<PAGE> 1
VANGUARD
TRUSTEES'
EQUITY FUND
ANNUAL REPORT 1994
THE VANGUARD VOYAGE . . . STAYING THE COURSE
<PAGE> 2
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations on June
30, 1929. Its first fifteen years were a struggle for survival in an industry
that was shaken to its roots by the Great Crash of 1929-1933. From an initial
base of $100,000, Wellington's assets had grown to but $27 million by the end of
World War II. The Vanguard Group was founded on September 24, 1974. Soon
thereafter, we assumed responsibility for the management of Wellington Fund and
ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were marked by
exceptional growth. Today, Wellington Fund, with assets of nearly $9 billion,
remains one of the largest mutual funds in the nation. And Vanguard, now
managing 85 mutual fund portfolios, is entrusted with assets of $134 billion,
and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio at a time when
holding individual securities was the conventional strategy. It incurred no debt
in an era of high leverage that would soon come back to haunt less cautious
investors. And it was a "balanced" fund--in fact, Wellington is America's oldest
balanced fund--with holdings from each of the three basic financial asset
classes: cash reserves, bonds, and common stocks. In short, Wellington Fund was
a staid investment in an era of stock speculation that was to become, almost
within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still our
watchword, because the three basic financial asset classes have different--and
usually countervailing--investment characteristics. When it began, Wellington
Fund provided a balanced program in a single investment; in 1994, such a balance
is often achieved by a combination of Vanguard money market, bond, and stock
funds.
"Conservatism," too, remains our standard. Over the years, we have tried
to maintain the discipline to eschew offering funds that lack sound financial
principles, often based on marketplace fads that could not--and did not--endure.
Our conservatism applies not only to the funds we offer, but to the instruments
in which they invest. For example, we have steered clear of exotic derivative
securities with unpredictable investment characteristics. Too many fund managers
have been taken in by these highly risky instruments, and their shareholders
have paid a heavy price--except in cases where the manager has "made the fund
whole," when to do otherwise would have shocked investors and impaired their
confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But the
investment principles to which we have adhered since Wellington Fund began in
1929 remain firm:
* We offer Funds with sound and durable investment objectives, designed for
long-term investors.
(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
APPEAR TO BE UNDERVALUED. THE INTERNATIONAL PORTFOLIO USES A PROPRIETY SCORING
SYSTEM FOR IDENTIFYING UNDERVALUED STOCKS IN MORE THAN 20 INTERNATIONAL
MARKETS.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Common stock prices generally faltered around the world during the year
ended December 31, 1994. Buttressed by a modest dividend yield, the U.S. stock
market, as measured by the Standard & Poor's 500 Composite Stock Price Index,
ended the year with a return that was just barely positive. In international
equity markets--most significantly in Japan--a weak U.S. dollar enhanced the
market returns as measured in each nation's currency, moving negative results to
the positive side of the ledger for U.S. investors.
In this environment, the U.S. Portfolio of Vanguard/Trustees' Equity
Fund provided a total return (capital change plus income) that was disappointing
both in an absolute sense and relative to competitive norms. This represents a
sharp contrast to 1993, when the U.S. Portfolio provided a double-digit return
that was well ahead of its benchmarks.
Happily, it was a different story in 1994 for our International Portfolio.
While the Portfolio's +5.3% return seems modest to a fault--particularly in the
light of last year's excellent performance--it was well ahead of the returns
achieved by other international mutual funds and just a bit below the return of
our unmanaged benchmark.
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 general equity
mutual fund; and 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, 1994
- ---------------------------------------------------------------------------
<S> <C>
TRUSTEES' U.S. PORTFOLIO -3.9%
- ---------------------------------------------------------------------------
AVERAGE GENERAL EQUITY FUND -1.7%
STANDARD & POOR'S 500 INDEX +1.3
===========================================================================
TRUSTEES' INTERNATIONAL PORTFOLIO +5.3%
- ---------------------------------------------------------------------------
AVERAGE INTERNATIONAL FUND -0.7%
MSCI EAFE INDEX +8.1
- ---------------------------------------------------------------------------
</TABLE>
The total return of the U.S. Portfolio is based on net asset values of $30.65
per share on December 31, 1993, and $29.09 on December 31, 1994, with the latter
figure adjusted to take into account the reinvestment of four dividends totaling
$.34 per share from net investment income and a distribution of $.03 per share
from net realized capital gains. For the International Portfolio, the respective
net asset values were $31.04 and $31.48; we distributed four quarterly dividends
totaling $.56 per share from net investment income and made a distribution of
$.63 per share from net realized capital gains.
TRUSTEES' INTERNATIONAL PORTFOLIO
MARKET OVERVIEW
For the second consecutive year, returns in offshore equity markets were
stronger than the returns in U.S. equity markets. The Pacific Basin markets
outpaced the European markets, while most emerging markets tumbled following
their extraordinary performance in 1993. It was a volatile year for each
nation's bourse, indeed one that defies most broad generalizations.
One general statement that can be made is that the weak U.S. dollar
enhanced the "local currency"
[FIGURE 1]
1
<PAGE> 4
[FIGURE 2]
returns earned in virtually every nation, as suggested in the table that
follows. As you know, when the U.S. dollar weakens relative to the currency of a
given nation, the return to U.S. investors is enhanced (just as a stronger
dollar reduces local currency returns). Put another way, if, say, the Japanese
yen can be converted into a larger number of U.S. dollars, then U.S. investors
in Japan are advantaged.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Year Ended December 31, 1994
--------------------------------------------
Local Currency Currency U.S. Dollar
Stock Market Return Impact Return
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
UNITED STATES PORTFOLIO + 1.3% -- + 1.3%
- ------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO - 1.8% + 9.9% + 8.1%
- ------------------------------------------------------------------------------
EUROPE - 6.2% + 9.0% + 2.8%
UNITED KINGDOM - 7.0 + 5.4 - 1.6
GERMANY - 6.2 +11.3 + 5.1
- ------------------------------------------------------------------------------
PACIFIC + 2.1% +10.7% +12.8%
JAPAN +28.7 +12.9 +21.6
HONG KONG -28.8 - 0.1 -28.9
- ------------------------------------------------------------------------------
EMERGING MARKETS + 199.1% -203.8% - 4.7%
BRAZIL +1,006.4 -954.0 +52.4
MALAYSIA - 19.8 + 4.4 -15.4
- ------------------------------------------------------------------------------
</TABLE>
The table clearly reflects the disparate valuation changes in some of the
world's major markets. It shows that the average return for U.S. investors in
international markets was a respectable +8.1%, due entirely to the continuing
weakness of the U.S. dollar. On a local currency basis, the average return was
- -1.8%, lagging the modest +1.3% return achieved by the U.S. stock market.
To add some perspective to the world financial markets in 1994, the chart
to the left contrasts the returns earned in markets around the world during the
past five years. I call your special attention to the chart's principal
findings: 1) the U.S. stock market provided the highest average annual returns
(+8.7%) among the industrialized nations; 2) average annual returns in the
Pacific markets were negative (-1.8%), as strong returns in the 1993-1994 period
were more than offset by negative annual returns for the three preceding years;
and 3) the emerging markets of the world provided championship returns during
1991-1993 only to weaken in 1994, although the net result was a remarkable
annualized return of +21.3% for the full period.
I should reemphasize 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 additional 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 each nation's currency in U.S. dollar terms.
THE INTERNATIONAL PORTFOLIO IN 1994
In a year in which most managed international mutual funds provided negative
total returns (averaging -0.7%), it is gratifying to report that the
International Portfolio achieved a solid positive return of +5.3%. It is not
hard to discern the reasons for our advantage. First, our Portfolio maintained a
much heavier weighting in Japanese stocks than did the average international
fund (35% of net assets versus 17% for the competitive funds). The Japanese
stock market, of course, was one of the world's strongest bourses in 1994.
Second, we had minimal exposure to the emerging stock markets of Latin America
(particularly Mexico, which fell -39%); our
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<PAGE> 5
competitors, on the other hand, maintained about 16% of their assets in Latin
America.
Relative to the +8.1% return on the unmanaged EAFE Index, our 1994
performance pales just a tad. A sizable portion of our shortfall simply reflects
the fact that the EAFE Index--like all indexes--does not incur the "drag" of
mutual fund expenses and transaction costs (especially high in international
markets). But two other factors also contributed to our lagging return: 1) our
weighting in Japan, while much larger than that of our competitors, was below
the 45% weighting of the Index; and 2) we held a modest weighting in the lagging
emerging markets, but the Index had only a token representation in such stocks.
The chart below gives a flavor of the Portfolio's long-term record. It
compares our returns over the past ten years relative to the EAFE Index and the
most appropriate "real world" option available to individual investors--the
average international fund. The following table summarizes the results over the
past decade.
[FIGURE 3]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1994
- ---------------------------------------------------------------------------
1 Year 5 Years 10 Years
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
TRUSTEES' INTERNATIONAL PORTFOLIO +5.25% +3.88% +16.84%
AVERAGE INTERNATIONAL FUND -0.71 +5.51 +16.36
MSCI EAFE INDEX +8.06 +1.82 +17.90
</TABLE>
Note: Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Total Return
----------------------------
Ten Years Ended
December 31, 1994
- -----------------------------------------------------------------------------
Cumulative Annual Rate
- -----------------------------------------------------------------------------
<S> <C> <C>
TRUSTEES' INTERNATIONAL PORTFOLIO +374% +16.8%
- -----------------------------------------------------------------------------
AVERAGE INTERNATIONAL FUND +355% +16.4%
MSCI EAFE INDEX +419 +17.9
- -----------------------------------------------------------------------------
</TABLE>
While we gained a small edge over most other international funds during the
decade, we are not particularly satisfied with this outcome. In fact, our annual
expense ratio advantage of 1.3% (we operate with costs equal to about 0.3% of
assets, while the cost of the average international fund is 1.6%) more than
accounts for our total margin of advantage. To put it simply, we aspire to
outperform our competitors over time before taking into account our cost
advantage. So, we look for an even better margin in the years ahead.
I should mention that the comparison ignores the sales "loads" charged on
purchases or redemptions by most international funds. Investors would have
3
<PAGE> 6
incurred these loads in the ownership of nearly two-thirds of all international
funds in existence during the period--with the exception of two Vanguard
Funds--reducing the fund returns reflected in the table.
I acknowledge that the comparison also reflects our shortfall relative to
the EAFE Index. This "cost free" Index, as you know, is a tough standard for all
actively managed mutual funds, but is perhaps even more so for international
funds, where the combination of fund operating expenses and transaction costs
may run as high as 3% annually. I would also note, as reflected in the chart,
that the EAFE Index benefited enormously from the bull market in Japan that took
place during the first four years of the period. Only a small portion of these
gains were relinquished during the steep Japanese market declines of 1990 and
1992. In any event, during the past decade, only 3 of the 19 international funds
in operation throughout the period outpaced the Index.
TRUSTEES' U.S. PORTFOLIO
MARKET OVERVIEW
During the year, the U.S. stock market enjoyed four "ups" and endured four
"downs." A pattern of quarterly declines in the late weeks of March, June, and
September was broken when a November to mid-December decline was aborted by a
solid year-end rally, which recaptured most of the year's earlier lost ground.
On balance, the price of the Standard & Poor's 500 Composite Stock Price Index
edged just a notch lower, from 466 when the year began to 459 at its close, down
- -1.5%. The positive total return (+1.3%) of the Index, then, was more than
accounted for by the dividend income that it generated.
As always, there were some important cross-currents in the domestic equity
markets. And in 1994, many of them were just the reverse of 1993. In particular,
a year ago value stocks (those with above-average yields and below-average
price-to-book value ratios) provided a return of +18.6%, and overwhelmingly
dominated the +1.7% return on growth stocks (those with the opposite
characteristics, and with above-average prospects for consistent earnings
growth). In 1994, however, growth stocks turned the tables and led the way, if
by a far more modest margin (+3.1% versus -0.6%) than for value stocks in 1993.
So, just as last year redounded to the benefit of value-oriented investors, this
past year redounded to the benefit of investors in growth equities.
If the performance of the U.S. stock market was "so-so" during the year,
nothing that gentle could be said about the bond market. The total return on the
Lehman Long-Term U.S. Treasury Bond Index was -7.6% (-14.5% decline in price,
partially offset by interest income of +6.9%), as Treasury yields rose from 6.4%
to 7.8%. Yields on short-term and intermediate-term bonds also rose sharply;
however, because of their shorter maturities, price declines were smaller. This
rising rate environment was surely a major factor in dampening the returns on
stocks of all stripes.
A primary cause of the interest rate rise was investor fears about a
resurgence of inflation. So far, at least, the U.S. Consumer Price Index gives
little evidence of it. The CPI has risen just 2.7% over the past twelve months,
although more sensitive indicators--such as commodity prices and producer
prices--have been rising at higher rates.
In an effort to quell inflationary fears, the Federal Reserve acted to
"tighten" the money supply in order to slow economic growth and rein in
potential future inflation. Fully six rate increases--in February, March, April,
May, August, and again in November--combined to raise the Federal funds rate (at
which banks borrow from one another) from 3.00% to 5.50%. Still, the specter of
inflation remains, and further rate increases may well lie in prospect.
To add some perspective to the U.S. financial market cross-currents in
1994, the chart to the right compares the returns on growth stocks and value
stocks during the past five years. While you can see that "cycles of
superiority" occurred throughout the period, when all was said and done, the
annual rates of return were very close: Growth +8.8%; Value +8.3%. This outcome
suggests the wisdom of consistently sticking to your objectives, rather than
endeavoring (fruitlessly, I believe) to switch back and forth between these two
market segments in the search for higher returns.
4
<PAGE> 7
[FIGURE 4]
THE U.S. PORTFOLIO IN 1994
Our shortfall relative to the Standard & Poor's 500 Index (-3.9% versus +1.3%)
was of mixed derivation. First, on balance, our industry selections were
generally quite good. In particular, the Portfolio's second largest position
during the year was in the technology sector (17% of net assets versus 9% for
the Index), the best-performing segment of the stock market during the year. We
also benefited from our lower exposure to the market's worst-performing major
sector--utility stocks--which fell -9.8%. Our 5% weighting in utilities was well
below the 12% weighting for the Index.
More than offsetting our successful choice of industry sectors, however,
were our individual stock selections, which, in most sectors, lagged the returns
of the Index. One of the biggest gaps, paradoxically, came in the technology
sector, where our holdings provided total returns averaging +15.0%, compared to
+20.3% for the technology stocks in the Index. To make a long story short, we
could have--and should have--done a better job of selecting individual stocks in
1994.
Our return also fell short of the -1.7% return for the average general
equity mutual fund. This competitive fund benchmark represents a change from
prior years, when we compared our Portfolio's performance to that of the average
value (growth and income) fund. Given the Portfolio's blend of growth stocks and
value stocks, we believe that the average general equity mutual fund is the most
appropriate measurement standard.
Relative to the average general equity fund, our sector weightings
generally had a positive influence on our performance, with the average such
fund holding a smaller position in technology stocks and a larger position in
utility stocks. However, our Portfolio's "smaller cap" bias was generally a
negative factor during a year in which smaller cap stocks trailed their large
cap cousins.
Compared with the results that the Portfolio's adviser, Geewax, Terker &
Company, achieved since assuming investment management responsibilities in April
1992 through the end of 1993 (+28.1% versus +22.7% for the average general
equity fund and +21.5% for the Standard & Poor's 500 Index), our results in 1994
were disappointing. With the adviser soon to complete three full years of
managing the Portfolio's investment operations, your Officers and Directors will
be monitoring our results during 1995 with special care.
Looking at the U.S. Portfolio's record over the past decade--a more
meaningful measurement period--our results leave something to be desired. The
chart on page 6 presents the Portfolio's record over the past ten years compared
to our two benchmarks, the unmanaged Standard & Poor's 500 Index and the average
general equity fund. This table summarizes our results:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Total Return
-------------------------------
Ten Years Ended
December 31, 1994
- -----------------------------------------------------------------------------
Cumulative Annual Rate
- -----------------------------------------------------------------------------
<S> <C> <C>
TRUSTEES' U.S. PORTFOLIO +187% +11.1%
- -----------------------------------------------------------------------------
AVERAGE GENERAL EQUITY FUND +215% +12.2%
STANDARD & POOR'S 500 INDEX +282 +14.3
- -----------------------------------------------------------------------------
</TABLE>
It should go without saying that the returns reflected in this table are merely
history. Future returns are
5
<PAGE> 8
[FIGURE 5]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1994
- ---------------------------------------------------------------------------
1 Year 5 Years 10 Years
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
TRUSTEES' U.S. PORTFOLIO -3.91% +6.83% +11.13%
AVERAGE GENERAL EQUITY FUND -1.69 +8.89 +12.15
STANDARD & POOR'S 500 INDEX +1.31 +8.68 +14.33
</TABLE>
Note: Past performance is not predictive of future performance.
unpredictable, and may be better or worse than those shown in the table.
The Portfolio's long-term record has been a disappointment to us and, I
have no doubt, to you. I acknowledged this fact in last year's Annual Report,
and noted as well our hope that the change in advisers would gradually restore
the Portfolio's long-term record to respectability. Despite our shortfall in
1994, our cumulative record since we implemented the management change would
seem to indicate that we are moving in the right direction.
As before, I would remind you that the comparison gives the average
general equity fund the benefit of a very large doubt. While our Portfolio is
purchased on a "no-load" (no sales commission) basis, most mutual funds carry
hefty initial sales charges, meaning that the returns shown are earned, not on
100% of the initial investment (as in the Portfolio), but on about 93% of the
investment (i.e., assuming the initial investment carried a sales charge of 7%).
We estimate, very roughly, that the impact of sales charges would have reduced
the return of the average general equity fund by about 0.5% per year, from
+12.2% to +11.7%.
I should also note, as the comparison surely reflects, that the Standard &
Poor's 500 Index is a tough competitor for actively managed mutual funds. It
always has been! But the Index is calculated "on paper," without the "real
world" expenses of fund operations, advisory fees, portfolio transaction costs,
and the impact of cash reserves. Mutual funds, on the other hand, must incur
such costs, and it is difficult for most professional managers to provide more
than compensatory returns. Indeed, during the past decade, only 14 of the 109
general equity funds in operation throughout the period outpaced the Index.
IN SUMMARY
A year ago, I cautioned shareholders "not to simply extrapolate (the exceptional
results in the world financial markets of 1993) into the future," since to
do so "would invite unrealistic expectations and ultimately disappointment." The
past year surely
6
<PAGE> 9
reaffirmed the importance of such caution, as most international markets
declined before taking into account the positive impetus of the weak dollar, and
the U.S. market eked out a marginal positive return.
On this note, it is worth reemphasizing that investing in stocks is risky,
particularly in international markets. That is, in essence, why stocks offer
higher reward potential than bonds and short-term reserves. The greatest risk,
of course, is faced by short-term investors who look for quick stock market
returns or transitory stock market trends. The lowest risk and the highest
rewards--at least in the past--have been achieved by investors who have "stayed
the course" with a sound investment approach that is consistent with their own
financial objectives. We urge you to do the same.
I would close with my customary reminder that the Portfolios of
Vanguard/Trustees' Equity Fund should represent only a portion of a balanced
portfolio of mutual funds--including stock funds, bond funds, and money market
funds. In the long run, we are confident that our Portfolios will be suitable
investments in helping you to implement the investment course you have chosen to
follow.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board
January 20, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE
PORTFOLIOS (PERIODS ENDED DECEMBER 31, 1994) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
10 YEARS
-------------------------------
INCEPTION TOTAL CAPITAL INCOME
PORTFOLIO DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
- ----------------------- --------- ------ ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
U.S. PORTFOLIO 1/31/80 -3.91% +6.83% +11.13% + 7.98% +3.15%
INTERNATIONAL PORTFOLIO 5/16/83 +5.25 +3.88 +16.84 +13.82 +3.02
</TABLE>
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.
7
<PAGE> 10
REPORT FROM GEEWAX, TERKER & COMPANY
This past year was an extreme disappointment for us as we underperformed the
Standard & Poor's 500 Index by -5.2% and the Wilshire 5000 by -3.8%. We found
the second quarter and the fourth quarter extremely difficult for our style of
investing, as the marketplace rewarded large S&P 500 stocks, rather than the
medium-capitalization names that we emphasize. Furthermore, in both the second
and fourth quarter of the year, companies having a high degree of earnings
surprise were punished for their outstanding performance! Our equity style is to
orient the portfolio towards those stocks that are continuing to positively
surprise the market; when the market doesn't "pay" for this event, it is
difficult for us to do well. All in all, it was a frustrating year for us and
for you, as shareholders.
As mentioned in our mid-year letter, we began a rotation in the latter
part of 1993 that continued into 1994, namely, a decrease in our exposure to the
Financial and Utility sectors and a corresponding increase in Capital
Equipment/Technology and Basic Materials stocks. These moves were all in the
right direction, although we were negatively impacted by the downward move in
Financial stocks in the fourth quarter that occurred in reaction to the increase
in interest rates. As of this writing, we are paring back some of our bank-stock
holdings and will likely have a below-market-weight stance shortly. Our other
significant sector "bet" is our relatively low exposure to the Consumer area
(approximately 20% weighting for the Portfolio versus 29% for the S&P 500). We
are, however, starting to find more attractive investments in this group, and we
expect to narrow the differential with the S&P 500 by several percentage points
during the coming quarter.
Notwithstanding the second and fourth quarters of last year, we continue
to feel that a portfolio of stocks that 1) have good recent earnings reports, 2)
have been experiencing some upward revisions in investors' expected earnings,
and 3) have reasonable valuations--given current levels of interest rates and
their growth opportunities--should be rewarded over time. Due to the uncertainty
of the effect of the recent rise in interest rates on corporate earnings, there
are sure to be some pitfalls realized in the upcoming quarter. However, we
firmly feel that the overall Portfolio is well situated for the coming quarter
in the aggregate, and we are quite comfortable with the positions we have taken.
Although the most recent market environment has not been a rewarding one
in terms of recognizing good earnings news, we find solace in knowing that
ultimately, earnings do drive stock prices. Consistent, rational investment
rigor is rewarded.
Respectfully,
Geewax, Terker & Company
January 20, 1995
8
<PAGE> 11
REPORT FROM BATTERYMARCH FINANCIAL MANAGEMENT, INC.
PERFORMANCE
The total return for the International Portfolio in 1994 was +5.3% compared with
+8.1% for the MSCI Europe, Australia, and Far East ("EAFE") Index. This result
places the Fund in the top quartile of international funds. The return for the
average international fund was -0.7%.
After excellent returns in 1993, many of the world's stock markets were
disappointing to investors in 1994. The increase in interest rates by the
Federal Reserve beginning in February reverberated around the world, leading to
lower stock prices in many developed and emerging markets. The S&P 500 was up a
mere +1.3% for the year.
The positive performance of the Fund and the EAFE Index can largely be
attributed to two factors: concentration in the relatively strong Japanese stock
market and exposure to foreign currencies. Japan was one of the few bright spots
for the year, as its economy came out of recession. U.S. investors earned 21.6%
from a combination of higher stock prices and a higher yen compared with only
2.8% for an index of European markets. The weakness of the U.S. dollar versus
most currencies benefited both the Portfolio and the index.
The Portfolio's shortfall relative to the EAFE Index and its strength
relative to most competitive funds can be understood by comparing weights in
Japanese stocks and in emerging markets. The Fund's weight in Japan was lower
than that of EAFE, but higher than most mutual funds. Unlike 1993, when emerging
markets around the world were up sharply, rising interest rates in 1994
contributed to the contraction of stock prices in many of these markets. Again,
the Portfolio carried a position between EAFE--which, as a developed markets
index contains no emerging markets--and other mutual funds (which tended to have
a higher concentration in emerging markets than your Portfolio).
INVESTMENT ENVIRONMENT
The Federal Reserve acted to keep inflation in check by raising rates throughout
the year as the U.S. economy continued to enjoy economic expansion. Despite the
fact that European and Japanese economic recoveries were lagging the U.S.
recovery, long-term bond interest rates rose around the globe to the surprise of
economic watchers, who expected those countries to enjoy a prolonged period of
growth in a low interest rate environment. This hurt many local stock markets
despite generally rising earnings.
Dollar weakness contributed all of the EAFE Index's positive return, with
local stock market weakness roughly neutralized by the strong Japanese market.
Rising real interest rates in Europe and the U.S. trade deficit, especially with
Japan, led to a generally lower U.S. dollar. The dollar was down against major
continental European currencies in the range of 10.0% to 13.5%, and off 5.4%
versus the U.K. pound. Similarly, the yen rose 12.9% versus the dollar.
Emerging markets rode a roller coaster in 1994, with a weak first half, a
strong bounce in the third quarter, and weak markets in the fourth quarter led
by the Mexican peso devaluation in December.
INVESTING STRATEGY
Our investment strategy focuses on four 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. Our
fundamental research is supplemented by standard global data services and
information supplied by brokers. These companies are in the more advanced
developing markets of Greece, South 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.
Traditional Value- Identifies smaller capitalization stocks with attractive
combinations of low price-to-book ratios, low price-to-earnings ratios, and
9
<PAGE> 12
high-dividend yields, ranked within country and economic sector.
Our investment approach leads us to seek opportunity in value and small
capitalization stocks. This emphasis gradually changes according to our economic
outlook. Because of the global economic recoveries this year, we increased the
exposure to stocks with lower price-to-book values and higher yields via the
Corporate Value and Traditional Value strategic themes. These two strategies
were the best performers for the year with Corporate Value, which is less
vulnerable to rising interest rates, the better of the two.
We also increased the weight in our Early Database strategic theme after
the weak performance of emerging markets in the first half of the year. Because
of their volatility, we will use dollar averaging to gradually increase
participation in emerging markets where we expect dynamic growth to continue.
Respectfully,
Batterymarch Financial Management, Inc.
January 23, 1995
10
<PAGE> 13
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in the
U.S. Portfolio since inception through December 31, 1994. During the period
illustrated, stock prices fluctuated widely; these results should not be
considered a representation of the dividend income or capital gain or loss that
may be realized from an investment made in the Portfolio today.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN*
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Portfolio
Value with Income --------------------------- S&P 500
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL (1/80) $25.00 -- -- $25.00 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
1980 26.95 $ .84 $ 1.49 29.35 +11.2% +6.2% +17.4% +24.6%
- -----------------------------------------------------------------------------------------------------------------------------------
1981 27.05 .87 1.80 32.38 + 3.6 +6.7 +10.3 - 4.9
- -----------------------------------------------------------------------------------------------------------------------------------
1982 30.56 1.19 1.75 40.42 +17.4 +7.4 +24.8 +21.5
- -----------------------------------------------------------------------------------------------------------------------------------
1983 35.72 2.15 1.52 52.19 +23.9 +5.2 +29.1 +22.5
- -----------------------------------------------------------------------------------------------------------------------------------
1984 30.56 2.51 1.57 50.69 - 7.4 +4.5 - 2.9 + 6.2
- -----------------------------------------------------------------------------------------------------------------------------------
1985 31.15 4.10 1.45 61.09 +15.4 +5.1 +20.5 +31.6
- -----------------------------------------------------------------------------------------------------------------------------------
1986 28.69 6.15 1.16 70.41 +11.3 +4.0 +15.3 +18.6
- -----------------------------------------------------------------------------------------------------------------------------------
1987 22.77 5.88 .72 71.60 - 0.3 +2.0 + 1.7 + 5.2
- -----------------------------------------------------------------------------------------------------------------------------------
1988 26.35 1.00 .97 89.24 +20.1 +4.5 +24.6 +16.5
- -----------------------------------------------------------------------------------------------------------------------------------
1989 26.15 3.81 .88 104.61 +13.8 +3.4 +17.2 +31.6
- -----------------------------------------------------------------------------------------------------------------------------------
1990 22.90 -- 1.08 95.90 -12.4 +4.1 - 8.3 - 3.1
- -----------------------------------------------------------------------------------------------------------------------------------
1991 28.20 -- .71 121.38 +23.1 +3.5 +26.6 +30.4
- -----------------------------------------------------------------------------------------------------------------------------------
1992 28.43 .86 .67 129.21 + 3.9 +2.6 + 6.5 + 7.6
- -----------------------------------------------------------------------------------------------------------------------------------
1993 30.65 2.16 .43 151.49 +15.6 +1.6 +17.2 +10.1
- -----------------------------------------------------------------------------------------------------------------------------------
1994 29.09 .03 .34 145.56 - 5.0 +1.1 - 3.9 + 1.3
- -----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +482.2% +615.0%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN +12.5% +14.1%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Adjusted to include reinvestment of income dividends and any capital gains
distributions for both 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 TABLE
The following table illustrates the results of a single-share investment in the
International Portfolio for the period from May 31, 1983, to December 31, 1994.
During the period illustrated, stock prices fluctuated widely; these results
should not be considered a representation of the dividend income or capital gain
or loss that may be realized from an investment made in the Portfolio today.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN*
- ----------------------------------------------------------------------------------------------------------------------------------
International Portfolio
Value with Income ------------------------- EAFE Index
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL (5/83) $25.00 -- -- $25.00 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
1983 25.98 $ .02 $ .44 26.46 + 4.8% +1.8% + 6.6% +11.8%
- ----------------------------------------------------------------------------------------------------------------------------------
1984 24.59 .11 1.09 26.26 - 4.9 +4.1 - 0.8 + 7.9
- ----------------------------------------------------------------------------------------------------------------------------------
1985 30.91 2.54 .93 36.85 +36.1 +4.2 +40.3 +56.7
- ----------------------------------------------------------------------------------------------------------------------------------
1986 38.68 6.55 1.03 55.53 +46.8 +3.9 +50.7 +69.9
- ----------------------------------------------------------------------------------------------------------------------------------
1987 28.66 18.32 .75 68.79 +22.1 +1.8 +23.9 +24.9
- ----------------------------------------------------------------------------------------------------------------------------------
1988 28.27 4.58 .99 81.71 +14.8 +4.0 +18.8 +28.6
- ----------------------------------------------------------------------------------------------------------------------------------
1989 32.44 2.08 .79 102.93 +22.8 +3.2 +26.0 +10.8
- ----------------------------------------------------------------------------------------------------------------------------------
1990 26.58 1.01 .95 90.31 -15.1 +2.8 -12.3 -23.2
- ----------------------------------------------------------------------------------------------------------------------------------
1991 27.78 .61 .77 99.30 + 6.9 +3.1 +10.0 +12.5
- ----------------------------------------------------------------------------------------------------------------------------------
1992 24.44 .28 .67 90.64 -11.0 +2.3 - 8.7 -11.9
- ----------------------------------------------------------------------------------------------------------------------------------
1993 31.04 -- .81 118.28 +27.0 +3.5 +30.5 +33.0
- ----------------------------------------------------------------------------------------------------------------------------------
1994 31.48 .63 .56 124.50 + 3.5 +1.8 + 5.3 + 8.1
- ----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +401.8% +525.7%
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN +14.9% +17.1%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Adjusted to include reinvestment of income dividends and any capital gains
distributions for both 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
FINANCIAL STATEMENTS
December 31, 1994
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
U.S. PORTFOLIO Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.8%)
- -----------------------------------------------------------------------------
BASIC MATERIALS (13.6%)
* AK Steel Holding Corp. 15,000 $ 457
* Alumax, Inc. 17,900 508
Aluminum Co. of America 6,000 520
Asarco, Inc. 10,100 288
Boise Cascade Corp. 3,000 80
Borden Chemicals 8,000 184
Champion International Corp. 13,200 482
Consolidated Papers 5,000 225
Dow Chemical Co. 6,200 417
E.I. du Pont de Nemours & Co. 4,000 225
Eastman Chemical 14,600 737
* FMC Corp. 2,800 162
Federal Paper Board Co., Inc. 17,700 513
Geon Co. 18,800 515
* Georgia Gulf Corp. 17,700 688
Georgia-Pacific Corp. 8,500 608
International Paper Co. 5,000 377
Kimberly-Clark Corp. 4,000 202
Loctite Corp. 10,500 488
* Magma Copper Co. Class B 35,800 600
The Mead Corp. 12,200 593
Monsanto Co. 17,500 1,234
Nucor Corp. 2,200 122
Olin Corp. 14,000 721
Phelps Dodge Corp. 4,200 260
Potash Corp. of Saskatchewan, Inc. 11,100 377
Praxair, Inc. 19,000 389
Rayonier Inc. 9,900 302
Rohm & Haas Co. 9,000 514
Scott Paper Co. 12,200 843
Temple-Inland Inc. 5,000 226
Union Camp Corp. 4,500 212
Union Carbide Corp. 20,500 602
Westvaco Corp. 8,500 334
Worthington Industries, Inc. 14,865 294
---------
GROUP TOTAL 15,299
---------
- -----------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (10.7%)
Allied-Signal, Inc. 3,900 133
* Amphenol Corp. 9,900 238
* BMC West Corp. 1,500 20
Browning-Ferris Industries, Inc. 5,200 148
Caterpillar, Inc. 28,500 1,571
* Clark Equipment Co. 12,000 651
Cooper Industries, Inc. 10,000 341
Cummins Engine Co., Inc. 15,500 701
Dover Corp. 15,800 816
Fluor Corp. 8,000 345
General Dynamics Corp. 7,400 322
* General Instrument 31,200 936
General Motors Corp. Class H 7,400 258
Harnischfeger Industries Inc. 4,000 112
Johnson Controls, Inc. 18,400 902
Lockheed Corp. 15,500 1,126
Martin Marietta Corp. 8,700 386
* Owens-Corning Fiberglas Corp. 9,900 317
* Redman Industries, Inc. 900 15
TRW, Inc. 13,400 884
Tecumseh Products Co. Class A 1,500 67
Tyco International Ltd. 26,803 1,273
* USG Corp. 27,100 528
---------
GROUP TOTAL 12,090
---------
- -----------------------------------------------------------------------------
CONSUMER CYCLICALS (17.3%)
* Acclaim Entertainment Inc. 36,800 529
* Ann Taylor Stores Corp. 5,000 172
Armstrong World Industries Inc. 8,900 343
Breed Technological Inc. 4,000 114
Brunswick Corp. 26,000 491
Callaway Golf Co. 12,000 397
* Champion Enterprises, Inc. 15,000 457
* Chris Craft Industries, Inc. 2,000 69
Chrysler Corp. 34,500 1,690
Circuit City Stores, Inc. 23,100 514
* Coleman Inc. 6,600 232
* Cyrk International, Inc. 6,000 247
Dana Corp. 28,300 662
Dayton-Hudson Corp. 2,800 198
Dollar General Corp. 3,906 115
Eaton Corp. 3,000 149
* Eckerd Corp. 21,700 648
* Federated Department Stores 8,900 171
Fleetwood Enterprises, Inc. 31,900 598
Ford Motor Co. 40,200 1,126
* General Nutrition Cos., Inc. 3,000 85
Heilig-Meyers Co. 23,425 591
* Hospitality Franchise Systems, Inc. 20,000 530
* Lear Seating Corp. 27,300 543
Leggett & Platt, Inc. 8,000 280
Lowes Cos., Inc. 30,600 1,063
Magna International, Inc. Class A 12,300 472
Masland Corp. 29,500 450
Mattel, Inc. 11,425 287
May Department Stores Co. 8,300 280
Maytag Corp. 33,000 495
Mercantile Stores Co., Inc. 16,200 640
* National Gaming Corp. 2,000 24
* Nautica Enterprises Inc. 10,000 297
* Office Depot, Inc. 29,100 698
Paccar, Inc. 15,600 683
J.C. Penney Co., Inc. 4,600 205
Premark International, Inc. 15,200 665
Rite Aid Corp. 29,500 690
Royal Caribbean Cruises, Ltd. 2,000 57
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
Sears, Roebuck & Co. 6,100 $ 281
Superior Industries International, Inc. 18,000 475
Talbots Inc. 11,000 344
Wabash National Corp. 7,500 293
Wolverine World Wide, Inc. 7,500 193
---------
GROUP TOTAL 19,543
---------
- -----------------------------------------------------------------------------
CONSUMER STAPLES (5.9%)
Adolph Coors Co. Class B 9,600 162
American Brands, Inc. 11,000 413
ConAgra, Inc. 32,800 1,025
Goodmark Foods, Inc. 12,400 198
IBP, Inc. 25,900 783
* The Kroger Co. 17,500 422
Midwest Grain Products 6,000 138
* Owens-Illinois, Inc. 28,400 312
Philip Morris Cos., Inc. 29,400 1,691
* RJR Nabisco Holdings Corp. 33,000 182
Ralston-Purina Group 7,700 344
* Safeway, Inc. 27,300 870
* Stop & Shop Cos., Inc. 2,000 51
---------
GROUP TOTAL 6,591
---------
- -----------------------------------------------------------------------------
ENERGY (7.7%)
Amoco Corp. 9,400 556
El Paso Natural Gas 22,700 692
Exxon Corp. 16,000 972
Imperial Oil Ltd. 2,000 66
* Input/Output, Inc. 25,000 591
Mobil Corp. 21,300 1,795
Murphy Oil Corp. 8,200 348
Panhandle Eastern Corp. 35,100 693
Phillips Petroleum Co. 25,800 845
Sun Co., Inc. 27,000 776
Texaco, Inc. 10,900 653
Tosco Corp. 13,000 379
USX-Marathon Group 21,400 350
---------
GROUP TOTAL 8,716
---------
- -----------------------------------------------------------------------------
FINANCIAL (11.1%)
AFLAC, Inc. 20,000 640
AT&T Capital Corp. 3,300 70
AON Corp. 8,000 256
The Bank of New York Co., Inc. 9,500 275
Beneficial Corp. 7,000 273
CIGNA Corp. 5,600 354
Chemical Banking Corp. 7,000 251
Citicorp 10,200 422
Comdisco, Inc. 20,700 479
Crestar Financial Corp. 17,800 670
Dean Witter Discover & Co. 11,500 390
Equitable of Iowa Co. 6,400 181
First Bank System, Inc. 2,000 66
First Interstate Bancorp. 9,100 615
First Union Corp. 9,000 372
First USA Inc. 22,500 740
GFC Financial Corp. 16,700 530
GP Financial Corp. 3,000 62
Green Tree Financial Corp. 17,800 541
Household International, Inc. 13,000 483
Jefferson-Pilot Corp. 4,800 249
MBNA Corp. 5,000 117
Mercury Finance Co. 4,500 58
Michigan National Corp. 3,868 289
NBD Bancorp, Inc. 20,700 567
NWNL Cos., Inc. 9,000 261
NationsBank, Inc. 12,600 569
Protective Life Corp. 3,500 170
Charles Schwab Corp. 28,300 987
Sunamerica Inc. 11,000 399
Transamerica Corp. 285 14
Wells Fargo & Co. 5,900 855
West One Bancorp 10,700 284
---------
GROUP TOTAL 12,489
---------
- -----------------------------------------------------------------------------
HEALTH CARE (5.2%)
* Amgen, Inc. 18,000 1,060
* Health Management Associates
Class A 7,500 187
* Healthsource, Inc. 6,500 266
* Humana, Inc. 20,000 452
Johnson & Johnson 24,400 1,336
Mylan Laboratories, Inc. 25,500 688
* Oxford Health Plan 8,500 674
U.S. Healthcare, Inc. 27,900 1,144
---------
GROUP TOTAL 5,807
---------
- -----------------------------------------------------------------------------
TECHNOLOGY (17.0%)
* ADC Telecommunications, Inc. 5,000 247
* ALC Communications 20,100 626
* Amdahl Corp. 25,400 279
* Applied Materials, Inc. 10,600 443
* Arrow Electronics, Inc. 16,800 603
* Atmel Corp. 24,000 801
* BMC Software, Inc. 4,300 244
* Cabletron Systems, Inc. 8,250 384
* COMPAQ Computer Corp. 6,500 257
Computer Associates
International, Inc. 33,400 1,620
* DSC Communications Corp. 39,000 1,404
* EMC Corp. 26,000 562
* Harris Corp. 9,500 404
Intel Corp. 3,900 248
International Business
Machines Corp. 13,800 1,014
* KLA Instruments Corp. 5,200 255
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
Micron Technology Inc. 48,450 $ 2,138
* Microsoft Corp. 14,000 856
Motorola, Inc. 18,312 1,060
* Oracle Systems Corp. 14,000 618
Philips Electronics NV 17,500 514
* Seagate Technology 36,500 876
* Silicon Graphics, Inc. 34,000 1,054
* Stratus Computer, Inc. 5,000 190
* Sun Microsystems, Inc. 7,500 265
* Sybase, Inc. 7,500 388
* Tandem Computers, Inc. 11,000 188
* Tech Data Corp. 12,000 202
* Tellabs, Inc. 5,000 277
Texas Instruments, Inc. 12,900 966
* Western Digital Corp. 9,500 159
---------
GROUP TOTAL 19,142
---------
- -----------------------------------------------------------------------------
TRANSPORT & SERVICES (1.3%)
Alexander & Baldwin, Inc. 13,500 300
* Federal Express Corp. 7,000 422
* Northwest Airlines Corp. Class A 19,600 309
Pittston Services Group 6,200 164
Ryder System, Inc. 1,500 33
* Southern Pacific Rail Corp. 14,500 263
---------
GROUP TOTAL 1,491
---------
- -----------------------------------------------------------------------------
UTILITIES (4.8%)
Ameritech Corp. 16,000 646
Bell Atlantic Corp. 22,000 1,095
Brooklyn Union Gas Co. 10,000 223
DQE Inc. 16,000 474
Duke Power Co. 13,300 507
General Public Utilities Corp. 2,200 58
MCN Corp. 26,200 475
National Fuel & Gas Co. 2,000 51
Rochester Gas & Electric Corp. 6,000 125
Rochester Telephone Corp. 24,200 511
Southwestern Bell Corp. 30,000 1,211
Southwestern Public Service Co. 3,000 80
---------
GROUP TOTAL 5,456
---------
- -----------------------------------------------------------------------------
MISCELLANEOUS (3.2%)
The Dial Corp. 23,400 497
ITT Corp. 4,500 399
* Litton Industries Inc. 34,300 1,269
Manpower Inc. 10,100 284
Textron, Inc. 23,300 1,174
---------
GROUP TOTAL 3,623
---------
- -----------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $102,919) 110,247
- -----------------------------------------------------------------------------
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (2.4%)
- -----------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.90%, 1/3/95
(Cost $2,744) $2,744 $ 2,744
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (100.2%)
(Cost $105,663) 112,991
- -----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.2%)
- -----------------------------------------------------------------------------
Other Assets--Notes C and F 4,814
Liabilities--Note F (5,027)
---------
(213)
- -----------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------
Applicable to 3,876,387 outstanding
shares of beneficial interest
(unlimited authorization) $112,778
- -----------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $29.09
=============================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
- -----------------------------------------------------------------------------
AT DECEMBER 31, 1994, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Per
(000) Share
-------- ------
<S> <C> <C>
Paid in Capital $107,177 $27.65
Undistributed Net
Investment Income 14 --
Accumulated Net
Realized Losses--Note D (1,741) (.45)
Unrealized Appreciation
of Investments--Note D 7,328 1.89
- -----------------------------------------------------------------------------
NET ASSETS $112,778 $29.09
- -----------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
INTERNATIONAL PORTFOLIO Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.2%)
- -----------------------------------------------------------------------------
AUSTRALIA (3.3%)
Australia & New
Zealand Bank Group 1,059,500 $ 3,493
Broken Hill Proprietary Ltd. 375,300 5,706
CSR Ltd. 2,139,300 7,385
Gio Australia Holdings 525,000 998
Mayne Nickless Ltd. 406,200 2,080
Odin Mining & Investment Co. 93,500 27
Santos Ltd. 1,879,600 5,074
Howard Smith 808,300 3,649
Stockland Trust Group 2,492,000 5,683
Westfield Trust (Units) 583,300 1,018
---------
GROUP TOTAL 35,113
---------
- -----------------------------------------------------------------------------
AUSTRIA (.2%)
* Austrian Airlines 9,560 1,788
Constantia Industrie
Holdings AG 9,000 719
---------
GROUP TOTAL 2,507
---------
- -----------------------------------------------------------------------------
CANADA (2.9%)
* Air Canada Inc. 104,800 626
* Avencor Inc. 135,700 2,685
BCE, Inc. 37,200 1,195
Canadian Imperial Bank
of Commerce 79,300 1,915
Canadian Pacific Ltd. 110,000 1,637
Canbra Foods 10% Pfd. Series 1 262 1
Fletcher Challenge Canada Ltd. 150,800 1,909
Hemlo Gold Mines Inc. 90,900 932
Imasco Ltd. 97,700 2,769
Inco Ltd. 25,800 738
Laidlaw Inc. Class B 123,000 969
Macmillan Bloedel Ltd. 59,400 747
Maple Leaf Foods Inc. 99,500 869
* Methanex Corp. 66,700 868
Moore, Ltd. 49,800 940
Petro-Canada 119,800 972
Placer Dome Group, Inc. 49,800 1,083
Power Corp. 119,600 1,652
Ranger Oil Ltd. 121,800 716
Royal Bank of Canada 105,100 2,108
Shell Canada Ltd. Class A 98,000 2,987
Toronto Dominion Bank 68,400 1,036
Transalta Corp. 81,500 843
---------
GROUP TOTAL 30,197
---------
- -----------------------------------------------------------------------------
DENMARK (.7%)
ISS (International Service Systems)
Series B 191,400 5,190
Jyske Bank 33,400 2,080
---------
GROUP TOTAL 7,270
---------
- -----------------------------------------------------------------------------
FINLAND (.1%)
Repola Oy 37,900 684
---------
- -----------------------------------------------------------------------------
FRANCE (4.7%)
BIC 40,600 5,104
Bon Marche 4,800 810
Comptoirs Modernes 17,600 4,419
Eridania Beghin-Say 12,600 1,657
Esso Francais 18,900 2,532
Finextel 49,900 870
Fromageries Bel 12,300 10,439
Navigation Mixte 28,800 5,223
Pernod-Ricard 38,500 2,254
Poliet Ex Lambert Freres 17,600 1,166
Sagem 27,200 13,555
Sovac 26,100 1,829
---------
GROUP TOTAL 49,858
---------
- -----------------------------------------------------------------------------
GERMANY (7.1%)
Altana Ind. AG 16,150 6,468
Bayer AG 24,090 5,640
Bayer Vereins Bank 11,750 3,387
Bayerische Hypotheken und
Wechsel Bank 26,700 7,060
Berliner Handels und
Frankfurter Bank 25,040 6,105
Cassella AG 200 368
Commerzbank AG 2,590 544
Daimler Benz AG 7,310 3,593
Douglas Holding AG 9,800 2,756
Hoechst AG 33,640 7,138
IKB Deutsche Industriebank 7,260 1,231
Industrie-Werke Karlsruhe 18,400 4,035
Man AG 21,900 5,989
RWE-DEA AG 1,326 331
Rheinisch-Westfaelisches
Elektrizitaetswerk AG 25,700 7,202
Schering AG 2,100 1,377
* Varta AG 15,480 2,875
Viag AG 23,500 7,321
Wurtt Metallwaren 6,900 1,624
---------
GROUP TOTAL 75,044
---------
- -----------------------------------------------------------------------------
GREECE (1.3%)
Alpha Credit Bank 40,300 1,734
Alpha Leasing Bank 61,970 1,576
Delta Dairy 71,890 1,678
Ergo Bank 44,210 1,824
Etva Leasing SA 26,220 530
Hellenic Bottling Co. 74,100 2,625
Michaniki 122,540 1,887
Titan Cement 60,680 1,783
---------
GROUP TOTAL 13,637
---------
- -----------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
HONG KONG (3.1%)
Cheung Kong Holdings Ltd. 612,000 $ 2,491
China Light and Power 399,000 1,702
China Travel International 4,182,000 773
Citic Pacific Ltd. 608,000 1,465
Cross-Harbor Tunnel Co. 1,215,000 2,332
Guoco Group 143,000 612
HSBC Holdings PLC 95,000 1,025
Hang Seng Bank 70 1
Hong Kong Aircraft 100,000 333
Hong Kong Realty &
Trust Class A 2,465,000 4,301
Hong Kong
Telecommunication Ltd. 3,641,600 6,942
Hutchison Whampoa Ltd. 260,000 1,052
Jardine Strategic 651,000 2,137
Johnson Electric Holdings 830,000 1,904
Mandarin Oriental
International Ltd. 478,000 559
New World Development 312,000 833
Orient Overseas Holdings 197,641 129
Peregrine Investment Holdings 514,000 604
Sun Hung Kai Properties Ltd. 93,700 559
Tai Cheung Properties 854,502 828
Television Broadcasts Ltd. 313,000 1,250
Varitronix International 498,000 708
Wharf Holdings Ltd. 169,800 573
---------
GROUP TOTAL 33,113
---------
- -----------------------------------------------------------------------------
INDONESIA (1.3%)
Astra International (Foreign) 695,000 1,328
* Bank Dagang Nasional IDR 443,000 740
Bank International
Indonesia (Foreign) 445,500 1,418
* Duta Anggada Realty (Foreign) 806,666 550
HM Sampoerna (Foreign) 393,750 1,934
Indah Kiat Pulp & Paper 1,156,600 1,262
* Indorama Synthetic (Foreign) 406,000 1,477
Inti Indorayon (Foreign) 545,000 1,413
Inti Indorayon ADR 38,000 296
Kalbe Farma (Foreign) 307,000 1,264
* Matahari Putra Prima 196,500 366
Tjiwi Kimia (Foreign) 539,500 1,006
Unilever Indonesia (Foreign) 48,400 770
---------
GROUP TOTAL 13,824
---------
- -----------------------------------------------------------------------------
IRELAND (.9%)
Allied Irish Bank 343,864 1,434
Bank of Ireland (Dublin) 346,200 1,604
CRH PLC 263,600 1,445
Greencore 249,000 1,557
Irish Life 453,100 1,329
Jefferson Smurfit Group 439,900 2,554
---------
GROUP TOTAL 9,923
---------
- -----------------------------------------------------------------------------
ITALY (2.8%)
Banca Commerciale Italiana Risp. 898,200 1,938
Banca Pop Novara 38,400 207
Banca Toscana 1,072,400 2,309
* Breda Ernesto Finanziaria 3,759,600 185
Credito Fondiario 162,500 556
* Finmeccanica SPA 1,133,940 1,048
Franco Tosi SPA 48,550 536
Gilardini 1,922,300 4,619
Istituto Bancario San Paolo
Ditorino SPA 619,600 3,627
Sirti SPA 1,129,400 7,202
Telecom Italia 2,792,640 7,235
---------
GROUP TOTAL 29,462
---------
- -----------------------------------------------------------------------------
JAPAN (35.1%)
AIDA Engineering 431,000 3,806
Aisin Seiki Co. 29,000 404
Aoki Corp. 1,433,000 6,254
Best Denki 50,000 823
Brother Industries Ltd. 1,151,000 7,611
Calsonic Corp. 81,000 674
Canon Inc. 224,000 3,798
Chubu Electric Power 200,400 4,886
Chudenko Corp. 30,000 1,099
Chugoku Electric Power Co. 260,700 6,069
Daido Steel Co. 1,101,000 6,407
Daiichi Pharmaceutical Co., Ltd. 455,000 7,167
Daiwa House Industries 267,000 3,777
Daiwa Securities Ltd. 133,000 1,922
Danto Corp. 40,000 482
Eisai Co., Ltd. 94,000 1,537
Fuji Photo Film Co., Ltd. 294,000 6,814
Fukusuke Corp. 36,000 210
Hazama-Gumi Ltd. 766,000 3,297
Hitachi Cable 303,000 2,523
Hitachi Maxwell 164,000 3,077
Hokkaido Electric Power 265,800 6,081
Hokuriku Electric Power 237,000 5,446
House Foods Industrial Co., Ltd. 546,000 10,847
Itoham Food Co., Ltd. 341,000 2,693
Izumiya Co. 3,000 57
JGC Corp. 90,000 1,535
Japan Synthetic Rubber 194,000 1,226
Kajima Corp. 305,000 2,613
Kawasaki Heavy Industries 422,000 1,905
Kirin Brewery Co., Ltd. 547,000 6,092
Kokuyo Co., Ltd. 40,000 963
Konica 438,000 3,692
</TABLE>
17
<PAGE> 20
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
Kumagai Gumi Co., Ltd. 756,000 $ 3,929
Kyudenko Corp. 172,400 2,162
Kyushu Electric Power 266,800 6,291
Marubeni Corp. 468,000 2,583
Marudai Food Co. 576,000 4,531
Maruetsu Inc. 27,000 284
Marui Co. 423,000 7,724
Maruichi Steel Tube 111,000 1,994
Matsushita Electric Industries
Co., Ltd. 24,000 395
Matsushita-Kotobuki Electric 98,000 2,557
Mitsubishi Material 1,103,000 5,854
NHK Spring Co. 224,000 1,214
NTN Corp. 1,211,000 9,077
New Japan Securities Co., Ltd. 1,485,000 10,936
Nichicon Corp. 510,000 7,471
Nintendo Co. 18,900 1,015
Nippon Credit Bank 104,000 625
Nippon Denso Co., Ltd. 361,000 7,606
Nippon Steel Corp. 2,059,000 7,747
Nishimatsu Construction 671,000 7,002
Nisshin Oil Mills 334,000 2,718
Nisshinbo Industries 693,000 7,996
Nitto Denko Corp. 170,000 2,695
Okumura Corp. 347,000 2,594
Ono Pharmaceutical Co., Ltd. 25,000 1,204
Onward Kashiyama Co. 1,492,000 20,659
Ricoh Co. 769,000 7,639
Royal Co. 128,000 1,965
Sankyo Co., Ltd. 65,000 1,617
Sekisui Chemical Co. 408,000 4,053
Shikoku Electric Power 83,200 1,978
Showa Shell Sekiyu 197,000 2,491
Sumitomo Metal Industries 2,081,000 6,744
Sumitomo Warehouse 228,000 1,544
TDK Corp. 131,000 6,349
Taisei Construction Corp. 1,019,000 6,319
Takasago Thermal Engineering 119,000 1,815
Takashimaya Co. 72,000 1,084
Takeda Chemical Industries 594,000 7,212
Teijin Ltd. 166,000 874
Teikoku Oil Co., Ltd. 266,000 1,866
Toho Co., Ltd. 9,000 1,580
Tokyo Sowa Bank 284,000 1,413
Tokyo Style Co. 393,000 6,664
Tokyo Tanabe Co., Ltd. 12,000 102
Tokyu Construction 595,000 3,075
Tonen Corp. 188,000 2,943
Toyo Ink Manufacturing 79,000 510
Toyo Seikan Kaisha Ltd. 61,000 2,032
Toyo Trust & Banking 3,000 31
Toyoda Automatic Loom Works 118,000 2,427
Toyota Motor Corp. 681,000 14,349
Uny Co. 285,000 4,747
Wacoal Corp. 1,076,000 11,984
Yamanouchi Pharmaceuticals Ltd. 382,000 7,857
Yamatake-Honeywell 397,000 6,333
The Yasuda Trust and Banking
Co., Ltd. 689,000 5,489
---------
GROUP TOTAL 369,736
---------
- -----------------------------------------------------------------------------
MALAYSIA (1.8%)
AMMB Holdings Bhd. 278,000 2,633
Berjuntai Tin 199,000 997
Genting Bhd. 229,500 1,967
Hong Leong Industries 193,000 997
IJM Corp. Bhd. 208,000 696
Land and General Bhd. 374,000 1,551
Malaysia Mining Corp. Bhd. 1,395,000 2,568
Malaysian International Shipping
Corp. Bhd. (Foreign) 530,666 1,516
Malaysian Tobacco 754,000 1,180
Sungei Way Holdings 427,000 1,704
* Technology Resource 141,000 450
Tractors Malaysia Holdings 1,120,000 1,525
Uniphone Telecommunications 486,000 940
* Uniphone Telecommunications
Warrants Exp. 9/7/99 121,500 81
Westmont Bhd. 72,000 448
---------
GROUP TOTAL 19,253
---------
- -----------------------------------------------------------------------------
MEXICO (1.0%)
Cementos Mexicanos SA Class B 289,237 1,560
Cifra `C' SA 866,600 1,690
Empresas ICA 78,600 1,305
* Grupo Carso Series A-1 216,600 1,660
* Grupo Sidek `B' 583,400 1,319
Kimberly Clark Class A 104,200 1,256
Telefonos de Mexico `L' 818,400 1,746
---------
GROUP TOTAL 10,536
---------
- -----------------------------------------------------------------------------
NETHERLANDS (5.6%)
ABN Amro Holding NV 224,000 7,782
Aegon NV 121,214 7,752
Amev NV 161,600 6,862
Grolsch NV 56,000 1,733
Hollandsche Beton Groep NV 7,600 1,174
International Nederlanden Group 159,500 7,536
Kon Bijenk 5,000 282
Kon Bolswessanen 114,900 2,178
Koninklijke Knp BT NV 55,200 1,571
Royal Dutch Petroleum 65,000 7,078
Telegraaf Holdings 59,600 6,868
Unilever NV 62,900 7,357
VOLMAC Group 70,000 968
---------
GROUP TOTAL 59,141
---------
- -----------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
NEW ZEALAND (.3%)
Lion Nathan Ltd. 1,367,700 $ 2,612
---------
- -----------------------------------------------------------------------------
NORWAY (.6%)
Norsk Hydro 151,100 5,944
---------
- -----------------------------------------------------------------------------
Philippines (1.2%)
Ayala Corp `B' 1,019,600 1,663
* Engineering Equipment 8,870,000 875
JG Summit Holdings Inc. `B' 4,151,600 1,523
Manila Electric B 104,100 1,422
* Metro Pacific A Corp. 1,721,000 256
Petron Corp. 932,000 817
* Philex Mining Corp B 3,807,000 590
Philippine Long
Distance Telephone 28,480 1,579
Philippine National Bank 96,240 1,324
* RFM Corp. 179,800 289
San Miguel Corp. B 319,400 1,667
* SM Prime Holdings 1,448,000 472
---------
GROUP TOTAL 12,477
---------
- -----------------------------------------------------------------------------
PORTUGAL (1.2%)
Banco Commercial
Portugal (Registered) 132,920 1,741
Banco Espirito Santo
e Commercial 40,100 778
* Cimentos de Portugal 79,700 1,410
* Corticeira Amorin 197,200 3,292
Efacec-Emp 36,300 434
Jeronimo Martins 26,580 1,140
* Modelo S.G.P.S. 47,000 1,436
Radio Marconi 41,400 1,418
Soares Da Costa 33,600 635
---------
GROUP TOTAL 12,284
---------
- -----------------------------------------------------------------------------
SINGAPORE (1.2%)
Asia Pacific Breweries Ltd. 9,000 108
City Development 235,307 1,317
Cycle & Carriage 174,000 1,565
Fraser & Neave Ltd. 91,000 944
Inchcape Bhd. 130,000 491
Keppel Corp. 137,000 1,167
Marco Polo Development Ltd. 278,000 397
Overseas Union Bank 299,000 1,745
Rothmans Industries Ltd. 284,000 1,307
Singapore Press Holdings
Ltd. (Foreign) 61,000 1,110
Singapore Technologies
Industries 1,003,000 1,206
Straits Steamship Land Ltd. 447,000 1,535
---------
GROUP TOTAL 12,892
---------
- -----------------------------------------------------------------------------
SPAIN (3.6%)
Autopistas Del Mare Nostrum 332,000 3,133
Banco Bilbao Vizcaya 80,700 1,997
Banco Central Hispanoamericano 134,100 3,202
Banco Santander 144,200 5,509
Fuerzas Electrica 897,300 4,659
Iberduola 1,012,600 6,233
Sevillana de Electricidad Cia 1,390,600 6,493
Union Electrica Fenosa 1,613,500 6,702
---------
GROUP TOTAL 37,928
---------
- -----------------------------------------------------------------------------
SWEDEN (.2%)
Incentive AB Series `B' 19,300 621
Svenska Cell Series `B' (Free)(SCA) 58,000 909
---------
GROUP TOTAL 1,530
---------
- -----------------------------------------------------------------------------
SWITZERLAND (6.8%)
Baer Holdings 2,610 2,670
BBC Brown Boveri A 8,650 7,443
CS Holdings (Bearer) 5,655 2,418
CS Holdings (Registered) 72,525 6,202
Elektrowatt AG 22,920 6,055
Holderbank Financiere Glarus
AG (Bearer) 14,000 10,593
Magazine Zum Globus
Inhaber (Registered) 1,500 871
Nestle SA (Registered) 8,050 7,665
Sandoz AG (Registered) 9,000 4,687
Schindler Holdings AG 200 1,107
Societe Generale de Surveillance
Holdings SA (Bearer) 5,000 6,910
Swiss Bank Corp. (Bearer) 25,810 7,134
* Swissair Inhaber 5,200 3,057
Winterthur (Bearer) 9,080 4,742
---------
GROUP TOTAL 71,554
---------
- -----------------------------------------------------------------------------
THAILAND (1.0%)
American Standard (Foriegn) 18,150 239
Bangkok Bank Public Co.
Ltd. (Foreign) 208,000 2,221
Dhana Siam Finance & Securities
Co., Ltd. (Foreign) 226,000 1,594
Shinawatra Computer &
Communications Co.,
Ltd. (Foreign) 42,000 917
Siam Cement Co., Ltd. (Foreign) 23,200 1,390
Siam Pulp & Paper (Foreign) 374,400 1,536
TPI Polene Co., Ltd. 87,500 753
Thai Farmers Bank Ltd. (Foreign) 44,000 357
Thai Plastic Chemical Co., Ltd. 154,100 1,535
---------
GROUP TOTAL 10,542
---------
- -----------------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
TURKEY (1.3%)
Akbank Turkery 4,661,862 $ 1,274
* Akbank Turkery Cvt.
Promissory Notes 2,330,930 576
Alarko Holdings 1,469,682 1,262
Arcelik 5,630,528 1,465
Brisa Bridgestone Sabanci 6,138,500 1,038
Cimsa Cemento 603,100 1,554
EGE Biracilik 1,524,560 972
Koc Holdings AS 1,575,140 1,168
Migros 609,600 1,174
Netas 5,782,950 1,844
Tofas-Turk Otomobil
Fabrikas AS 1,146,000 984
---------
GROUP TOTAL 13,311
---------
- -----------------------------------------------------------------------------
UNITED KINGDOM (8.9%)
Amersham International PLC 175,400 2,316
Carlton Communications PLC 134,200 1,883
Charter Consolidated (Registered) 343,600 4,225
Cobham PLC 225,000 1,172
ECC Group 195,300 1,130
East Midlands Electric 268,664 3,530
Eastern Group 783,900 9,528
General Accident PLC 323,200 2,568
Great Portland Estates 245,000 705
Greenalls Group 285,780 1,936
Hazlewood Foods PLC 1,092,500 1,931
Hillsdown Holdings 809,200 2,278
Lex Services 187,100 884
Lloyds Abbey Life 370,400 1,929
Lonrho PLC 497,000 1,182
Manweb PLC 108,200 1,472
Midlands Electric 126,800 1,616
North West Water Group 225,800 1,914
Northern Electricity PLC 347,720 5,450
Norweb PLC 110,500 1,486
Peninsular & Orient Steam
Navigation Co. 668,300 6,377
Pentland Group 334,800 550
Powell Duffryn PLC 75,000 598
Powergen PLC 531,710 4,458
Rothmans International Units 312,300 2,213
Royal Insurance Holdings 302,800 1,326
Seeboard PLC 272,600 2,064
Severn Trent Water PLC 110,200 915
Slough Estates PLC 341,500 1,261
South Wales Electricity 108,100 1,522
South West Water 244,400 1,934
Sun Alliance Group 1,138,300 5,164
T & N PLC 588,600 1,473
Thames Water PLC 269,100 2,042
Unilever PLC 399,230 7,228
Vsel Consortium PLC 46,600 984
Welsh Water 76,900 796
Arjo Wiggins Appleton PLC 302,300 1,116
Williams Holdings PLC 454,000 2,216
---------
GROUP TOTAL 93,372
---------
- -----------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $873,279) 1,033,744
- -----------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.5%)
- -----------------------------------------------------------------------------
<CAPTION>
Face
Amount
(000)
--------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.90%, 1/3/95
(Cost $26,325) $ 26,325 26,325
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (100.7%)
(Cost $899,604) 1,060,069
- -----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.7%)
- -----------------------------------------------------------------------------
Other Assets--Notes C and F 187,543
Liabilities--Note F (194,487)
---------
(6,944)
- -----------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------
Applicable to 33,457,585 outstanding
shares of beneficial interest
(unlimited authorization) $1,053,125
- -----------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $31.48
=============================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AT DECEMBER 31, 1994, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------
Amount Per
(000) Share
----------- ------
<S> <C> <C>
Paid in Capital--Note E $ 886,884 $26.51
Undistributed Net
Investment Income--Note E 377 .01
Accumulated Net
Realized Gains--Notes D and E 5,399 .16
Unrealized Appreciation
of Investments--Note D 160,465 4.80
- -----------------------------------------------------------------------------
NET ASSETS $ 1,053,125 $31.48
- -----------------------------------------------------------------------------
</TABLE>
20
<PAGE> 23
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
U.S. INTERNATIONAL
PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1994 December 31, 1994
(000) (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends(1)............................................... $ 2,169 $ 20,758
Interest................................................... 141 1,770
- ----------------------------------------------------------------------------------------------------------------------------
Total Income................................... 2,310 22,528
- ----------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B........................... 563 1,622
The Vanguard Group--Note C.................................
Management and Administrative.......................... $246 $870
Marketing and Distribution............................. 21 267 184 1,054
---- ----
Taxes (other than income taxes)............................ 10 87
Custodians' Fees........................................... 34 818
Auditing Fees.............................................. 8 10
Shareholders' Reports...................................... 17 98
Annual Meeting and Proxy Costs............................. 1 13
Trustees' Fees and Expenses................................ 1 5
- ----------------------------------------------------------------------------------------------------------------------------
Total Expenses................................. 901 3,707
- ----------------------------------------------------------------------------------------------------------------------------
Net Investment Income...................... 1,409 18,821
- ----------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) ON
INVESTMENT SECURITIES SOLD .................................... (1,747) 48,027
- ----------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT
SECURITIES..................................................... (5,504) (17,417)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations.............. $(5,842) $ 49,431
============================================================================================================================
</TABLE>
(1) Dividends for the International Portfolio are net of foreign withholding
taxes of $3,592,000.
21
<PAGE> 24
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
U.S. PORTFOLIO INTERNATIONAL PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
DECEMBER 31, 1994 December 31, 1993 DECEMBER 31, 1994 December 31, 1993
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income...................... $ 1,409 $ 1,224 $ 18,821 $ 14,708
Realized Net Gain (Loss)................... (1,747) 5,818 48,027 7,616
Change in Unrealized
Appreciation (Depreciation)............ (5,504) 5,947 (17,417) 187,176
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Net Assets Resulting
from Operations................ (5,842) 12,989 49,431 209,500
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income...................... (1,401) (1,229) (19,131) (24,484)
Realized Net Gain.......................... (129) (7,223) (21,716) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions................ (1,530) (8,452) (40,847) (24,484)
- ----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular....................... 13,497 23,118 155,908 173,380
--In Lieu of
Cash Distributions............ 1,340 7,922 38,823 22,676
--Exchange...................... 33,652 51,318 192,662 197,436
Redeemed --Regular....................... (15,728) (8,342) (198,824) (152,955)
--Exchange...................... (31,355) (28,191) (126,363) (121,635)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions..... 1,406 45,825 62,206 118,902
- ----------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease).......... (5,966) 50,362 70,790 303,918
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year.......................... 118,744 68,382 982,335 678,417
- ----------------------------------------------------------------------------------------------------------------------------------
End of Year (3)............................ $112,778 $118,744 $1,053,125 $ 982,335
==================================================================================================================================
(1) Distributions Per Share
Net Investment Income.................. $.34 $.43 $.56 $.81
Realized Net Gain...................... $.03 $2.16 $.63 --
- ----------------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued................................. 1,527 2,388 10,643 12,809
Issued in Lieu of Cash Distributions... 45 261 1,222 761
Redeemed............................... (1,570) (1,180) (10,051) (9,687)
- ----------------------------------------------------------------------------------------------------------------------------------
2 1,469 1,814 3,883
- ----------------------------------------------------------------------------------------------------------------------------------
(3) Undistributed (Overdistributed)
Net Investment Income--Note E...... $ 14 $ 6 $ 377 $ (5,822)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 25
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
U.S. PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR .................... $30.65 $28.43 $28.20 $22.90 $26.15
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.............................. .34 .43 .68 .71 1.02
Net Realized and Unrealized Gain
(Loss) on Investments.......................... (1.53) 4.38 1.08 5.30 (3.19)
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS .......... (1.19) 4.81 1.76 6.01 (2.17)
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............... (.34) (.43) (.67) (.71) (1.08)
Distributions from Realized Capital Gains.......... (.03) (2.16) (.86) -- --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS ....................... (.37) (2.59) (1.53) (.71) (1.08)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR .......................... $29.09 $30.65 $28.43 $28.20 $22.90
===============================================================================================================================
TOTAL RETURN .......................................... -3.91% +17.24% +6.45% +26.57% -8.33%
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions)..................... $113 $119 $68 $115 $100
Ratio of Expenses to Average Net Assets................ .73% .90% .65% .44% .52%
Ratio of Net Investment Income to
Average Net Assets................................. 1.14% 1.43% 2.33% 2.67% 4.18%
Portfolio Turnover Rate................................ 151% 139% 209% 84% 81%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 26
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR .................... $31.04 $24.44 $27.78 $26.58 $32.44
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.............................. .55 .50 .66 .78 1.02
Net Realized and Unrealized Gain
(Loss) on Investments.......................... 1.08 6.91 (3.05) 1.80 (4.92)
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS .......... 1.63 7.41 (2.39) 2.58 (3.90)
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............... (.56) (.81) (.67) (.77) (.95)
Distributions from Realized Capital Gains.......... (.63) -- (.28) (.61) (1.01)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS ....................... (1.19) (.81) (.95) (1.38) (1.96)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR .......................... $31.48 $31.04 $24.44 $27.78 $26.58
===============================================================================================================================
TOTAL RETURN .......................................... +5.25% +30.49% -8.72% +9.96% -12.26%
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions)..................... $1,053 $982 $678 $878 $796
Ratio of Expenses to Average Net Assets................ .34% .40% .42% .38% .44%
Ratio of Net Investment Income to
Average Net Assets................................. 1.71% 1.76% 2.48% 2.87% 3.62%
Portfolio Turnover Rate................................ 40% 39% 51% 46% 18%
- -------------------------------------------------------------------------------------------------------------------------------
</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 U.S. exchanges
are based upon the latest quoted sales prices for such securities on the
appropriate exchange as of the close of the New York Stock Exchange
(generally 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
London 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
primarily 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. See Note E.
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. The Fund does not isolate that
portion of the results of operations resulting from changes in foreign
exchange rates on investments from the portion arising from changes in
market prices of securities. Such fluctuations are included in net realized
gain (loss) and unrealized appreciation (depreciation) on investments.
Dividend income is recorded on the ex-dividend date.
B. Under the terms of a contract which expires March 31, 1995, 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, 1994,
the investment advisory fee of the U.S. Portfolio represented an effective
annual rate of .45 of 1% of average net assets.
25
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS (continued)
Under the terms of a contract which expires January 4, 1997, the International
Portfolio pays Batterymarch Financial Management, Inc. an investment advisory
fee calculated at an annual percentage rate of average net assets of the
Portfolio. For the year ended December 31, 1994, the investment advisory fee of
the International Portfolio represented an effective
annual rate of .15 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, 1994, the Fund had contributed capital of $191,000 to Vanguard
(included in Other Assets), representing 1.0% of Vanguard's capitalization. The
Fund's trustees and officers are also directors and officers of Vanguard.
D. During the year ended December 31, 1994, 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. $186,614 $182,361
- ------------------------------------------------------------------------------
INTERNATIONAL 472,358 418,887
- ------------------------------------------------------------------------------
</TABLE>
At December 31, 1994, the U.S. Portfolio had available realized capital losses
of $1,747,000 to offset future net capital gains of $932,000 through December
31, 2002, and $815,000 through December 31, 2003.
The International Portfolio utilized a capital loss carryforward of $12,431,000
to offset capital gains realized during the year ended December 31, 1994.
At December 31, 1994, unrealized appreciation for financial reporting and
Federal income tax purposes was:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(000)
------------------------------------------------
Net
Appreciated Depreciated Unrealized
Portfolio Securities Securities Appreciation
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $ 11,617 $ (4,289) $ 7,328
- ------------------------------------------------------------------------------
INTERNATIONAL 206,721 (46,256) 160,465
- ------------------------------------------------------------------------------
</TABLE>
E. During the year ended December 31, 1994, the International
Portfolio realized gains on the sale of "passive foreign investment companies of
$6,509,000," which had been included in 1994 and prior years' distributable
income for tax purposes; accordingly such gains have been reclassified from
accumulated net realized gains to undistributed net investment income.
During the year ended December 31, 1994, the International Portfolio realized
$2,338,000 of net capital gains resulting from in-kind redemptions. Such gains
are not taxable income to the Portfolio and therefore will not be distributed to
shareholders; accordingly, such gains have been reclassified from accumulated
net realized gains to paid in capital.
F. The market values of securities on loan to broker/dealers at December 31,
1994, 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. $ 2,108 $ 2,224
- ------------------------------------------------------------------------------
INTERNATIONAL 170,849 181,992
- ------------------------------------------------------------------------------
</TABLE>
Security loans are required to be secured at all times by collateral at
least equal to the market value of securities loaned; 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.
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, 1994, 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 custodian 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 LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 13, 1995
SPECIAL TAX INFORMATION
SPECIAL 1994 TAX INFORMATION (UNAUDITED)
FOR U.S. PORTFOLIO OF VANGUARD/TRUSTEES' EQUITY FUND
Corporate shareholders should note that for the fiscal year ended December
31, 1994, 100% of the Portfolio's investment income (i.e., dividend income
plus short-term capital gains, if any) 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 of Rhone-Poulenc Rorer, Inc.; Director of Sun
Company, Inc.
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
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., The Jeffrey Co., and Southern New England
Communications Company.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company,
Reliance Electric 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 Chief Executive Officer 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 VINCENT S. MCCORMACK
Senior Vice President Senior Vice President
Planning & Development Operations
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Institutional Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
<PAGE> 31
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and
principles.
* We adhere to the highest standards of investment quality, consistent with
each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure of
risk) to prospective investors, and in our description to
shareholders of each Fund's success (or, sometimes, lack of
the same).
These principles make at least as much sense today as they did in 1929, perhaps
even more. For we live in an era when many fund organizations have become
asset-gathering machines, capitalizing on past performance that is unrepeatable
and investment fads that today, as yesterday, will come and go. The new
marketing policy is too often "if investors want it, we'll sell it to them." But
our principle remains "if it makes sound investment sense, we'll offer it, even
if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values was
brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of the
benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for its
low costs, which we believe are just as essential a consideration in investing
in mutual funds as risk potential and total return. We call this relationship
between risk, return, and cost the "eternal triangle" of mutual fund investing.
We take special pride in our position as (by far) the lowest-cost provider
of financial services in the world. Under our "no-load" offering structure,
shareholders begin their Vanguard investment program with $1,000 of assets (not,
say, $950) for each $1,000 investment. Then, under our "at-cost" operating
structure, each $1,000 is managed for only about $3 per year; our competitors
may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with sound
and durable goals to investors with long-term time horizons, and doing so at the
fairest financial terms available. We believe that the unique Vanguard structure
"promotes a healthy and viable mutual fund complex within which each Fund can
better prosper; enables the Funds to realize substantial savings from advisory
fee reductions; promotes savings from economies of scale; and provides the Funds
with direct and conflict-free control over distribution functions." We are not
alone in this belief. Indeed, the quotation is taken verbatim from the unanimous
decision of the U.S. Securities and Exchange Commission when, in 1981, it
approved our application for the structure under which we operate today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The Vanguard
Group have come to represent, and we are grateful for the success and growth
with which we have been blessed. We are an industry leader, and, as a competitor
observed a few years ago, we are "the standard by which all fund organizations
are judged."
In battle terms, "the vanguard" is the first wave of troops or ships, and
Vanguard surely is in the first wave of the battle for investment survival. As
we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
<PAGE> 32
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money Market Portfolio
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 Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[LOGO]
<TABLE>
<CAPTION>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
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.
Q250-12/94
<PAGE> 33
EDGAR APPENDIX
This appendix describes the components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The front cover of the printed version of this report features the
Vanguard ship in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through
the sea appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through seven.
A photograph of John C. Bogle appears at the lower-right of page one.
A line chart depicting Cumulative Performance of the U.S. Stocks versus
International Stocks, MSCI Emerging Markets (Free) Index, Standard & Poor's 500
Index, MSCI Europe (Free) Index, MSCI Pacific (Free) Index for the period
1990-1994 at the top left of page two.
A line chart depicting Cumulative Performance for Trustees'
International Portfolio, MSCI EAFE Index and Average International Fund, for the
period December 31, 1984, to December 31, 1994, including Average Annual Total
Returns, appears at the bottom of page three.
A line chart depicting Cumulative Performance for Growth Stocks versus
Value Stocks (Index Value), Standard & Poor's Growth Index and Standard &
Poor's Value Index, for the period 1990-1994, appears at the top left of page
five.
A line chart depicting Cumulative Performance for Standard & Poor's 500
Index, Trustees' U.S. Portfolio and Average General Equity Fund, for the period
December 31, 1984 to December 31, 1994, appears at the top of page six.
A running head featuring a telescope and map appears on pages eight
through ten.
A running head featuring a lantern appears on pages eleven and twelve.
A running head featuring a log book and pen appears on page thirteen
through twenty-seven.
A running head featuring a compass appears on page twenty-eight.
At the bottom of the inside back cover appears a triangle with the
sides labeled "Risk," "Cost," and "Return."
A seagull in flight is featured at the top of the outside back cover of
the report.
