ratio of Expenses to Average Net Assets . . . . . . . . .90% .65% .44% .52% .51%
Ratio of Net Investment Income to Average Net Assets . 1.43% 2.33% 2.67% 4.18% 2.90%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . 139% 209% 84% 81% 72%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . $24.44 $27.78 $26.58 $32.44 $28.27
------- ------- ------- ------- -------
INVESTMENT ACTIVITIES
Net Investment Income . . . . . . . . . . . . . . . . .50 .66 .78 1.02 .82
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . . 6.91 (3.05) 1.80 (4.92) 6.22
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . 7.41 (2.39) 2.58 (3.90) 7.04
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.81) (.67) (.77) (.95) (.79)
Distributions from Realized Capital Gains . . . . . . -- (.28) (.61) (1.01) (2.08)
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (.81) (.95) (1.38) (1.96) (2.87)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . $31.04 $24.44 $27.78 $26.58 $32.44
============================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . +30.49% -8.72% +9.96% -12.26% +25.97%
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . $982 $678 $878 $796 $646
Ratio of Expenses to Average Net Assets . . . . . . . . .40% .42% .38% .44% .46%
Ratio of Net Investment Income to Average Net Assets . 1.76% 2.48% 2.87% 3.62% 2.61%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . 39% 51% 46% 18% 25%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
Vanguard/Trustees' Equity Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company and consists of the U.S.
and International Portfolios. The International Portfolio invests in securities
of foreign issuers which may subject the Portfolio to investment risks not
normally associated with investing in securities of United States corporations.
* A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Market values for securities listed on the New York
Stock Exchange or other U.S. exchanges are based upon the latest quoted
sales prices for such securities on the appropriate exchange as of 4:00 PM
on the valuation date; such securities not traded are valued at the mean
of the latest quoted bid and asked prices. Securities listed on foreign
exchanges are valued at the latest quoted sales prices. Securities not
listed are valued at the latest quoted bid prices. Temporary cash
investments are valued at cost which approximates market value. Foreign
currency amounts are converted into U.S. dollars at the bid prices of such
currencies against U.S. dollars last quoted by major banks as of 4:00 PM
Central Europe Time.
2. FEDERAL INCOME TAXES: Each Portfolio of 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 of Investment Companies, transfers uninvested cash balances into a
Pooled Cash Account, the daily aggregate of which is invested in
repurchase agreements secured by U.S. Government obligations. Securities
pledged as collateral for repurchase agreements are held by the Fund's
custodian banks until maturity of each repurchase agreement. Provisions of
each agreement ensure that the market value of this collateral is
sufficient in the event of default; however, in the event of default or
bankruptcy by the other party to the agreement, realization and/or
retention of the collateral may be subject to legal proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may
differ from net investment income and realized capital gains for financial
reporting purposes. In the International Portfolio, such differences
relate to investments in securities considered to be "passive foreign
investment companies," for which any unrealized appreciation and/or
realized gains are required to be included in distributable net investment
income for tax purposes. Distributions from passive foreign investment
company income totaled $9,633,000 during 1993.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
are those of specific securities sold. Dividend income is recorded on the
ex-dividend date.
* B. Under the terms of a contract which expires March 31, 1994, the U.S.
Portfolio pays Geewax, Terker & Company an investment advisory fee which
represents a percentage rate of average net assets of the Portfolio adjusted
for the investment performance of the Portfolio relative to that of the
Standard & Poor's 500 Composite Stock Price Index. For the year ended December
31, 1993, the investment advisory fee of the U.S. Portfolio represented an
effective annual rate of .59 of 1% of average net assets. Under the terms of a
contract which expires April 30, 1995, the International Portfolio pays
Batterymarch Financial Management
25
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS (continued)
an investment advisory fee calculated at an annual percentage rate of average
net assets of the Portfolio. For the year ended December 31, 1993, the
investment advisory fee of the International Portfolio represented an effective
annual rate of .16 of 1% of average net assets.
* C. The Vanguard Group, Inc. 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. At December 31, 1993, the Fund had contributed capital of $168,000 to
Vanguard (included in Other Assets), representing .8% of Vanguard's
capitalization. The Fund's trustees and officers are also directors and
officers of Vanguard.
* D. During the year ended December 31, 1993, purchases and sales of
investment securities other than U.S. Government securities and temporary cash
investments were:
<TABLE>
<CAPTION>
- -------------------------------------------------------
(000)
-----------------------
Portfolio Purchases Sales
- -------------------------------------------------------
<S> <C> <C>
U.S. $151,572 $115,212
- -------------------------------------------------------
INTERNATIONAL 411,412 304,815
- -------------------------------------------------------
</TABLE>
At December 31, 1993, the International Portfolio had available a capital loss
carryforward of $12,431,000 to offset future net realized gains through
December 31, 2001.
At December 31, 1993, unrealized appreciation (depreciation) for Federal income
tax purposes was:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
(000)
-------------------------------------------
Net
Appreciated Depreciated Unrealized
Portfolio Securities Securities Appreciation
<S> <C> <C> <C>
U.S. $ 15,071 $ (2,239) $ 12,832
- ----------------------------------------------------------------
INTERNATIONAL 222,313 (50,074) 172,239
- ----------------------------------------------------------------
</TABLE>
* E. The market values of securities on loan to broker/dealers at December
31, 1993, and the cash collateral received with respect to such loans were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(000)
------------------------------------
Market Value Cash
of Loaned Collateral
Portfolio Securities Received
- -------------------------------------------------------------------
<S> <C> <C>
U.S. $ 565 $ 578
- -------------------------------------------------------------------
INTERNATIONAL 126,491 134,013
</TABLE>
* F. Effective in 1993, generally accepted accounting principles require that
differences between undistributed net investment income or accumulated net
realized gains/losses for financial reporting and tax purposes, if permanent,
be reclassified to/from paid in capital. In connection with the adoption of
this accounting method, the following permanent book/tax differences have been
reclassified:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Increase (Decrease)
Paid in Capital
Portfolio (000)
- -------------------------------------------------------------------
<S> <C>
U.S.
UNDISTRIBUTED NET INVESTMENT INCOME $ (284)
ACCUMULATED NET REALIZED GAINS 6,963
- -------------------------------------------------------------------
INTERNATIONAL
UNDISTRIBUTED NET INVESTMENT INCOME (1,701)
ACCUMULATED NET REALIZED LOSSES 7,687
- -------------------------------------------------------------------
</TABLE>
The reclassification of U.S. Portfolio gains primarily represents prior years'
realized gains on in-kind redemptions. The International Portfolio
reclassifications primarily relate to investments in securities considered to
be "passive foreign investment companies."
The above reclassifications have no effect on net assets or net asset
values per share.
26
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
Vanguard/Trustees' Equity Fund
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the U.S. Portfolio and the International Portfolio of Vanguard/Trustees' Equity
Fund (the "Fund") at December 31, 1993, the results of each of their
operations, the changes in each of their net assets and the financial
highlights for each of the respective periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities by correspondence with
the custodians and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1994
SPECIAL 1993 TAX INFORMATION (UNAUDITED)
FOR U.S. PORTFOLIO OF VANGUARD/TRUSTEES' EQUITY FUND
Corporate shareholders should note that for the fiscal year ended December 31,
1993, 51.2% of the Portfolio's investment income (i.e., dividend income plus
short-term capital gains) qualifies for the intercorporate dividends received
deduction.
27
<PAGE> 30
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc Rorer
Inc.; Director of Sun Company, Inc. and Immune Response Corporation; Trustee of
the Universal Health Realty Income Trust.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of Dayton
Hudson Corporation, American Express Bank Ltd., The St. Paul Companies, Inc.,
and Scott Paper Company.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., and The Southern New England Telephone
Company.
ALFRED M. RANKIN, JR., President and Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company, and The
Standard Products Company.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Company
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Director of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt University and the Culver
Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD
Senior Vice President
Planning & Development
JAMES H. GATELY
Senior Vice President
Institutional
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
VINCENT S. MCCORMACK
Senior Vice President
Operations
RALPH K. PACKARD
Senior Vice President
Chief Financial Officer
28
<PAGE> 31
(Continued from inside front cover)
toward those of the 1970s. However, the current level of inflation suggests
that future real returns may prove to be satisfactory. Looking forward, the
main risks to the investor are two: (1) that yields on financial assets will
rise sharply, reducing the prices of stocks and bonds alike; and (2) that
inflation, presently at moderate levels, will accelerate.
SOME COURSES OF ACTION
What, if any, present action should be taken by investors to deal with these
two major risks? Should your allocation of assets among stock funds, bond
funds, and money market funds be adjusted? Here are some reasonable courses of
action to consider:
* For long-term investors who have built a substantial balanced portfolio of
stock, bond, and money market funds, stay the course. Even if withdrawing
from the stock market proves to be justified, the next decision--when to
return--will one day be required. "Being right twice" is no mean
challenge.
* For long-term investors gradually accumulating assets for, say,
retirement, stay your present course. Continue to invest regularly. By
doing so, you buy more shares of a mutual fund when its price falls, and
fewer shares when its price rises, virtually assuring a reasonable average
cost.
* For risk-averse investors who are highly confident that stock prices are
"too high," make only marginal--not "all or nothing"--changes in your
portfolio balance. Given the perils of predicting the future, any changes
should be limited to, say, 15 percentage points. That is, if your normal
portfolio allocation is 60% in stock funds, it might be reduced to 45%; if
85%, to 70%.
* For investors who simply must have more income, never lose sight of the
added principal risk involved in shifting from money market funds to bond
funds. Long-term bond funds provide a generous and durable income stream,
but their prices are highly volatile. Short-term and intermediate-term
bond funds offer a "middle way" of increasing income with more modest risk
to principal.
* For investors who are tempted to find an "easy way" to higher returns,
never forget that risk and reward go hand in hand. Precipitously replacing
certificates of deposit with broad-based common stock funds verges on the
irrational. Funds investing in other securities markets--emerging nations,
international stocks and bonds, and small U.S. companies--carry their own
special risks. Generally, limit such alternative investments to, say, 20%
of your total portfolio.
For all investors, be prepared for sharp interim swings in stock and bond
prices. The central tenet of investing is "prices fluctuate," and sensible
long-term investors simply must take such fluctuations in their stride.
Successful investing is as much a function of your own discipline and
equanimity as it is of the returns available in the securities markets.
THREE ESSENTIAL PRINCIPLES
As we confront the brave new world of investing that may well lie ahead in the
coming decade--and it is important to think in decade-length terms--we would
underscore three caveats:
1. Have "rational expectations" for future returns. At prices prevailing
today, it seems highly unlikely that the returns enjoyed by investors in
the past decade will be repeated in the coming decade.
2. Maintain a balanced portfolio consisting of stock, bond, and money market
funds. Each asset class has its own risk and reward characteristics. By
allocating your resources among the three asset classes according to your
own requirements, you can build a portfolio providing appropriate elements
of capital appreciation, capital conservation, and current income.
3. In balancing risk against reward, be sure to consider cost. Many mutual
funds carry hefty sales charges or high expense ratios, or both. Other
factors held equal, expenses reduce returns, dollar for dollar. Put
another way, high-cost funds must select investments with higher
prospective gross returns--which entail higher risks--to match the net
returns earned by low-cost funds.
This brief Annual Report essay can provide only an elementary look at the
challenges investors face today. History can give us perspective, but it cannot
give us performance. Famed British economist Lord Keynes had it right when he
said, "the inevitable never happens. It is the unexpected always."
<PAGE> 32
THE VANGUARD FAMILY OF FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Long-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
FIXED INCOME FUNDS
Vanguard Admiral Funds
Vanguard Bond Index Fund
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
EQUITY FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Index Trust
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Small Capitalization Stock Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
[LOGO]
Vanguard Financial Center * Valley Forge, Pennsylvania 19482
New Account Information 1-(800) 662-7447
Shareholder Account Services: 1-(800) 662-2739
This Report has been prepared for shareholders and
may be distributed to others only if preceded or
accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q250-12/93
<PAGE> 33
EDGAR Appendix
This appendix describes components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features the flags of The
United States of America and Vanguard flying from a halyard.
A bar chart called "A Tale of Two Decades" appears on the inside front
cover. This chart illustrates Average Annual Total Return, in nominal and real
terms, of Stocks, Bonds and Reserves (U.S. Treasury bills) for the two decades
since 1973.
A running head featuring the Vanguard flag logo appears at the top of
pages one through 28.
A photograph of John C. Bogle appears at the upper-right of page one.
A line chart illustrating cumulative performance of Standard & Poor's 500
Growth Index compared to Standard & Poor's Value Index for the fiscal years 1989
through 1993 appear on page 2.
A line chart illustrating cumulative performance of the Vanguard Trustees'
Equity Fund compared to the Standard & Poor's 500 Index and the Standard &
Poor's Growth for the fiscal years 1984 through 1993 appear on page three.
A line chart illustrating cumulative performance of domestic stocks versus
international stocks compared to the Standard & Poor's 500 Index Growth for
1989-1993 on page 4.
A line chart illustrating cumulative performance of international
portfolio with Vanguard Trustees' Fund MSCI EAFE Index
and Average International Fund for the years 1984-1993 on page 5.
