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[LOGO OF VANGUARD TRUSTEES' APPEARS HERE] A Member of The Vanguard Group
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PROSPECTUS--APRIL 21, 1995
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
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INVESTMENT Vanguard/Trustees' Equity Fund (the "Fund"), is an open-end
OBJECTIVE AND diversified investment company that seeks to realize maximum
POLICIES long-term total return consistent with reasonable risk. The
Fund consists of two Portfolios: the U.S. Portfolio, which
invests in equity securities of companies based in the United
States, and the International Portfolio, which invests in eq-
uity securities of companies based outside the United States.
There is no assurance that either Portfolio will achieve its
stated objective. Shares of the Fund are neither insured nor
guaranteed by any agency of the U.S. Government, including
the FDIC.
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OPENING AN To open a regular (non-retirement) account, please complete
ACCOUNT and return the Account Registration Form. If you need assis-
tance in completing this Form, please call our Investor In-
formation Department. To open an Individual Retirement Ac-
count (IRA), please use a Vanguard IRA Adoption Agreement. To
obtain a copy of this form, call 1-800-662-7447, Monday
through Friday from 8:00 a.m to 9:00 p.m. and Saturday, from
9:00 a.m. to 4:00 p.m. (Eastern time). The minimum initial
investment is $10,000, or $500 for Uniform Gifts/Transfers to
Minors Act accounts. The Fund is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees). Howev-
er, the Fund incurs expenses for investment advisory, manage-
ment, administrative and distribution services.
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ABOUT THIS This Prospectus is designed to set forth concisely the infor-
PROSPECTUS mation you should know about the Fund before you invest. It
should be retained for future reference. A "Statement of Ad-
ditional Information" containing additional information about
the Fund has been filed with the Securities and Exchange Com-
mission. This Statement is dated April 21, 1995 and has been
incorporated by reference into this Prospectus. A copy may be
obtained without charge by writing to the Fund or by calling
the Investor Information Department.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Fund Expenses.......... 2
Financial Highlights... 3
Yield and Total Return. 4
FUND INFORMATION
Investment Objective... 5
Investment Policies.... 5
Investment Risks....... 6
Who Should Invest...... 8
Implementation of
Policies.............. 8
Investment Limitations. 10
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Management of the
Fund................. 11
Investment Advisers... 12
Performance Record.... 14
Dividends, Capital
Gains and Taxes...... 15
The Share Price of
Each Portfolio....... 17
General Information... 18
SHAREHOLDER GUIDE
Opening an Account and
Purchasing Shares.... 19
</TABLE>
<TABLE>
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Page
<S> <C>
Choosing a
Distribution Option.. 21
Tax Caution........... 21
When Your Account Will
Be Credited.......... 22
Selling Your Shares... 23
Exchanging Your
Shares............... 24
Important Information
About Telephone
Transactions......... 26
Transferring
Registration......... 26
Other Vanguard
Services............. 27
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
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<PAGE>
FUND EXPENSES The following table illustrates all expenses and fees that
you would incur as a shareholder of the Fund. The expenses
and fees set forth in the table are for the 1994 fiscal year.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
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<S> <C> <C>
Sales Load Imposed on Purchases...................... None
Sales Load Imposed on Reinvested Dividends........... None
Redemption Fees...................................... None
Exchange Fees........................................ None
<CAPTION>
U.S. INTERNATIONAL
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO
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<S> <C> <C>
Management & Administrative Expenses...... 0.20% 0.08%
Investment Advisory Fees.................. 0.45 0.15
12b-1 Fees................................ None None
Other Expenses
Distribution Costs....................... 0.02% 0.02%
Miscellaneous Expenses................... 0.06 0.09
---- ----
Total Other Expenses...................... 0.08 0.11
---- ----
TOTAL OPERATING EXPENSES................ 0.73% 0.34%
==== ====
</TABLE>
The purpose of this table is to assist you in understanding
the various costs and expenses that you would bear directly
or indirectly as an investor in the Fund.
The following example illustrates the expenses that you would
incur on a $1,000 investment over various periods, assuming
(1) a 5% annual rate of return and (2) redemption at the end
of each period. As noted in the table above, the Fund charges
no redemption fees of any kind.
<TABLE>
<S> <C> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
U.S. Portfolio..................... $7 $23 $41 $91
International Portfolio............ $3 $11 $19 $43
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY
BE HIGHER OR LOWER THAN THOSE SHOWN.
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2
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FINANCIAL The following financial highlights for a share outstanding
HIGHLIGHTS throughout each period, insofar as they relate to each of the
five years in the period ended December 31, 1994, have been
audited by Price Waterhouse LLP, independent accountants,
whose report thereon was unqualified. This information should
be read in conjunction with the Fund's financial statements
and notes thereto which are incorporated by reference in the
Statement of Additional Information and in this Prospectus,
and which appear, along with the report of Price Waterhouse
LLP, in the Fund's 1994 Annual Report to Shareholders. For a
complete discussion of the Fund's performance, please see the
Fund's 1994 Annual Report to Shareholders which may be ob-
tained without charge by writing to the Fund or by calling
our Investor Information Department at 1-800-662-7447.
<TABLE>
<CAPTION>
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U.S. PORTFOLIO
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YEAR ENDED DECEMBER 31,
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1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR................... $30.65 $28.43 $28.20 $22.90 $26.15 $26.35 $22.77 $28.69 $31.15 $30.56
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.... .34 .43 .68 .71 1.02 .87 1.02 .92 1.16 1.45
Net Realized and
Unrealized Gain (Loss)
on Investments.......... (1.53) 4.38 1.08 5.30 (3.19) 3.62 4.53 (.24) 3.69 4.69
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS.............. (1.19) 4.81 1.76 6.01 (2.17) 4.49 5.55 .68 4.85 6.14
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DISTRIBUTIONS
Dividends from Net
Investment Income....... (.34) (.43) (.67) (.71) (1.08) (.88) (.97) (.72) (1.16) (1.45)
Distributions from
Realized Capital Gains.. (.03) (2.16) (.86) -- -- (3.81) (1.00) (5.88) (6.15) (4.10)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS..... (.37) (2.59) (1.53) (.71) (1.08) (4.69) (1.97) (6.60) (7.31) (5.55)
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NET ASSET VALUE, END OF
YEAR..................... $29.09 $30.65 $28.43 $28.20 $22.90 $26.15 $26.35 $22.77 $28.69 $31.15
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TOTAL RETURN.............. (3.91)% 17.24% 6.45% 26.57% (8.33)% 17.23% 24.64% 1.68% 15.26% 20.53%
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RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)............... $ 113 $ 119 $ 68 $ 115 $ 100 $ 121 $ 115 $ 122 $ 163 $ 202
Ratio of Expenses to
Average Net Assets ...... .73% .90% .65% .44% .52% .51% .58% .52% .52% .48%
Ratio of Net Investment
Income to Average Net
Assets .................. 1.14% 1.43% 2.33% 2.67% 4.18% 2.90% 3.86% 2.77% 3.46% 4.42%
Portfolio Turnover Rate .. 151% 139% 209% 84% 81% 72% 90% 44% 19% 23%
</TABLE>
3
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<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO
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YEAR ENDED DECEMBER 31,
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1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $31.04 $24.44 $27.78 $26.58 $32.44 $28.27 $28.66 $38.68 $30.91 $24.59
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Expenses...............
Net Investment Income.. .55 .50 .66 .78 1.02 .82 .77 1.14 1.03 .93
Net Realized and
Unrealized Gain (Loss)
on Investments........ 1.08 6.91 (3.05) 1.80 (4.92) 6.22 4.41 7.91 14.32 8.86
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... 1.63 7.41 (2.39) 2.58 (3.90) 7.04 5.18 9.05 15.35 9.79
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DISTRIBUTIONS
Dividends from Net
Investment Income..... (.56) (.81) (.67) (.77) (.95) (.79) (.99) (.75) (1.03) (.93)
Distributions from
Realized Capital
Gains................. (.63) -- (.28) (.61) (1.01) (2.08) (4.58) (18.32) (6.55) (2.54)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS... (1.19) (.81) (.95) (1.38) (1.96) (2.87) (5.57) (19.07) (7.58) (3.47)
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NET ASSET VALUE, END OF
YEAR................... $31.48 $31.04 $24.44 $27.78 $26.58 $32.44 $28.27 $28.66 $38.68 $30.91
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TOTAL RETURN............ 5.25% 30.49% (8.72)% 9.96% (12.26)% 25.97% 18.78% 23.88% 50.71% 40.33%
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RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)............. $1,053 $ 982 $ 678 $ 878 $ 796 $ 646 $ 467 $ 657 $ 719 $ 582
Ratio of Expenses to
Average Net Assets..... .34% .40% .42% .38% .44% .46% .51% .50% .52% .56%
Ratio of Net Investment
Income to Average Net
Assets ................ 1.71% 1.76% 2.48% 2.87% 3.62% 2.61% 2.55% 2.44% 2.65% 3.11%
Portfolio Turnover Rate
....................... 40% 39% 51% 46% 18% 25% 14% 48% 24% 29%
</TABLE>
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YIELD AND From time to time a Portfolio may advertise its yield and to-
TOTAL RETURN tal return. Both yield and total return figures are based on
historical earnings and are not intended to indicate future
performance. The "total return" of a Portfolio refers to the
average annual compounded rates of return over one-, five-
and ten-year periods or for the life of the Portfolio (as
stated in the advertisement) that would equate an initial
amount invested at the beginning of a stated period to the
ending redeemable value of the investment, assuming the rein-
vestment of all dividend and capital gains distributions.
In accordance with industry guidelines set forth by the U.S.
Securities and Exchange Commission, the "30-day yield" of a
Portfolio is calculated by dividing the net investment income
per share earned during a 30-day period by the net asset
value per share on the last day of the period. Net investment
income includes interest and dividend income earned on the
Portfolio's securities; it is net of all expenses and all re-
curring and nonrecurring charges that have been applied to
all shareholder accounts. The yield calculation assumes that
the net investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used to
calculate advertised yields are standardized for all stock
and bond mutual funds. However, these methods differ from the
accounting methods used by a Portfolio to maintain its books
and records,
4
<PAGE>
and so the advertised 30-day yield may not fully reflect the
income paid to your own account or the yield reported in the
Fund's reports to shareholder.
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INVESTMENT The Fund is an open-end diversified investment company that
OBJECTIVE consists of two Portfolios. The U.S. Portfolio invests in eq-
uity securities of companies based in the United States, and
EACH PORTFOLIO the International Portfolio invests in equity securities of
SEEKS TO companies based outside the United States.
PROVIDE
MAXIMUM LONG-
TERM TOTAL
RETURN
The objective of each Portfolio is to realize maximum long-
term total return consistent with reasonable risk. Total re-
turn includes both capital return (appreciation or deprecia-
tion in a Portfolio's net asset value, adjusted for any dis-
tributions of net realized capital gains) and income return
(dividends from investment income, net of operating ex-
penses); and assumes the reinvestment of all dividend and
capital gains distributions.
There is no assurance that either Portfolio will achieve its
stated objective.
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INVESTMENT Both Portfolios of the Fund invest primarily in common stocks
POLICIES that have attractive total return potential. The Fund is man-
aged without regard to tax ramifications. The two Portfolios
THE U.S. differ primarily in their geographic orientation and their
PORTFOLIO investment adviser.
BLENDS GROWTH
AND VALUE The U.S. Portfolio invests primarily in domestic common
STRATEGIES stocks that are considered undervalued by its investment ad-
viser. Geewax, Terker & Co. ("Geewax Terker") utilizes a
quantitative approach to identify from a large universe of
companies those common stocks with the best relative total
return potential. Geewax Terker selects a combination of at-
tractively priced "value" and "growth" stocks for the Portfo-
lio. Among the characteristics emphasized in stock selection
are (i) market liquidity; (ii) low volatility; and (iii) fi-
nancial strength relative to other domestic common stocks.
THE The International Portfolio invests primarily in common
INTERNATIONAL stocks of companies located outside the United States. Under
PORTFOLIO normal circumstances, at least 65% of the International Port-
EMPHASIZES folio's assets will be invested in at least three different
STOCK countries. Batterymarch Financial Management, Inc. ("BFM,
SELECTION Inc.") examines securities from over 25 international stock
RATHER THAN markets, with emphasis on the five largest--Japan, the United
COUNTRY Kingdom, France, Canada and Germany. Common stocks are chosen
WEIGHTING for the International Portfolio using the investment advis-
er's scoring system for identifying undervalued common
stocks. The weighting of the International Portfolio's assets
among individual countries is not based on a forecast of ex-
pected changes in currency exchange rates. Rather, country
weightings reflect an assessment of the attractiveness of in-
dividual equity securities regardless of where they trade.
Both Portfolios of the Fund will be diversified across a
broad range of industries, and the International Portfolio
will be diversified across a number of countries, consistent
with the objective of providing a high level of total return
with a reasonable level of risk. Both Portfolios are expected
to remain substantially
5
<PAGE>
fully invested in equity securities. However, the proportion
of cash reserves held by a Portfolio may increase if the
Portfolio's adviser feels that a conservative investment pos-
ture is warranted.
Each Portfolio of the Fund is authorized to invest in stock
index futures and options to a limited extent. Each Portfolio
is permitted to hold equity securities other than common
stock, such as debentures or preferred stock that are con-
vertible into common stock, although there are no present
plans to do so. The International Portfolio may also enter
into forward foreign currency exchange contracts in order to
protect against fluctuations in exchange rates. See "Imple-
mentation of Policies" for a description of these and other
investment practices of the Fund.
The investment objectives and policies of the Fund are not
fundamental and so may be changed by the Board of Trustees
without shareholder approval. However, shareholders would be
notified prior to a material change in either.
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INVESTMENT As mutual funds investing in equity securities, the Portfo-
RISKS lios of the Fund are subject to market risk--i.e., the possi-
bility that stock prices in general will decline over short
BOTH or even extended periods. Domestic and foreign stock markets
PORTFOLIOS ARE tend to be cyclical, with periods when stock prices generally
SUBJECT TO rise and periods when stock prices generally decline.
STOCK MARKET
RISK
To illustrate the volatility of domestic stock prices, the
following table sets forth the extremes for U.S. stock market
returns as well as the average return for the period from
1926 to 1994, as measured by the Standard & Poor's 500 Com-
posite Stock Price Index:
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1994) OVER
VARIOUS TIME HORIZONS
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.2 +10.2 +10.7 +10.7
</TABLE>
As shown, common stocks have provided annual total returns
(capital appreciation plus dividend income) averaging +10.7%
for all 10-year periods from 1926-1994. While this average
return can be used as a guide for setting reasonable expecta-
tions for future stock market returns, it may not be useful
for forecasting future returns in any particular period, as
stock returns are quite volatile from year to year.
INTERNATIONAL Investments in foreign stock markets can be as volatile, if
STOCKS MAY BE not more volatile, than investments in U.S. markets. To il-
MORE VOLATILE lustrate the volatility of foreign stock market returns for
THAN U.S. the U.S. dollar-based investor, the following table sets
STOCKS forth the extremes for foreign stock market returns as well
as the average return for the period from 1969 to 1994, as
measured by the Morgan Stanley Capital International Europe,
Australia and Far East (EAFE) Index:
6
<PAGE>
AVERAGE ANNUAL INTERNATIONAL STOCK MARKET RETURNS (1969-1994)
OVER VARIOUS TIME HORIZONS
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEAR
------ ------- -------- -------
<S> <C> <C> <C> <C>
Best +69.9% +36.5% +22.8% +16.3%
Worst -23.2 + 1.5 + 7.0 +12.0
Average +15.0 +14.1 +16.0 +15.0
</TABLE>
As shown, international (non-U.S.) stocks have provided an-
nual total returns averaging +16.0% for all 10-year periods
from 1969 to 1994. Note, however, that the period from 1969
to 1994 was a favorable one for foreign stock market invest-
ing. As a result, the figures on total return and stock mar-
ket volatility are provided here only as a guide to potential
market risk, and may not be useful for forecasting future re-
turns in any particular period.
INTERNATIONAL For U.S. investors, the returns of foreign investments, such
STOCKS ALSO as those held by the International Portfolio, are influenced
EXPOSE by not only the returns on foreign common stocks themselves,
INVESTORS TO but also by currency risk--i.e., changes in the value of the
CURRENCY AND currencies in which the stocks are denominated. In a period
OTHER RISKS when the U.S. dollar generally rises against foreign curren-
cies, the returns on foreign stocks for a U.S. investor are
diminished. By contrast, in a period when the U.S. dollar
generally declines, the returns on foreign stocks are en-
hanced.
Other risks and considerations of international investing in-
clude the following: differences in accounting, auditing and
financial reporting standards; generally higher commission
rates on foreign portfolio transactions; the smaller trading
volumes and generally lower liquidity of foreign stock mar-
kets, which may result in greater price volatility; foreign
withholding taxes payable on the Portfolio's foreign securi-
ties, which may reduce dividend income payable to sharehold-
ers; the possibility of expropriation or confiscatory taxa-
tion; adverse changes in investment or exchange control regu-
lations; political instability which could affect U.S. in-
vestment in foreign countries; difficulty in obtaining and
enforcing foreign court judgements and potential restrictions
on the flow of international capital.
These tables on U.S. and international stock market returns
should not be viewed as representations of future returns
from U.S. or international stock markets or the U.S. or In-
ternational Portfolios of the Fund. The illustrated returns
represent historical investment performance, which may be a
poor guide to future returns. Also, stock market indexes are
based on unmanaged portfolios of securities before transac-
tion costs and other expenses. Such costs will reduce the
relative investment performance of the Fund's Portfolios and
other "real world" portfolios. Finally, the Fund's Portfolios
are likely to differ in portfolio composition from broad
stock market averages, and so a Portfolio's performance
should not be expected to mirror the returns provided by a
specific index.
7
<PAGE>
BOTH The investment advisers manage the Portfolios according to
PORTFOLIOS ARE traditional methods of "active" investment management, which
SUBJECT TO involve the buying and selling of securities based upon eco-
MANAGER RISK nomic, financial and market analysis and investment judge-
ment. Manager risk refers to the possibility that a Portfo-
lio's investment adviser may fail to execute the Portfolio's
investment strategy effectively. As a result, the Portfolio
may fail to achieve its stated objectives.
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WHO SHOULD The two Portfolios of the Fund are intended for investors who
INVEST are seeking maximum long-term total return with reasonable
risk. Because of the risks associated with common stock in-
INVESTORS vestments, the two Portfolios of the Fund are intended to be
SEEKING LONG- long-term investment vehicles and are not designed to provide
TERM TOTAL investors with a means of speculating on short-term stock
RETURN market movements. Investors should be able to tolerate sud-
den, sometimes substantial fluctuations in the value of their
investment. Investors in the International Portfolio should
be cognizant of the unique risks of international investing,
including their exposure to currency fluctuations.
The Fund is intended to be a long-term investment vehicle and
is not designed to provide investors with a means of specu-
lating on short-term market movements. Investors who engage
in excessive account activity generate additional costs which
are borne by all of the Fund's shareholders. In order to min-
imize such costs, the Fund has adopted the following poli-
cies. The Fund reserves the right to reject any purchase re-
quest (including exchange purchases from other Vanguard port-
folios) that is reasonably deemed to be disruptive to effi-
cient portfolio management, either because of the timing of
the investment or previous excessive trading by the investor.
Additionally, the Fund has adopted exchange privilege limita-
tions as described in the section "Exchange Privilege Limita-
tions." Finally, the Fund reserves the right to suspend the
offering of its shares.
No assurance can be given that a Portfolio of the Fund will
attain its objective or that shareholders will be protected
from the risk of loss that is inherent in equity investing.
Investors may wish to reduce the potential risk of investing
in the Fund by purchasing shares on a regular, periodic basis
(dollar-cost averaging) rather than making an investment in
one lump sum.
Because of these risks, the Fund should not be considered a
complete investment program. Most investors should maintain
diversified holdings of securities with different risk char-
acteristics--including common stocks, bonds and money market
instruments. Investors may also wish to complement an invest-
ment in the Fund with other types of common stock invest-
ments.
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IMPLEMENTATION In addition to investing primarily in equity securities, each
OF POLICIES Portfolio of the Fund follows a number of additional invest-
ment practices to achieve its objective.
THE The International Portfolio of the Fund may enter into for-
INTERNATIONAL ward foreign currency exchange contracts in order to protect
PORTFOLIO MAY against uncertainty in the level of future foreign exchange
ENTER INTO rates in the purchase and sale of investment securities. It
FORWARD may not enter into such contracts for speculative purposes.
CURRENCY
CONTRACTS
8
<PAGE>
A forward foreign currency exchange contract is an obligation
to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the
time of the contract. These contracts may be bought or sold
to protect the Portfolio to a limited extent against adverse
changes in exchange rates between foreign currencies and the
U.S. dollar. Such contracts, which protect the value of a
Portfolio's investment securities against a decline in the
value of a currency, do not eliminate fluctuations in the un-
derlying prices of the securities, they simply establish an
exchange rate at a future date. Also, although such contracts
tend to minimize the risk of loss due to a decline in the
value of the hedged currency, at the same time they tend to
limit any potential gain that might be realized should the
value of such currency increase.
EACH PORTFOLIO Although both normally seek to remain substantially fully in-
MAY INVEST IN vested in equity securities, the two Portfolios of the Fund
SHORT-TERM may invest temporarily in certain short-term fixed income se-
FIXED INCOME curities. Such securities may be used to invest uncommitted
SECURITIES cash balances, to maintain liquidity to meet shareholder re-
demptions, or to take a temporary defensive position against
potential stock market declines. No more than 35% of a Port-
folio's assets will be invested in short-term fixed income
securities for other than temporary defensive purposes. These
securities include: obligations of the United States Govern-
ment and its agencies or instrumentalities; commercial paper,
bank certificates of deposit, and bankers' acceptances; and
repurchase agreements collateralized by these securities.
EACH PORTFOLIO Each Portfolio may utilize stock futures contracts and op-
MAY USE tions to a limited extent. Specifically, each Portfolio may
FUTURES enter into futures contracts provided that not more than 5%
CONTRACTS AND of its assets are required as a futures contract deposit; in
OPTIONS addition, each Portfolio may enter into futures contracts and
options transactions only to the extent that obligations un-
der such contracts or transactions represent not more than
20% of the Portfolio's assets.
Futures contracts and options may be used for several rea-
sons: to simulate full investment in underlying securities
while retaining a cash balance for Fund management purposes,
to facilitate trading, to reduce transaction costs, or to
seek higher investment returns when a futures contract is
priced more attractively than the underlying equity security
or index.
The risk of loss in trading futures contracts in some strate-
gies can be substantial due both to the low margin deposits
required and the extremely high degree of leveraging involved
in futures pricing. As a result, a relatively small price
movement in a futures contract may result in immediate and
substantial loss or gain. However, a Portfolio will not use
futures contracts or options for speculative purposes or to
leverage its assets. Accordingly, the primary risks associ-
ated with the use of futures contracts and options by a Port-
folio are: (i) imperfect correlation between the change in
market value of the stocks held by the Portfolio and the
prices of futures contracts and options; and (ii) possible
lack of a liquid secondary market for a futures contract and
the resulting inability to
9
<PAGE>
close a futures position prior to its maturity date. The risk
of imperfect correlation will be minimized by investing only
in those contracts whose behavior is expected to resemble
that of a Portfolio's underlying securities. The risk that a
Portfolio will be unable to close at a futures position will
be minimized by entering into such transactions on a national
exchange with an active and liquid secondary market. In addi-
tion, when investing in futures contracts, each Portfolio
will segregate cash or cash equivalents in the amount of the
underlying obligation.
EACH PORTFOLIO Each Portfolio may lend its investment securities on a short-
MAY LEND ITS term or long-term basis to qualified institutional investors
SECURITIES for the purpose of realizing additional income. Loans of se-
curities by a Portfolio will be collateralized by cash, let-
ters of credit, or securities issued or guaranteed by the
U.S. Government or its agencies. The collateral will equal at
least 100% of the current market value of the loaned securi-
ties.
BORROWING Each Portfolio may borrow money, subject to the limits set
forth below, for temporary or emergency purposes, including
the meeting of redemption requests which might otherwise re-
quire the untimely disposition of securities.
U.S. PORTFOLIO Although both Portfolio's generally seek to invest for the
TURNOVER HAS long term, the Portfolios of the Fund retain the right to
EXCEEDED 100% sell securities irrespective of how long they have been held.
OVER THE PAST Annual turnover for the U.S. Portfolio has exceeded 100% ev-
SEVERAL YEARS ery year since 1992. A turnover rate of 100% would occur, for
example, if all the securities of a Portfolio were replaced
within one year. The International Portfolio's annual turn-
over is not expected to exceed 100%.
- --------------------------------------------------------------------------------
INVESTMENT Each Portfolio has adopted certain limitations designed to
LIMITATIONS reduce its exposure to specific situations. Some of these
limitations are that a Portfolio will not:
THE FUND HAS (a) with respect to 75% of the value of its total assets,
ADOPTED invest more than 5% of its assets in the securities of
CERTAIN any single issuer (other than obligations issued or
FUNDAMENTAL guaranteed as to principal and interest by the U.S.
LIMITATIONS Government, its agencies or instrumentalities);
(b) with respect to 75% of the value of its total assets,
purchase more than 10% of the voting securities of any
issuer;
(c) invest more than 25% of its assets in any one industry;
(d) borrow money, except from banks (or through repurchase
agreements) for temporary or emergency (not leveraging)
purposes, and then not in an amount exceeding 10% of the
value of the Fund's net assets at the time the borrowing
is made. Whenever borrowing exceeds 5% of the value of
the Fund's net assets, the Fund will not make any
additional investments; and
(e) make loans, except by (i) purchasing a portion of an
issue of bonds, debentures or similar obligations which
are either publicly distributed or customarily purchased
by institutional investors, (ii) entering into repurchase
agreements (provided, however, that repurchase agreements
10
<PAGE>
maturing in more than seven days, together with securities
which are not readily marketable, will not exceed 15% of a
Portfolio's total assets), and (iii) lending its investment
securities.
These investment limitations are considered at the time in-
vestment securities are purchased. The limitations described
here and in the Statement of Additional Information may be
changed only with the approval of a majority of a Portfolio's
shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment Com-
THE FUND panies, a family of more than 30 investment companies with
more than 80 distinct investment portfolios and total assets
VANGUARD in excess of $130 billion. Through their jointly-owned sub-
ADMINISTERS sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and
AND the other funds in the Group obtain at cost virtually all of
DISTRIBUTES their corporate management, administrative and distribution
THE FUND services. Vanguard also provides investment advisory services
on an at-cost basis to certain Vanguard funds. As a result of
Vanguard's unique corporate structure, the Vanguard funds
have costs substantially lower than those of most competing
mutual funds. In 1994, the average expense ratio (annual
costs including advisory fees divided by total net assets)
for the Vanguard funds amounted to approximately .30% com-
pared to an average of 1.05% for the mutual fund industry
(data provided by Lipper Analytical Services).
Vanguard employs a supporting staff of management and admin-
istrative personnel needed to provide the requisite services
to the funds and also furnishes the funds with necessary of-
fice space, furnishings and equipment. Each fund pays its
share of Vanguard's total expenses, which are allocated among
the funds under methods approved by the Board of Trustees
(Directors) of each fund. In addition, each fund bears its
own direct expenses, such as legal, auditing and custodian
fees.
The Officers of the Fund manage its day-to-day operations and
are responsible to the Fund's Board of Trustees. The Trustees
set broad policies for the Fund and choose its Officers. A
list of the Trustees and Officers of the Fund and a statement
of their present positions and principal occupations during
the past five years can be found in the Statement of Addi-
tional Information.
Vanguard provides distribution and marketing services to the
funds. The funds are available on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees). However, each
fund bears its share of the Group's distribution costs.
- --------------------------------------------------------------------------------
11
<PAGE>
INVESTMENT The investment adviser to the U.S. Portfolio is Geewax,
ADVISERS Terker & Co. ("Geewax Terker"), 99 Starr Street, Phoenix-
ville, PA 19460. Under an investment advisory agreement dated
GEEWAX TERKER April 1, 1992, Geewax Terker manages the investment and rein-
MANAGES THE vestment of the U.S. Portfolio's assets and continuously re-
U.S. views, supervises and administers the U.S. Portfolio's in-
PORTFOLIO'S vestment program. Geewax Terker discharges its responsibili-
INVESTMENTS ties subject to the control of the Officers and Trustees of
the Fund.
Founded in 1982, Geewax Terker provides investment advisory
services to institutional endowment and pension funds. As of
December 31, 1994, Geewax Terker provided investment advisory
services with respect to approximately $2.05 billion of cli-
ent assets. Geewax Terker's investment approach is quantita-
tive and it uses a series of analytical screens to evaluate a
universe of over 3,000 stocks from which an "investable uni-
verse" of approximately 900 stocks is determined. Stock se-
lections for the U.S. Portfolio are made from those 900
stocks. John J. Geewax and Bruce E. Terker, founders and
Partners of Geewax Terker, are primarily responsible for man-
aging the U.S. Portfolio.
The investment advisory fee payable to Geewax Terker by the
U.S. Portfolio will represent a percentage of the Portfolio's
average net assets adjusted for the investment performance of
the Portfolio relative to that of the Standard & Poor's 500
Composite Stock Price Index ("S&P 500") over the preceding
36-month period as follows:
<TABLE>
<CAPTION>
CUMULATIVE THREE-
YEAR PERFORMANCE ANNUAL
DIFFERENTIAL VS. THE S&P 500 FEE RATE
---------------------------- --------
<S> <C>
+4.5% points or more above 0.60%
+2.25% points but less than
+4.5% points above 0.40%
Less than +2.25% points above 0.20%
</TABLE>
The incentive/penalty fee structure was not fully operable
until the quarter ending March 31, 1995, and, before that
date, was calculated according to certain transition rules.
BATTERYMARCH, The investment adviser to the International Portfolio of the
INC. MANAGES Fund is Batterymarch Financial Management, Inc. ("BFM,
THE Inc."), 200 Clarendon Street, Boston, MA 02116. Under an in-
INTERNATIONAL vestment advisory agreement dated January 4, 1995, BFM, Inc.
PORTFOLIO'S manages the investment and reinvestment of the International
INVESTMENTS Portfolio's assets and continuously reviews, supervises, and
administers the Portfolio's investment program. BFM, Inc.
discharges its responsibilities subject to the control of the
Officers and Trustees of the Fund.
From the inception of the Fund in 1983 through January 3,
1995, Batterymarch Financial Management ("Batterymarch"),
served as investment adviser to the International Portfolio.
On January 4, 1995, Batterymarch was acquired by BFM, Inc., a
wholly-owned subsidiary of Legg Mason, Inc. formed for the
purpose of acquiring all of the operating assets and business
of Batterymarch. Legg Mason
12
<PAGE>
is a publicly held, New York Stock Exchange listed, holding
company that provides securities brokerage, investment advi-
sory, corporate and public finance, and mortgage banking
services to individuals, institutions, corporations and mu-
nicipalities through its wholly-owned subsidiaries.
BFM, Inc. provides investment advisory services to institu-
tional accounts, such as corporate pension plans and endow-
ment funds, as well as to individual investors. Total assets
under management were $5.1 billion as of January 4, 1995. For
the majority of BFM, Inc. clients, including the Fund, the
investment principals develop a common, firm-wide investment
strategy that is employed in managing client investment port-
folios and selecting equity securities for those portfolios.
Tania Zouikin, CFA and Deborah H. Miller, CFA are primarily
responsible for managing the International Portfolio of the
Fund. Ms. Zouikin is Chief Executive Officer and Chief In-
vestment Officer of BFM, Inc. and has been with the firm for
eleven years. Ms. Miller has 19 years of investment experi-
ence, including seven years at Batterymarch, and has a Ph.D.
from The Wharton School of the University of Pennsylvania.
The International Portfolio pays BFM, Inc. a basic advisory
fee at the end of each fiscal quarter, calculated by applying
a quarterly rate, based on the following annual percentage
rates, to the average month-end assets of the Portfolio for
the quarter:
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
---------- ------
<S> <C>
First $10 million 0.85%
Next $10 million 0.45%
Next $30 million 0.35%
Next $450 million 0.15%
Next $500 million 0.12%
Over $1 billion 0.10%
</TABLE>
The basic advisory fee may be increased or decreased by ap-
plying an adjustment formula based on the investment perfor-
mance of the Portfolio relative to the Morgan Stanley Capital
International Europe, Australia and Far East ("EAFE") Index.
The following table sets forth the incentive/penalty adjust-
ment to the basic advisory fee payable by the Portfolio to
BFM, Inc. under the investment advisory agreement:
<TABLE>
<CAPTION>
CUMULATIVE THREE-
YEAR PERFORMANCE INCENTIVE/PENALTY
DIFFERENTIAL VS. THE EAFE INDEX FEE ADJUSTMENT
------------------------------- -----------------
<S> <C>
Less than -9.0% 0.50 X Basic Fee
Between -9.0% and 0.0% 0.75 X Basic Fee
Between 0.0% and 4.5% 1.00 X Basic Fee
Between 4.5% and 13.5% 1.25 X Basic Fee
More than 13.5% 1.50 X Basic Fee
</TABLE>
13
<PAGE>
Under rules of the Securities and Exchange Commission, the
incentive/penalty fee adjustment will not be fully operable
until the quarter ending December 31, 1997, and until that
date, will be calculated according to certain transition
rules. Prior to the fiscal quarter ending December 31, 1995,
the incentive/penalty fee adjustment will not be in effect.
However, throughout this period BFM has agreed to waive any
fees payable that would be in excess of 75% of the Basic Fee
if the cumulative performance of the Portfolio from January
1, 1995 is less than that of the EAFE Index.
For the fiscal year ended December 31, 1994, the investment
advisory fee paid by the U.S. Portfolio represented an effec-
tive annual rate of .45 of 1% of average net assets, while
the International Portfolio's fee represented an effective
annual rate of .15 of 1% of average net assets.
The investment advisory agreements authorize BFM, Inc. and
Geewax Terker to select brokers and dealers to execute pur-
chases and sales of the Fund's portfolio securities, and di-
rect the respective advisers to use their best efforts to ob-
tain the best available price and the most favorable execu-
tion with respect to all transactions. The full range and
quality of brokerage services available are considered in
making these determinations.
The Fund has authorized BFM, Inc. and Geewax Terker to pay
higher commissions in recognition of brokerage services felt
necessary for the achievement of better execution, provided
the respective advisers believe this to be in the best inter-
est of the Portfolio. Although the Fund does not market its
shares through intermediary brokers, each Portfolio may place
orders with qualified broker-dealers who recommend the Port-
folio to clients if the Officers of the Fund believe that the
quality of the transaction and the commission are comparable
to what they would be with other qualified brokerage firms.
The Fund's Board of Trustees may, without the approval of
shareholders, provide for: (a) the employment of a new in-
vestment adviser pursuant to the terms of a new advisory
agreement, either as a replacement for an existing adviser or
as an additional adviser; (b) a change in the terms of an ad-
visory agreement; and (c) the continued employment of an ex-
isting adviser on the same advisory contract terms where a
contract has been assigned because of a change in control of
the adviser. Any such change will only be made upon not less
than 30 days' prior written notice to shareholders of the
Fund which shall include substantially the information con-
cerning the adviser that would have normally been included in
a proxy statement.
- --------------------------------------------------------------------------------
PERFORMANCE The tables below provide investment results for both Portfo-
RECORD lios for several periods throughout the Fund's lifetime. The
results shown represent "total return" investment perfor-
mance, which assumes the reinvestment of all capital gains
and income dividends for the indicated periods. Also included
is comparative information with respect to the unmanaged
Standard & Poor's 500 Composite Stock Price Index, a widely-
used barometer of U.S. stock market activity; the
14
<PAGE>
Consumer Price Index, a statistical measure of changes in the
prices of U.S. goods and services; and the Morgan Stanley
Capital International Europe, Australia and Far East ("EAFE")
Index, a diversified portfolio of foreign stocks commonly
used as a benchmark of foreign stock market activity. The ta-
bles do not make any allowance for federal, state or local
income taxes, which shareholders must pay on a current basis.
The results shown should not be considered a representation
of the total return from an investment made in the Fund to-
day. The periods shown were generally favorable ones for
stock market investing. This information is provided to help
investors better understand the Fund and may not provide a
basis for comparison with other investments or mutual funds
which use a different method to calculate performance.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURN FOR
VANGUARD/TRUSTEES' EQUITY FUND--
U.S. PORTFOLIO
-----------------------------------------
FISCAL PERIODS U.S. S&P 500 CONSUMER
ENDED 12/31/94 PORTFOLIO INDEX PRICE INDEX
-------------- ----------- ----------- ------------
<S> <C> <C> <C>
1 Year - 3.9% + 1.3% +2.7%
5 Years + 6.8 + 8.7 +3.5
10 Years +11.1 +14.3 +3.6
Lifetime* +12.5 +14.1 +4.5
</TABLE>
*January 31, 1980 to December 31, 1994.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURN FOR
VANGUARD/TRUSTEES' EQUITY FUND--
INTERNATIONAL PORTFOLIO
------------------------------------------
FISCAL PERIODS INTERNATIONAL EAFE CONSUMER
ENDED 12/31/94 PORTFOLIO INDEX PRICE INDEX
-------------- -------------- ----------- ------------
<S> <C> <C> <C>
1 Year + 5.3% + 8.1% +2.7%
5 Years + 3.9 + 1.8 +3.5
10 Years +16.8 +17.9 +3.6
Lifetime* +14.8 N/A N/A
</TABLE>
*May 16, 1983 to December 31, 1994.
- --------------------------------------------------------------------------------
DIVIDENDS, Dividend and capital gains distributions may be automatically
CAPITAL GAINS reinvested or received in cash. See "Choosing a Distribution
AND TAXES Option" for a description of these distribution methods.
THE FUND PAYS In addition, in order to satisfy certain distribution re-
QUARTERLY quirements of the Tax Reform Act of 1986, the Fund may de-
DIVIDENDS AND clare special year-end dividend and capital gains distribu-
ANY CAPITAL tions during December. Such distributions, if received by
GAINS ANNUALLY shareholders by January 31, are deemed to have been paid by
the Fund and received by shareholders on December 31 of the
prior year.
15
<PAGE>
Each Portfolio of the Fund intends to continue to qualify for
taxation as a "regulated investment company" under the Inter-
nal Revenue Code so that each Portfolio will not be subject
to federal income tax to the extent its income is distributed
to shareholders. Dividends paid by the Fund from net invest-
ment income and net short-term gains, whether received in
cash or reinvested in additional shares, will be taxable to
shareholders as ordinary income. For corporate investors of
the U.S. Portfolio, dividends from net investment income will
generally qualify in part for the intercorporate dividends-
received deduction. However, the portion of the dividends so
qualified depends on the aggregate taxable qualifying divi-
dend income received by the Portfolio from domestic (U.S.)
sources.
Distributions paid by the Fund from long-term capital gains,
whether received in cash or reinvested in additional shares,
are taxable as long-term capital gains, regardless of the
length of time you have owned shares in the Fund. Capital
gains distributions are made when a Portfolio realizes net
capital gains on sales of portfolio securities during the
year. The Fund does not seek to realize any particular amount
of capital gains during a year; rather, realized gains are a
by-product of portfolio management activities. Consequently,
capital gains distributions may be expected to vary consider-
ably from year to year; there will be no capital gains dis-
tributions in years when a Portfolio realizes net capital
losses.
Note that if you accept capital gains distributions in cash,
instead of reinvesting them in additional shares, you are in
effect reducing the capital at work for you in the Fund. Al-
so, keep in mind that if you purchase shares in the Fund
shortly before the record date for a dividend or capital
gains distribution, a portion of your investment will be paid
to you as a taxable distribution, regardless of whether you
are reinvesting your distributions or receiving them in cash.
The Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by the Fund.
THE The International Portfolio may elect to "pass through" to
INTERNATIONAL the Portfolio's shareholders the amount of foreign income
PORTFOLIO MAY taxes paid by the Portfolio. The Portfolio will make such an
"PASS THROUGH" election only if it deems it to be in the best interests of
FOREIGN TAXES its shareholders.
If this election is made, shareholders of the International
Portfolio will be required to include in their gross income
their pro rata share of foreign taxes paid by the Portfolio.
However, shareholders will be able to treat their pro rata
share of foreign taxes as either an itemized deduction or a
foreign tax credit against U.S. income taxes (but not both)
on their federal income tax return.
A CAPITAL GAIN A sale of shares of the Fund is a taxable event, and may re-
OR LOSS MAY BE sult in a capital gain or loss. A capital gain or loss may be
REALIZED UPON realized from an ordinary redemption of shares or an exchange
EXCHANGE OR of shares between two mutual funds (or two portfolios of a
REDEMPTION mutual fund).
16
<PAGE>
Dividend distributions, capital gains distributions, and cap-
ital gains or losses from redemptions and exchanges may be
subject to state and local taxes.
The Fund is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to share-
holders who have not complied with IRS taxpayer identifica-
tion regulations. You may avoid this withholding requirement
by certifying on your Account Registration Form your proper
Social Security or Employer Identification number and by cer-
tifying that you are not subject to backup withholding.
The Fund is organized as a Pennsylvania business trust and
therefore is not liable under current law for any corporate
income or franchise tax of the Commonwealth of Pennsylvania.
The Fund is subject to Pennsylvania county personal property
tax in the county which is the site of its principal office.
In the opinion of counsel, shareholders who are Pennsylvania
residents are not subject to county personal property taxes
on their shares, with the exception of shareholders who are
residents of Allegheny County or the City and School District
of Pittsburgh.
The tax discussion set forth above is included for general
information only. Prospective investors should consult their
own tax advisers concerning the tax consequences of an in-
vestment in the Fund. The Fund is managed without regard to
tax ramifications.
- --------------------------------------------------------------------------------
THE SHARE Each Portfolio's share price or "net asset value" per share
PRICE OF EACH is determined as of the close of regular trading on the New
PORTFOLIO York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the Exchange is open for trading. Net asset value
per share is computed by dividing the total value of a Port-
folio's investments and other assets of each Portfolio, less
any liabilities, by the number of outstanding shares of such
Portfolio.
Securities listed on a U.S. exchange are valued at the latest
quoted sale prices on the day the valuation is made. Securi-
ties listed on a U.S. exchange which are not traded on the
valuation date are valued at the mean between the bid and ask
prices. Securities listed on a foreign exchange are valued at
the latest quoted sales price available. All prices of listed
securities are taken from the exchange where the security is
primarily traded. Securities regularly traded in the over-
the-counter market for which market quotations are readily
available will be valued at the latest quoted bid price. Se-
curities may be valued on the basis of prices provided by a
pricing service when such prices are believed to reflect the
fair market value of such securities. Other assets and secu-
rities for which no quotations are readily available will be
valued in a manner determined in good faith by the Board of
Trustees to reflect their fair value.
For purposes of determining the International Portfolio's net
asset value per share, all assets and liabilities initially
expressed in foreign currencies will be translated into U.S.
dollars using the quoted daily exchange rates determined by
an external currency pricing agent as of 4:00 p.m. London
time. This officially
17
<PAGE>
quoted daily exchange rate may be determined by Morgan Stan-
ley Capital International prior to or after the close of a
particular foreign securities market. If such quotations are
not available, the rate of exchange will be determined in ac-
cordance with policies established by the Board of Trustees.
The share price of each Portfolio can be found daily in the
mutual fund section of most major newspapers under the head-
ing of The Vanguard Group.
- --------------------------------------------------------------------------------
GENERAL Vanguard/Trustees' Equity Fund is a Pennsylvania business
INFORMATION trust. The Declaration of Trust permits the Trustees to issue
an unlimited number of shares of beneficial interest, without
par value, from an unlimited number of classes of shares.
Currently, the Fund is offering two classes of shares (known
as Portfolios).
Shares of each Portfolio when issued are fully paid and non-
assessable; participate equally in dividends, distributions
and net assets; are entitled to one vote per share; have pro
rata liquidation rights; and do not have pre-emptive rights.
Also, shares of the Fund have non-cumulative voting rights,
meaning that the holders of more than 50% of the shares vot-
ing for the election of the Trustees can elect all of the
Trustees if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other ap-
plicable law. An annual meeting will be held to vote on the
removal of a Trustee or Trustees of the Fund if requested in
writing by the holders of not less than 10% of the outstand-
ing shares of the Fund.
All securities and cash of the U.S. Portfolio are held by
State Street Bank and Trust Company, Boston, MA. All securi-
ties and cash of the International Portfolio are held by Mor-
gan Stanley Trust Company, New York, NY. The Vanguard Group,
Inc., Valley Forge, PA, serves as the Fund's Transfer and
Dividend Disbursing Agent. Price Waterhouse LLP, serves as
independent accountants for the Fund and will audit its fi-
nancial statements annually. The Fund is not involved in any
litigation.
- --------------------------------------------------------------------------------
18
<PAGE>
SHAREHOLDER GUIDE
OPENING AN You may open a regular (non-retirement) account either by
ACCOUNT AND mail or wire. Simply complete and return your Account Regis-
PURCHASING tration Form and any required legal documentation, indicating
SHARES the amount you wish to invest. Your purchase must be equal to
or greater than the $10,000 minimum initial investment re-
quirement ($500 for Uniform Gifts/Transfers to Minors Act ac-
counts). You must open a new Individual Retirement Account by
mail (IRAs may not be opened by wire) using a Vanguard IRA
Adoption Agreement. Your purchase must be equal to or greater
than the $500 minimum initial investment requirement, but no
more than $2,000 if you are making a regular IRA contribu-
tion. Rollover contributions are generally limited to the
amount withdrawn within the past 60 days from an IRA or other
qualified Retirement Plan. If you need assistance with the
forms or have any questions about this Fund, please call our
Investor Information Department (1-800-662-7447). Note: For
other types of account registrations (e.g., corporations, as-
sociations, other organizations, trusts or powers of attor-
ney), please call us to determine which additional forms you
may need.
Because of the risks associated with common stock invest-
ments, the Fund is intended to be a long-term investment ve-
hicle and is not designed to provide investors with a means
of speculating on short-term market movements. Consequently,
the Fund reserves the right to reject any specific purchase
(and exchange purchase) request. The Fund also reserves the
right to suspend the offering of shares for a period of time.
The Fund's shares are purchased at the next-determined net
asset value after your investment has been received. The Fund
is offered on a no-load basis (i.e., there are no sales com-
missions or 12b-1 fees).
ADDITIONAL Subsequent investments to regular accounts may be made by
INVESTMENTS mail ($1,000 minimum), wire ($1,000 minimum), exchange from
another Vanguard Fund account ($100 minimum), or Vanguard
Fund Express. Subsequent investments to Individual Retirement
Accounts may be made by mail ($100 minimum) or exchange from
another Vanguard Fund account. In some instances, contribu-
tions may be made by wire or Vanguard Fund Express. Please
call us for more information on these options.
--------------------------------------------------------------
19
<PAGE>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY Please include the Additional investments
MAIL Complete amount of your initial should include the In-
and sign the investment and the vest-by-Mail remit-
enclosed name of the Portfolio tance form attached to
Account you have selected on your Fund confirmation
Registration the registration form, statements. Please
Form make your check pay- make your check pay-
able to The Vanguard able to The Vanguard
Group-Portfolio Number Group-Portfolio Num-
(see below for the ap- ber, (see below for
propriate Portfolio the appropriate Port-
number) and mail to: folio number), write
your account number on
VANGUARD FINANCIAL your check and, using
CENTER P.O. BOX 2600 the return envelope
VALLEY FORGE, PA 19482 provided, mail to the
address indicated on
the Invest-by-Mail
Form.
For express or VANGUARD FINANCIAL All written requests
registered CENTER 455 DEVON PARK should be mailed to
mail, send to: DRIVE WAYNE, PA 19087 one of the addresses
indicated for new ac-
counts. Do not send
registered or express
mail to the post of-
fice box address.
VANGUARD/TRUSTEES' EQUITY FUND PORTFOLIOS:
United States Portfolio--25
International Portfolio--46
--------------------------------------------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A.
Money should be ABA 031000011
wired to: CORESTATES NO. 0101 9897
ATTN VANGUARD
BEFORE WIRING VANGUARD/TRUSTEES' EQUITY FUND
Please contact PORTFOLIO NAME
Client Services ACCOUNT NUMBER
(1-800-662-2739) ACCOUNT REGISTRATION
To assure proper receipt, please be sure your bank includes
the Portfolio name, the account number Vanguard has assigned
to you and the eight-digit CoreStates number. If you are
opening a new account, please complete the Account Registra-
tion Form and mail it to the "New Account" address above af-
ter completing your wire arrangement. NOTE: Federal Funds
wire purchase orders will be accepted only when the Fund and
Custodian Banks are open for business.
--------------------------------------------------------------
PURCHASING BY You may open a new account or purchase additional shares by
EXCHANGE (from making an exchange from an existing Vanguard account. Howev-
a Vanguard er, the Fund reserves the right to refuse any exchange pur-
account) chase request. Call our Client Services Department (1-800-
662-2739) for assistance. The new account will have the same
registration as the existing account.
--------------------------------------------------------------
20
<PAGE>
PURCHASING BY The Fund Express Special Purchase option lets you move money
FUND EXPRESS from your bank account to your Vanguard account on an "as
needed" basis. Or if you choose the Automatic Investment op-
Special tion, money will be moved automatically from your bank ac-
Purchase and count to your Vanguard account on the schedule (monthly, bi-
Automatic monthly [every other month], quarterly or yearly) you select.
Investment To establish these Fund Express options, please provide the
appropriate information on the Account Registration Form. We
will send you a confirmation of your Fund Express enrollment;
please wait three weeks before using the service.
- --------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 1. AUTOMATIC REINVESTMENT OPTION--Both dividends and capital
gains distributions will be reinvested in additional Fund
shares. This option will be selected for you automatically
unless you specify one of the other options.
2. CASH DIVIDEND OPTION--Your dividends will be paid in cash
and your capital gains will be reinvested in additional
Fund shares.
3. ALL CASH OPTION--Both dividend and capital gains distribu-
tions will be paid in cash.
You may change your option by calling our Client Services De-
partment (1-800-662-2739).
In addition, an option to invest your cash dividends and/or
capital gains distributions in another Vanguard Fund account
is available. Please call our Client Services Department (1-
800-662-2739) for information. You may also elect Vanguard
Dividend Express which allows you to transfer your cash divi-
dends and/or capital gains distributions automatically to
your bank account. Please see "Other Vanguard Services" for
more information.
- --------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund shareholders.
INVESTORS These distributions are made to all shareholders who own Fund
SHOULD ASK shares as of the distribution's record date, regardless of
ABOUT THE how long the shares have been owned. Purchasing shares just
TIMING OF prior to the record date could have a significant impact on
CAPITAL GAINS your tax liability for the year. For example, if you purchase
AND DIVIDEND shares immediately prior to the record date of a sizable cap-
DISTRIBUTIONS ital gain or income dividend distribution, you will be as-
BEFORE sessed taxes on the amount of the capital gain and/or divi-
INVESTING dend distribution later paid even though you owned the Fund
shares for just a short period of time. (Taxes are due on the
distributions even if the dividend or gain is reinvested in
additional Fund shares.) While the total value of your in-
vestment will be the same after the distribution--the amount
of the distribution will offset the drop in the net asset
value of the shares--you should be aware of the tax implica-
tions the timing of your purchase may have.
Prospective investors should, therefore, inquire about poten-
tial distributions before investing. The Fund's annual capi-
tal gains distribution normally occurs in
21
<PAGE>
December, while income dividends are generally paid quarterly
in March, June, September and December. For additional infor-
mation on distributions and taxes, see the section titled
"Dividends, Capital Gains, and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on
INFORMATION your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO ADD
ESTABLISHING SHAREHOLDER OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD
OPTIONAL WITH ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE
SERVICES CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FUR-
THER ASSISTANCE.
SIGNATURE For our mutual protection, we may require a signature guaran-
GUARANTEES tee on certain written transaction requests. A signature
guarantee verifies the authenticity of your signature and may
be obtained from banks, brokers and any other guarantor that
Vanguard deems acceptable. A SIGNATURE GUARANTEE CANNOT BE
PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will be issued upon request. If a certifi-
cate is lost, you may incur an expense to replace it.
BROKER-DEALER If you purchase shares in Vanguard Funds through a registered
PURCHASES broker-dealer or investment adviser, the broker-dealer or ad-
viser may charge a service fee.
CANCELLING The Fund will not cancel any trade (e.g., a purchase, ex-
TRADES change or redemption) believed to be authentic, received in
writing or by telephone, once the trade request has been re-
ceived.
ELECTRONIC If you would prefer to receive a prospectus for the Fund or
PROSPECTUS any of the Vanguard Funds in an electronic format, please
DELIVERY call 1-800-231-7870 for additional information. If you elect
to do so, you may also receive a paper copy of the prospec-
tus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
WHEN YOUR Your trade date is the date on which your account is credit-
ACCOUNT WILL ed. If your purchase is made by check, Federal Funds wire or
BE CREDITED exchange, and is received by the close of the New York Stock
Exchange (generally 4:00 p.m. Eastern time), your trade date
is the day of receipt. If your purchase is received after the
close of the Exchange, your trade date is the next business
day. Your shares are purchased at the net asset value deter-
mined on your trade date. Vanguard will not accept third-
party checks to open an account. Please be sure your purchase
check is made payable to the Vanguard Group.
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a for-
eign check which has been drawn in U.S. dollars and has been
issued by a foreign bank with a U.S. correspondent bank. The
name of the U.S. correspondent bank must be printed on the
face of the foreign check.
- --------------------------------------------------------------------------------
22
<PAGE>
SELLING YOUR You may withdraw any portion of the funds in your account by
SHARES redeeming shares at any time. You may initiate a request by
writing or by telephoning. Your redemption proceeds are nor-
mally mailed within two business days after the receipt of
the request in Good Order.
SELLING BY Requests should be mailed to VANGUARD FINANCIAL CENTER,
MAIL VANGUARD/TRUSTEES' EQUITY FUND, P.O. BOX 1120, VALLEY FORGE,
PA 19482. (For express or registered mail, send your request
to Vanguard Financial Center, Vanguard/Trustees' Equity Fund,
455 Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received all
required documents in Good Order.
DEFINITION OF GOOD ORDER means that the request includes the following:
GOOD ORDER
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
3. Signatures of all owners EXACTLY as they are registered on
the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be re-
quired, in the case of estates, corporations, trusts and
certain other accounts.
6. Any certificates you are holding for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS TO
YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT (1-
800-662-2739).
--------------------------------------------------------------
SELLING BY To sell shares by telephone, you or your pre-authorized rep-
TELEPHONE resentative may call our Client Services Department at 1-800-
662-2739. The proceeds will be sent to you by mail. Please
see "Important Information About Telephone Transactions."
--------------------------------------------------------------
If you select the Fund Express Automatic Withdrawal option,
money will be automatically moved from your Vanguard Fund ac-
SELLING BY count to your bank account according to the schedule you have
FUND EXPRESS selected. The Special Redemption option lets you move money
from your Vanguard account to your bank account on an "as
Automatic needed" basis. To establish these Fund Express options,
Withdrawal & please provide the appropriate information on the Account
Special Registration Form. We will send you a confirmation of your
Redemption Fund Express service; please wait three weeks before using
the service.
--------------------------------------------------------------
SELLING BY You may sell shares by making an exchange into another Van-
EXCHANGE guard Fund account. Please see "Exchanging Your Shares" for
details.
--------------------------------------------------------------
IMPORTANT Shares purchased by check may be redeemed at any time. Howev-
REDEMPTION er, your redemption proceeds will not be paid until payment
INFORMATION for the purchase is collected, which may take up to ten cal-
endar days.
--------------------------------------------------------------
DELIVERY OF Redemption requests received by telephone prior to the close
REDEMPTION of regular trading on the New York Stock Exchange (generally
PROCEEDS 4:00 p.m. Eastern time) are processed on the day of receipt
and the redemption proceeds are normally sent on the follow-
ing business day.
23
<PAGE>
Redemption requests received by telephone after the close of
the Exchange are processed on the business day following re-
ceipt and the proceeds are normally sent on the second busi-
ness day following receipt.
Redemption proceeds must be sent to you within seven days of
receipt of your request in Good Order.
If you experience difficulty in making a telephone redemption
during periods of drastic economic or market changes, your
redemption request may be made by regular or express mail. It
will be implemented at the net asset value next determined
after your request has been received by Vanguard in Good Or-
der. The Fund reserves the right to revise or terminate the
telephone redemption privilege at any time.
The Fund may suspend the redemption right or postpone payment
at times when the New York Stock Exchange is closed or under
any emergency circumstances as determined by the United
States Securities and Exchange Commission.
If the Board of Trustees determines that it would be detri-
mental to the best interests of the Fund's remaining share-
holders to make payment in cash, the Fund may pay redemption
proceeds in whole or in part by a distribution in kind of
readily marketable securities.
--------------------------------------------------------------
VANGUARD'S If you make a redemption from a qualifying account, Vanguard
AVERAGE COST will send you an Average Cost Statement which provides you
STATEMENT with the tax basis of the shares you redeemed. Please see
"Other Vanguard Services" for additional information.
--------------------------------------------------------------
MINIMUM Due to the relatively high cost of maintaining smaller ac-
ACCOUNT counts, the Fund reserves the right to redeem shares in any
BALANCE account that is below the minimum initial investment amount
REQUIREMENT of $10,000. In addition, if at any time your total investment
in a Portfolio does not have a value of at least $1,000, you
may be notified that the value of your account is below the
Fund's minimum account balance requirement. You would then be
allowed 60 days to make an additional investment before the
account is liquidated. Proceeds would be promptly paid to the
shareholder. This minimum requirement does not apply to IRAs,
other retirement accounts and Uniform Gifts/Transfers to Mi-
nors Act accounts.
- --------------------------------------------------------------------------------
EXCHANGING Should your investment goals change, you may exchange your
YOUR SHARES shares of Vanguard/Trustees' Equity Fund for those of other
available Vanguard Funds.
EXCHANGING BY When exchanging shares by telephone, please have ready the
TELEPHONE Portfolio name, account number, Social Security Number or Em-
ployer Identification number listed on the account, and exact
Call Client name and address in which the account is registered. Only the
Services registered shareholder or the shareholder's pre-authorized
(1-800-662- representative may complete such an exchange. Requests for
2739) telephone exchanges received prior to the close of trading on
the New York Stock Exchange (generally 4:00 p.m. Eastern
time) are processed at the close of business that same day.
Requests received after the close of the Exchange are proc-
essed the
24
<PAGE>
next business day. TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO
OR FROM VANGUARD BALANCED INDEX FUND, VANGUARD INDEX TRUST,
VANGUARD INTERNATIONAL EQUITY INDEX FUND AND VANGUARD QUANTI-
TATIVE PORTFOLIOS. If you experience difficulty in making a
telephone exchange, your exchange request may be made by reg-
ular or express mail, and it will be implemented at the clos-
ing net asset value on the date received by Vanguard provided
the request is received in Good Order.
--------------------------------------------------------------
EXCHANGING BY Please be sure to include on your exchange request the name
MAIL and account number of your current Portfolio, the name of the
Fund you wish to exchange into, the amount you wish to ex-
change, and the signatures of all registered account holders.
Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD/TRUSTEES' EQUITY FUND, P.O. BOX 1120, VALLEY FORGE,
PA 19482. (For express or registered mail, send your request
to Vanguard Financial Center, Vanguard/Trustees' Equity Fund,
455 Devon Park Drive, Wayne, PA 19087.)
--------------------------------------------------------------
IMPORTANT Before you make an exchange, you should consider the follow-
EXCHANGE ing:
INFORMATION
. Please read the Fund's prospectus before making an ex-
change. For a copy and for answers to any questions you may
have, call our Investor Information Department (1-800-662-
7447).
. An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
. Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
. The shares to be exchanged must be on deposit and not held
in certificate form.
. New accounts are not currently accepted in the
Vanguard/Windsor Fund or Vanguard/PRIMECAP Fund.
. The redemption price of shares redeemed by exchange is the
net asset value next determined after Vanguard has received
the required documentation in Good Order.
. When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange privilege.
However, the Fund reserves the right to revise or terminate
its provisions, limit the amount of or reject any exchange,
as deemed necessary, at any time.
The Fund's exchange privilege is only available in states in
which the shares of the Fund are registered for sale. The
Fund's shares are currently registered for sale in all 50
states and the Fund intends to maintain such registration.
- --------------------------------------------------------------------------------
25
<PAGE>
EXCHANGE The Fund's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements in
LIMITATIONS the market. Accordingly, in order to prevent excessive use of
the exchange privilege that may potentially disrupt the man-
agement of the Fund and increase transaction costs, the Fund
has established a policy of limiting excessive exchange ac-
tivity.
Exchange activity generally will not be deemed excessive if
limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST 30
DAYS APART) from a Portfolio during any twelve month period.
Notwithstanding these limitations, the Fund reserves the
right to reject any purchase request (including exchange pur-
chases from other Vanguard portfolios) that is reasonably
deemed to be disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire redemptions)
INFORMATION and exchanges by telephone is automatically established on
ABOUT your account unless you request in writing that telephone
TELEPHONE transactions on your account not be permitted.
TRANSACTIONS
To protect your account from losses resulting from unautho-
rized or fraudulent telephone instructions, Vanguard adheres
to the following security procedures:
1.SECURITY CHECK. To request a transaction by telephone, the
caller must know (i) the name of the Portfolio; (ii) the 10-
digit account number; (iii) the exact name and address used
in the registration; and (iv) the Social Security or Employer
Identification number listed on the account.
2.PAYMENT POLICY. The proceeds of any telephone redemption by
mail will be made payable to the registered shareowner and
mailed to the address of record, only.
Neither the Fund nor Vanguard will be responsible for the au-
thenticity of transaction instructions received by telephone,
provided that reasonable security procedures have been fol-
lowed. Vanguard believes that the security procedures de-
scribed above are reasonable, and that if such procedures are
followed, you will bear the risk of any losses resulting from
unauthorized or fraudulent telephone transactions on your ac-
count.
- --------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund shares
REGISTRATION to another person by completing a transfer form and sending
it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110, VALLEY
FORGE, PA 19482. ATTENTION TRANSFER DEPARTMENT. The request
must be in Good Order. Before mailing your request, please
call our Client Services Department (1-800-662-2739) for full
instructions.
- --------------------------------------------------------------------------------
STATEMENTS AND Vanguard will send you a confirmation statement each time you
REPORTS initiate a transaction in your account, except for
checkwriting redemptions from Vanguard money market accounts.
You will also receive a comprehensive account statement at
the end of each calendar quarter. The fourth-quarter state-
ment will be a year-end statement, listing all transaction
activity for the entire calendar year.
26
<PAGE>
Vanguard's Average Cost Statement provides you with the aver-
age cost of shares redeemed from your account, using the av-
erage cost single category method. This service is available
for most taxable accounts opened since January 1, 1986. In
general, investors who redeemed shares from a qualifying Van-
guard account may expect to receive their Average Cost State-
ment in February of the following year. Please call our Cli-
ent Services department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you semi-an-
nually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please call
SERVICES our Investor Information Department at 1-800-662-7447.
VANGUARD With Vanguard's Direct Deposit Service, most U.S. Government
DIRECT DEPOSIT checks (including Social Security and military pension
SERVICE checks) and private payroll checks may be automatically de-
posited into your Vanguard Fund account. Separate brochures
and forms are available for direct deposit of U.S. Government
and private payroll checks.
VANGUARD Vanguard's Automatic Exchange Service allows you to move
AUTOMATIC money automatically among your Vanguard Fund accounts. For
EXCHANGE instance, the service can be used to "dollar cost average"
SERVICE from a money market portfolio into a stock or bond fund or to
contribute to an IRA or other retirement plan. Please contact
our Client Services Department at 1-800-662-2739 for addi-
tional information.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money between
EXPRESS your Fund account and your account at a bank, savings and
loan association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Fund Express
application.
The minimum amount that can be transferred by telephone is
$100. However, if you have established one of the automatic
options, the minimum amount is $50. The maximum amount that
can be transferred using any of the options is $100,000.
Special rules govern how your Fund Express purchases or re-
demptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific Van-
guard Funds. For more information, please refer to the Van-
guard Fund Express brochure.
VANGUARD Vanguard's Dividend Express allows you to transfer your divi-
DIVIDEND dends and/or capital gains distributions automatically from
EXPRESS your Fund account, one business day after the Fund's payable
date, to your account at a bank, savings and loan associa-
tion, or a credit union that is a member of the Automated
Clearing House (ACH) system. You may elect this service on
the Account Registration Form or
27
<PAGE>
call our Investor Information Department (1-800-662-7447) for
a Vanguard Dividend Express application.
VANGUARD TELE- Vanguard's Tele-Account is a convenient, automated service
ACCOUNT that provides share price, price change and yield quotations
on Vanguard Funds through any TouchTone (TM) telephone. This
service also lets you obtain information about your account
balance, your last transaction, and your most recent dividend
or capital gains payment. To contact Vanguard's Tele-Account
service, dial 1-800-ON-BOARD (1-800-662-6273). A brochure of-
fering detailed operating instructions is available from our
Investor Information Department (1-800- 662-7447).
- --------------------------------------------------------------------------------
28
<PAGE>
[LOGO OF VANGUARD TRUSTEES' EQUITY FUND APPEARS HERE]
- ---------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION
SERVICE FOR THE
HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
[LOGO OF VANGUARD TRUSTEES' EQUITY FUND APPEARS HERE]
P R O S P E C T U S
APRIL 21, 1995
[LOGO OF THE VANGUARD GROUP A MEMBER OF THE INVESTMENT COMPANIES APPEARS HERE]
P025
<PAGE>
PART B
VANGUARD/TRUSTEES' EQUITY FUND
(FORMERLY KNOWN AS "TRUSTEES' COMMINGLED FUND")
STATEMENT OF ADDITIONAL INFORMATION
APRIL 21, 1995
This Statement is not a prospectus but should be read in conjunction with
the Fund's Prospectus dated April 21, 1995. To obtain the Prospectus, please
call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... B-1
Purchase of Shares......................................................... B-6
Redemption of Shares....................................................... B-6
Yield and Total Return..................................................... B-7
Investment Limitations..................................................... B-7
Management of the Fund..................................................... B-9
Investment Advisory Services............................................... B-12
Portfolio Transactions..................................................... B-17
Performance Measures....................................................... B-17
General Information........................................................ B-19
Financial Statements....................................................... B-20
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the investment objective and policies set
forth in the Fund's Prospectus:
FOREIGN INVESTMENTS
Investors should recognize that investing in foreign companies involves cer-
tain special considerations which are not typically associated with investing
in U.S. companies. Since the stocks of foreign companies are frequently denom-
inated in foreign currencies, and since the International Portfolio may tempo-
rarily hold uninvested reserves in bank deposits in foreign currencies, the
International Portfolio will be affected favorably or unfavorably by changes
in currency rates and in exchange control regulations, and may incur costs in
connection with conversions between various currencies. The investment poli-
cies of the International Portfolio permit it to enter into forward foreign
currency exchange contracts in order to hedge the Portfolio's holdings and
commitments against changes in the level of future currency rates. Such con-
tracts involve an obligation to purchase or sell a specific currency at a fu-
ture date at a price set at the time of the contract.
As foreign companies are not generally subject to uniform accounting, audit-
ing and financial reporting standards and practices comparable to those appli-
cable to domestic companies, there may be less publicly available information
about certain foreign companies than about domestic companies. Securities of
some foreign companies are generally less liquid and more volatile than secu-
rities of comparable domestic companies. There is generally less government
supervision and regulation of stock exchanges, brokers and listed companies
than in the U.S. In addition, with respect to certain
B-1
<PAGE>
foreign countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect U.S. investments in those countries.
Although the International Portfolio will endeavor to achieve most favorable
execution costs in its portfolio transactions, fixed commissions on many for-
eign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges. In addition, it is expected that the expenses for custodian ar-
rangements of the Portfolio's foreign securities will be somewhat greater than
the expenses for the custodian arrangements for handling the U.S. Portfolio's
securities of equal value.
Certain foreign governments levy withholding taxes against dividend and in-
terest income. Although in some countries a portion of these taxes are recov-
erable, the non-recovered portion of foreign withholding taxes will reduce the
income received from the companies comprising the Fund's International Portfo-
lio. However, these foreign withholding taxes are not expected to have a sig-
nificant impact on the International Portfolio, since the Portfolio's invest-
ment objective is to seek long-term capital appreciation and any income should
be considered incidental.
FUTURES CONTRACTS
Each Portfolio may enter into futures contracts, options, options on futures
contracts and foreign currency futures contracts for several reasons: to main-
tain cash reserves while remaining fully invested, to facilitate trading, to
reduce transaction costs, or to seek higher investment returns when a futures
contract is priced more attractively than the underlying equity security or
index. Futures contracts provide for the future sale by one party and purchase
by another party of a specified amount of a specific security at a specified
future time and at a specified price. Futures contracts which are standardized
as to maturity date and underlying financial instrument are traded on national
futures exchanges. Futures exchanges and trading are regulated under the Com-
modity Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a
U.S. Government Agency.
Although futures contracts by their terms call for actual delivery or ac-
ceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Clos-
ing out an open futures position is done by taking an opposite position ("buy-
ing" a contract which has previously been "sold," "selling" a contract previ-
ously purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure comple-
tion of the contract (delivery or acceptance of the underlying security) if it
is not terminated prior to the specified delivery date. Minimal initial margin
requirements are established by the futures exchange and may be changed. Bro-
kers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin de-
posits that may range upward from less than 5% of the value of the contract
being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the con-
tract value may reduce the required margin, resulting in a repayment of excess
margin to the contract holder. Variation margin payments are made to and from
the futures broker for as long as the contract remains open. The Portfolios
expect to earn interest income on their margin deposits.
B-2
<PAGE>
The Portfolios will not use futures and options for speculative purposes. A
Portfolio will use futures and options to simulate full investment in under-
lying securities while retaining a cash balance for fund management purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions. Each Portfolio
will only sell futures contracts to protect securities it owns against price
declines or purchase contracts to protect against an increase in the price of
securities it intends to purchase. As evidence of this hedging interest, a
Portfolio expects that approximately 75% of its futures contract purchases
will be "completed"; that is, equivalent amounts of related securities will
have been purchased or are being purchased by the Portfolio upon sale of open
futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the exposure of Portfolio income to market fluctua-
tions, the use of futures contracts may be a more effective means of hedging
this exposure. While the Portfolios will incur commission expenses in both
opening and closing out futures positions, these costs are lower than transac-
tion costs incurred in the purchase and sale of U.S. Government securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
A Portfolio will not enter into futures contract transactions to the extent
that, immediately thereafter, the sum of its initial margin deposits on open
contracts exceeds 5% of the market value of the Portfolio's total assets. In
addition, a Portfolio will not enter into futures contracts to the extent that
its outstanding obligations to purchase securities under these contracts would
exceed 20% of the Portfolio's total assets.
RISK FACTORS IN FUTURES TRANSACTIONS
Positions in futures contracts may be closed out only on an Exchange which
provides a secondary market for such futures. However, there can be no assur-
ance that a liquid secondary market will exist for any particular futures con-
tract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, a Portfolio would continue
to be required to make daily cash payments to maintain its required margin. In
such situations, if a Portfolio has insufficient cash, it may have to sell
portfolio securities to meet daily margin requirements at a time when it may
be disadvantageous to do so. In addition, a Portfolio may be required to make
delivery of the instruments underlying interest rate futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge its portfolio. A Portfolio
will minimize the risk that it will be unable to close out a futures contract
by only entering into futures contracts which are traded on national futures
exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be sub-
stantial, due both to the low margin deposits required, and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and sub-
stantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin,
a subsequent 10% decrease in the value of the futures contract would result in
a total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Portfolios are engaged in only for hedging purposes, the Ad-
visers do not believe that the Portfolios are subject to the risks of loss
frequently associated with futures
B-3
<PAGE>
transactions. A Portfolio would presumably have sustained comparable losses
if, instead of the futures contract, it had invested in the underlying secu-
rity and sold it after the decline.
Utilization of futures transactions by a Portfolio does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is
also possible that a Portfolio could both lose money on futures contracts and
also experience a decline in value of its portfolio securities. There is also
the risk of loss by a Portfolio of margin deposits in the event of bankruptcy
of a broker with whom the Portfolio has an open position in a futures contract
or related option. Additionally, investments in futures contracts and options
involve risk that the investment advisers will incorrectly predict stock mar-
ket and interest rate trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades
may be made on that day at a price beyond that limit. The daily limit governs
only price movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the liquidation of unfa-
vorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS
A Portfolio is required for Federal income tax purposes to recognize as in-
come for each taxable year its net unrealized gains and losses on futures con-
tracts as of the end of the year as well as those actually realized during the
year. In most cases, any gain or loss recognized with respect to a futures
contract is considered to be 60% long-term capital gain or loss and 40% short-
term capital gain or loss, without regard to the holding period of the con-
tract. Furthermore, sales of futures contracts which are intended to hedge
against a change in the value of securities held by a Portfolio may affect the
holding period of such securities and, consequently, the nature of the gain or
loss on such securities upon disposition. A Portfolio may be required to defer
the recognition of losses on futures contracts to the extent of any unrecog-
nized gains on related positions held by the Portfolio.
In order for a Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of se-
curities or foreign currencies or other income derived with respect to the
Portfolio's business of investing in securities. In addition, gains realized
on the sale or other disposition of securities held for less than three months
must be limited to less than 30% of the Portfolio's annual gross income. It is
anticipated that any net gain realized from the closing out of futures con-
tracts will be considered gain from the sale of securities and therefore be
qualifying income for purposes of the 90% requirement. In order to avoid real-
izing excessive gains on securities held less than three months, a Portfolio
may be required to defer the closing out of futures contracts beyond the time
when it would otherwise be advantageous to do so. It is anticipated that
unrealized gains on futures contracts, which have been open for less than
three months as of the end of a Portfolio's fiscal year and which are recog-
nized for tax purposes, will not be considered gains on sales of securities
held less than three months for the purpose of the 30% test.
A Portfolio will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including
unrealized gains at the end of the Portfolio's fiscal year) on futures trans-
actions. Such distributions will be combined with distributions of capital
gains realized on the Portfolio's other investments and shareholders will be
advised on the nature of the distributions.
B-4
<PAGE>
REPURCHASE AGREEMENTS
Each Portfolio may invest in repurchase agreements with commercial banks,
brokers or dealers either for defensive purposes due to market conditions or
to generate income from its excess cash balances. A repurchase agreement is an
agreement under which the Portfolio acquires a money market instrument (gener-
ally a security issued by the U.S. Government or an agency thereof, a banker's
acceptance or a certificate of deposit) from a commercial bank, broker or
dealer, subject to resale to the seller at an agreed upon price and date (nor-
mally, the next business day). A repurchase agreement may be considered a loan
collateralized by securities. The resale price reflects an agreed upon inter-
est rate effective for the period the instrument is held by the Portfolio and
is unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by the Portfolio (including accrued in-
terest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by the Fund's custodian bank until repur-
chased. In addition, the Fund's Board of Trustees will monitor a Portfolio's
repurchase agreement transactions generally and will establish guidelines and
standards for review by the investment adviser of the creditworthiness of any
bank, broker or dealer party to a repurchase agreement with the Portfolio. No
more than an aggregate of 15% of a Portfolio's assets, at the time of invest-
ment, will be invested in repurchase agreements having maturities longer than
seven days and in securities subject to legal or contractual restrictions on
resale, or for which there are no readily available market quotations.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligation to repurchase the un-
derlying security at a time when the value of the security has declined, a
Portfolio may incur a loss upon disposition of the security. If the other
party to the agreement becomes insolvent and subject to liquidation or reorga-
nization under the Bankruptcy Code or other laws, a court may determine that
the underlying security is collateral for a loan by the Portfolio not within
the control of the Portfolio and therefore the realization by a Portfolio on
such collateral may be automatically stayed. Finally, it is possible that a
Portfolio may not be able to substantiate its interest in the underlying secu-
rity and may be deemed an unsecured creditor of the other party to the agree-
ment. While the Fund's management acknowledges these risks, it is expected
that they can be controlled through careful monitoring procedures.
LENDING OF SECURITIES
Each Portfolio may lend its investment securities on a short-term or long-
term basis to qualified institutional investors who need to borrow securities
in order to complete certain transactions, such as covering short sales,
avoiding failures to deliver securities or completing arbitrage operations. By
lending its investment securities, a Portfolio attempts to increase its net
investment income through the receipt of interest on the loan. Any gain or
loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the Portfolio. Each Portfolio may
lend its investment securities to qualified brokers, dealers, banks or other
financial institutions, so long as the terms, the structure and the aggregate
amount of such loans are not inconsistent with the Investment Company Act of
1940, or the Rules and Regulations or interpretations of the Securities and
Exchange Commission (the "Commission") thereunder, which currently require
that (a) the borrower pledge and maintain with the Portfolio collateral con-
sisting of cash, an irrevocable letter of credit issued by a domestic U.S.
bank, or securities issued or guaranteed by the United States Government hav-
ing a value at all times not less than 100% of the value of the securities
loaned, (b) the borrower add to such collateral whenever the price of the se-
curities loaned rises (i.e., the borrower "marks to the market" on a daily ba-
sis), (c) the loan be made subject to termination by the Portfolio at any
time, and (d) the Portfolio receive reasonable interest on the loan (which may
include the Portfolio's investing any cash collateral in interest bearing
short-term investments), any distribution on the loaned securities and any in-
crease in their market value. Loan arrangements made by a Portfolio will com-
ply with all other applicable regulatory requirements, including the rules of
the New York Stock Exchange, which rules presently require the borrower, after
notice, to redeliver the securities within
B-5
<PAGE>
the normal settlement time of five business days. All relevant facts and cir-
cumstances, including the creditworthiness of the broker, dealer or institu-
tion, will be considered in making decisions with respect to the lending of
securities, subject to review by the Fund's Board of Trustees.
At the present time, the Staff of the Commission does not object if an in-
vestment company pays reasonable negotiated fees in connection with loaned se-
curities, so long as such fees are set forth in a written contract and ap-
proved by the investment company's Directors (Trustees). In addition, voting
rights may pass with the loaned securities, but if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.
PURCHASE OF SHARES
The purchase price of shares of each Portfolio of the Fund is the net asset
value next determined after the order is received. The net asset value is cal-
culated as of the close of regular trading on the New York Stock Exchange on
each day the Exchange is open for business, and on any other day on which
there is sufficient trading in a Portfolio's investment securities to materi-
ally affect the Portfolio's net asset value per share. An order received prior
to the close of the Exchange will be executed at the price computed on the
date of receipt; and an order received after the close of the Exchange will be
executed at the price computed on the next day the Exchange is open.
Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum for initial and subsequent investments for certain
fiduciary accounts such as employee benefit plans or under circumstances where
certain economies can be achieved in sales of a Portfolio's shares.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and Ex-
change Commission (the "Commission"), (ii) during any period when an emergency
exists as defined by the rules of the Commission as a result of which it is
not reasonably practicable for a Portfolio to dispose of securities owned by
it, or fairly to determine the value of its assets, and (iii) for such other
periods as the Commission may permit.
The Fund has made an election with the Commission to pay in cash all redemp-
tions requested by any shareholder of record limited in amount during any 90-
day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in investment securities or in cash, as the Trustees
may deem advisable; however, payment will be made wholly in cash unless the
Trustees believe that economic or market conditions exist which would make
such a practice detrimental to the best interests of the Fund. If redemptions
are paid in investment securities, such securities will be valued as set forth
in the Prospectus under "The Share Price of Each Portfolio" and a redeeming
shareholder would normally incur brokerage expenses if he converted these se-
curities to cash.
No charge is made by a Portfolio for redemptions. Any redemption may be more
or less than the shareholder's cost depending on the market value of the secu-
rities held by the Portfolio.
SIGNATURE GUARANTEES. To protect your account, the Fund and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Fund to verify the
B-6
<PAGE>
identity of the person who has authorized a redemption from your account. SIG-
NATURE GUARANTEES ARE REQUIRED IN CONNECTION WITH: (1) REDEMPTIONS INVOLVING
MORE THAN $25,000 ON THE DATE OF RECEIPT BY VANGUARD OF ALL NECESSARY DOCU-
MENTS; (2) ALL REDEMPTIONS, REGARDLESS OF THE AMOUNT INVOLVED, WHEN THE PRO-
CEEDS ARE TO BE PAID TO SOMEONE OTHER THAN THE REGISTERED OWNER(S) AND/OR TO
AN ADDRESS OTHER THAN THE ADDRESS OF RECORD; AND (3) SHARE TRANSFER REQUESTS.
These requirements are not applicable to redemptions in Vanguard's prototype
retirement plans except in connection with: (1) distributions made when the
proceeds are to be paid to someone other than the plan participant; (2) cer-
tain authorizations to effect exchanges by telephone; and (3) when proceeds
are to be wired. These requirements may be waived by the Fund in certain in-
stances.
A guarantor must be a bank, a trust company, a member firm of a domestic
stock exchange, or a foreign branch of any of the foregoing. NOTARIES PUBLIC
ARE NOT ACCEPTABLE GUARANTORS.
YIELD AND TOTAL RETURN
The yield of the U.S. Portfolio of the Fund for the 30-day period ended De-
cember 31, 1994 was +1.43%.
The average annual total return of each Portfolio of the Fund for the fol-
lowing periods ending December 31, 1994 is set forth below:
<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
12/31/94 12/31/94 12/31/94
------------ ------------- --------------
<S> <C> <C> <C>
U.S. Portfolio..................... -3.91% +6.83% +11.13%
International Portfolio............ +5.25% +3.88% +16.84%
</TABLE>
Total return is computed by finding the average compounded rates of return
over the periods set forth above that would equate an initial amount invested
at the beginning of the periods to the ending redeemable value of the invest-
ment.
INVESTMENT LIMITATIONS
Each Portfolio of the Fund is subject to the following limitations which
(except as indicated otherwise below) may not be changed without the approval
of at least a majority of the outstanding voting securities (as defined in the
Investment Company Act of 1940 (the "1940 Act")) of the Fund. A Portfolio will
not:
(1) Borrow money except that the Portfolio may borrow from banks (or
through reverse repurchase agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests which
might otherwise require the untimely disposition of securities, in an
amount not exceeding 10% of the value of the Portfolio's net assets (in-
cluding the amount borrowed and the value of any outstanding reverse repur-
chase agreements) at the time the borrowing is made. Whenever borrowings
exceed 5% of the value of the Portfolio's net assets, the Portfolio will
not make any additional investments;
(2) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States govern-
ment and its instrumentalities) if as a result the Portfolio would hold
more than 10% of the outstanding voting securities of the issuer, or more
than 5% of the value of the Portfolio's total assets would be invested in
the securities of such issuer;
B-7
<PAGE>
(3) Invest in companies for the purpose of exercising control;
(4) Invest in securities of other investment companies, except as may be
acquired as a part of a merger, consolidation or acquisition of assets or
otherwise to the extent permitted by Section 12 of the 1940 Act. The Port-
folio will invest only in investment companies which have investment objec-
tives and investment policies consistent with those of the Portfolio;
(5) Engage in the business of underwriting securities issued by other
persons, except to the extent that the Portfolio may technically be deemed
to be an underwriter under the Securities Act of 1933, as amended, in dis-
posing of portfolio securities;
(6) Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(including the Fund's investment in The Vanguard Group, Inc., as discussed
on page B-10);
(7) Purchase or sell real estate although it may purchase and sell secu-
rities of companies which deal in real estate or interests therein;
(8) Purchase securities on margin or sell any securities short except
that each Portfolio may invest in stock futures contracts, stock options,
options on stock futures contracts and foreign currency futures contracts
to the extent that not more than 5% of its total assets are required as
margin deposit to secure obligations under futures contracts and not more
than 20% of its total assets are committed to such transactions at any
time;
(9) Invest more than 5% of the value of the total assets of the Portfolio
at the time of investment in the securities of any issuers which have rec-
ords of less than three years' continuous operation, including the opera-
tion of any predecessor, but this limitation does not apply to securities
issued or guaranteed as to interest and principal by the United States Gov-
ernment or its agencies or instrumentalities;*
(10) Purchase or retain any security if any officer, director, security
holder of the issuer of such security is at the same time an officer, di-
rector, or investment adviser of the Fund, or a partner or officer or di-
rector of such investment adviser and owns beneficially more than 1/2 of 1%
of the securities of such issuer provided that the aggregate holdings of
such securities of all such persons so owning more than 1/2 of 1% of the
outstanding stock or securities of such issuer exceed 5% of the outstanding
stock or securities of such issuer;*
(11) Make loans except by (i) purchasing a portion of an issue of bonds,
debentures or similar obligations which are either publicly distributed or
customarily purchased by institutional investors, (ii) entering into repur-
chase agreements, provided, however, that repurchase agreements maturing in
more than seven days, together with securities which do not have readily
available market quotations, will not exceed 10% of a Portfolio's total as-
sets, and (iii) lending its securities as provided under "Investment Objec-
tive and Policies";
(12) Purchase or write put or call options except as specified in "(8)"
above;
(13) Invest in interests in oil, gas, or other mineral exploration or de-
velopment programs;
(14) Purchase or sell commodities on commodity contracts except as speci-
fied in "(8)" above; and
(15) Concentrate its investments in a particular industry, although it
may invest up to 25% of the value of the Portfolio's total assets taken at
market in securities of issuers all of which conduct their principal busi-
ness activities in the same industry.
* These limitations are not fundamental and therefore may be changed by
the Fund's Trustees without a shareholder vote.
B-8
<PAGE>
Notwithstanding these limitations, the Fund may own all or any portion of
the securities of, or make loans to, or contribute to the costs or other fi-
nancial requirements of any company which will be wholly owned by the Fund and
one or more other investment companies and is primarily engaged in the busi-
ness of providing, at-cost, management, administrative or related services to
the Fund and other investment companies. See below for "MANAGEMENT OF THE
FUND."
The above-mentioned investment limitations are considered at the time in-
vestment securities are purchased.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Officers of the Fund manage its day-to-day operations and are responsi-
ble to the Fund's Board of Trustees. The Trustees set broad policies for the
Fund and choose its Officers. Following is a list of Trustees and Officers of
the Fund and a statement of their present positions and principal occupations
during the past five years. The mailing address of the Fund's Trustees and Of-
ficers is Post Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman, Chief JOHN C. SAWHILL, Trustee
Executive Officer and Trustee* President and Chief Executive Of-
Chairman, Chief Executive Officer, ficer, The Nature Conservancy;
and Director of The Vanguard Group, formerly, Director and Senior
Inc., and of each of the investment Partner, McKinsey & Co.; Presi-
companies in The Vanguard Group. Di- dent, New York University; Direc-
rector of The Mead Corporation and tor of Pacific Gas and Electric
General Accident Insurance. Company and NACCO Industries.
JAMES O. WELCH, JR., Trustee
JOHN J. BRENNAN, President & Trustee* Retired Chairman of Nabisco Brands
President and Director of The Van- Inc., retired Vice Chairman and
guard Group, Inc., and of each of Director of RJR Nabisco; Director
the other investment companies in of TECO Energy, Inc.
The Vanguard Group.
J. LAWRENCE WILSON, Trustee
Chairman and Chief Executive Offi-
ROBERT E. CAWTHORN, Trustee cer of Rohm & Haas Company; Direc-
Chairman of Rhone-Poulenc Rorer, tor of Cummins Engine Company;
Inc.; Director of Sun Company, Inc. Trustee of Vanderbilt University
and the Culver Educational Founda-
BARBARA BARNES HAUPTFUHRER, Trustee tion.
Director of The Great Atlantic and
Pacific Tea Company, Alco Standard RAYMOND J. KLAPINSKY, Secretary*
Corp., Raytheon Company, Knight- Senior Vice President and Secre-
Ridder, Inc., and Massachusetts Mu- tary of The Vanguard Group, Inc.;
tual Life Insurance Co. and Trustee Secretary of each of the invest-
Emerita of Wellesley College. ment companies in The Vanguard
Group.
Treasurer of The Vanguard Group,
BRUCE K. MACLAURY, Trustee Inc. and of each of the investment
President, The Brookings Institu- companies in The Vanguard Group.
tion; Director of American Express
Bank Ltd., The St. Paul Companies, KAREN E. WEST, Controller*
Inc. and Scott Paper Company. Vice President of The Vanguard
Group, Inc.; Controller of each of
BURTON G. MALKIEL, Trustee the investment companies in The
Chemical Bank Chairman's Professor Vanguard Group.
of Economics, Princeton University; --------
Director of Prudential Insurance Co. * Officers of the Fund are "inter-
of America, Amdahl Corporation, ested persons" as defined in the
Baker Fentress & Co., The Jeffrey Investment Company Act of 1940.
Co., and Southern New England Commu-
nications Company.
ALFRED M. RANKIN, JR., Trustee
Chairman, President and Chief Execu-
tive Officer of NACCO Industries
Inc.; Director of The BFGoodrich
Company, The Standard Products Com-
pany and The Reliance Electric Com-
pany.
B-9
<PAGE>
THE VANGUARD GROUP
Vanguard/Trustees' Equity Fund is a member of The Vanguard Group of Invest-
ment Companies. Through their jointly-owned subsidiary, The Vanguard Group,
Inc. ("Vanguard"), the Fund and the other Funds in the Group obtain at cost
virtually all of their corporate management, administrative and distribution
services. Vanguard also provides investment advisory services on an at-cost
basis to several of the Vanguard Funds.
Vanguard employs a supporting staff of management and administrative person-
nel needed to provide the requisite services to the Funds and also furnishes
the Funds with necessary office space, furnishings and equipment. Each Fund
pays its share of Vanguard's net expenses which are allocated among the Funds
under methods approved by the Board of Trustees (Directors) of each Fund. In
addition, each Fund bears its own direct expenses, such as legal, auditing and
custodian fees.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to pre-
vent unlawful practices in connection with the purchase or sale of securities
by persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are per-
mitted to engage in personal securities transactions. However, such transac-
tions are subject to procedures and guidelines substantially similar to those
recommended by the mutual fund industry and approved by the U.S. Securities
and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested are adjusted from time to time
in order to maintain the proportionate relationship between each Fund's rela-
tive net assets and its contribution to Vanguard's capital. At December 31,
1994, the Fund had contributed capital of $191,000 to Vanguard, representing
1.0% of Vanguard's capitalization. The Funds' Service Agreement provides as
follows: (a) each Vanguard Fund may invest up to .40% of its current assets in
Vanguard, and (b) there is no other limitation on the amount that each Van-
guard Fund may contribute to Vanguard's capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian rela-
tionships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended December 31, 1994, the Fund's share of Vanguard's actual net
costs of operation relating to management and administrative services (includ-
ing transfer agency) totaled approximately $1,116,000.
DISTRIBUTION. Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of Vanguard, acts as Sales Agent for shares of the Funds in connec-
tion with any sales made directly to investors in the states of Florida, Mis-
souri, New York, Ohio, Texas and such other states as it may be required.
The principal distribution expenses are for advertising, promotional materi-
als and marketing personnel. Distribution services may also include organizing
and offering to the public, from time to time, one or more new investment com-
panies which will become members of the Group. The Directors and Officers of
Vanguard determine the amount to be spent annually on distribution activities,
the manner and amount to be spent on each Fund, and whether to organize new
investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon their relative net assets. The remain-
ing one half of these expenses is allocated
B-10
<PAGE>
among the Funds based upon each Fund's sales for the preceding 24 months rela-
tive to the total sales of the Funds as a Group, provided, however, that no
Fund's aggregate quarterly rate of contribution for distribution expenses of a
marketing and promotional nature shall exceed 125% of the average distribution
expense rate for the Group, and that no Fund shall incur annual distribution
expenses in excess of 20/100 of 1% of its average month-end net assets. During
the fiscal year ended December 31, 1994, the Fund paid approximately $205,000
of the Group's distribution and marketing expenses.
INVESTMENT ADVISORY SERVICES. Vanguard provides investment advisory services
to Vanguard Money Market Reserves, Vanguard Institutional Money Market Portfo-
lio, Vanguard Municipal Bond Fund, Vanguard Admiral Funds, several Portfolios
of Vanguard Fixed Income Securities Fund, Vanguard California Tax-Free Fund,
Vanguard Florida Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund,
Vanguard New York Insured Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard
Pennsylvania Tax-Free Fund, Vanguard Index Trust, Vanguard International Eq-
uity Index Fund, Vanguard Balanced Index Fund, Vanguard Bond Index Fund, Van-
guard Institutional Index Fund, Vanguard Tax-Managed Fund, several Portfolios
of Vanguard Variable Insurance Fund, a portion of Vanguard/Windsor II and a
portion of Vanguard/Morgan Growth Fund, as well as several indexed separate
accounts. These services are provided on an at-cost basis from a money manage-
ment staff employed directly by Vanguard. The compensation and other expenses
of this staff are paid by the Funds utilizing these services.
REMUNERATION OF TRUSTEES AND OFFICERS. The Fund pays each Trustee, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Fund's Officers and employees are paid by Van-
guard which, in turn, is reimbursed by the Fund, and each other Fund in the
Group, for its proportionate share of Officers' and employees' salaries and
retirement benefits.
During the fiscal year ended December 31, 1994, the Fund paid approximately
$6,000 in fees and expenses to its "non-interested" Trustees. The Fund's pro-
portionate share of remuneration paid by Vanguard (and reimbursed by the Fund)
during the fiscal year to all Officers of the Fund, as a group, was approxi-
mately $48,220.
Trustees who are not Officers are paid an annual fee upon retirement equal
to $1,000 for each year of service on the Board up to a maximum of $15,000.
Under its Retirement Plan, Vanguard contributes annually an amount equal to
10% of each Officer's annual compensation plus 5.7% of that part of the eligi-
ble Officer's compensation during the year, if any, that exceeds the Social
Security Taxable Wage Base then in effect. Under its Thrift Plan, all eligible
officers are permitted to make pre-tax contributions in an amount equal to 4%
of total compensation which are matched by Vanguard on a 100% basis. The
Fund's proportionate share of retirement contributions made by Vanguard under
its Retirement and Thrift Plans on behalf of all eligible Officers of the
Fund, as a group, during the 1994 fiscal year was approximately $6,000.
B-11
<PAGE>
The following table provides detailed information with respect to the
amounts paid or accrued for the Trustees for the fiscal year ended December
31, 1994.
VANGUARD/TRUSTEES' EQUITY FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PENSION OR FROM ALL
AGGREGATE RETIREMENT BENEFITS ESTIMATED VANGUARD FUNDS
COMPENSATION ACCRUED AS PART OF ANNUAL BENEFITS PAID TO
NAMES OF TRUSTEES FROM TRUST TRUST EXPENSES UPON RETIREMENT TRUSTEES(2)
- ----------------- ------------ ------------------- --------------- ------------------
<S> <C> <C> <C> <C>
John C. Bogle(1)........ -- -- -- --
John J. Brennan(1)...... -- -- -- --
Barbara Barnes
Hauptfuhrer............ $481 $125 $15,000 $50,000
Robert E. Cawthorn...... $481 $ 91 $13,000 $50,000
Bruce K. MacLaury....... $545 $129 $12,000 $45,000
Burton G. Malkiel....... $481 $ 58 $15,000 $50,000
Alfred M. Rankin, Jr.... $481 $ 29 $15,000 $50,000
John C. Sawhill......... $481 $ 49 $15,000 $50,000
James O. Welch, Jr...... $462 $ 81 $15,000 $48,000
J. Lawrence Wilson...... $472 $ 37 $15,000 $49,000
</TABLE>
- --------
(1) As "Interested Trustees," Messrs. Bogle and Brennan receive no
compensation for their service as Trustees.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for their service as Director or Trustee of 33 Vanguard Funds
(26 in the case of Mr. MacLaury).
INVESTMENT ADVISORY SERVICES
The investment adviser to the Fund's International Portfolio is a wholly-
owned subsidiary of Legg Mason, Inc. doing business under the name
"Batterymarch Financial Management, Inc." ("BFM, Inc."), 200 Clarendon Street,
Boston, Massachusetts 02216. BFM, Inc. provides investment management services
to numerous institutional accounts, such as corporate pension plans, endowment
funds and individual investors. Under an Investment Advisory Agreement
("Agreement") with the Fund, dated January 5, 1995, BFM, Inc., subject to the
control and supervision of the Fund's Board of Trustees and in conformance
with the stated investment objective and policies of the International Portfo-
lio, manages the investment and reinvestment of the assets of the Interna-
tional Portfolio. In this regard, it is the responsibility of BFM, Inc. to
make investment decisions for the International Portfolio and to place the
Portfolio's purchase and sale orders for investment securities.
As compensation for the services rendered by BFM, Inc. under the Agreement,
and the assumption by BFM, Inc. of the expenses related thereto (other than
the cost of securities purchased for the International Portfolio and the taxes
and brokerage commissions, if any, payable in connection with the purchase
and/or sale of such securities), the International Portfolio pays BFM, Inc. an
advisory fee calculated by applying various percentage rates to the average
month-end assets of the International Portfolio, and then apportioning that
fee to the International Portfolio, according to its net assets. The fee
schedule is as follows:
B-12
<PAGE>
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- -----
<S> <C>
First $10 million.................................................. 0.85%
Next $10 million................................................... 0.45%
Next $30 million................................................... 0.35%
Next $450 million.................................................. 0.15%
Next $500 million.................................................. 0.12%
Over $1 billion.................................................... 0.10%
</TABLE>
Although the base advisory fee rate on the first $10 million of the Interna-
tional Portfolio's net assets is in excess of the fee rate paid by many other
mutual funds, it is substantially reduced as the value of the Portfolio's as-
sets increases. For example, it will result in an effective fee rate of .59%
at $25 million of assets, .47% at $50 million of assets, and .31% at $100 mil-
lion of assets. During the years ended December 31, 1992, 1993 and 1994, the
International Portfolio paid Batterymarch Financial Management (predecessor to
BFM, Inc.) advisory fees totaling $1,246,000 (.15 of 1% of average net as-
sets), $1,326,000 (.16 of 1% of average net assets), and $1,622,000 (.15 of 1%
of average net assets), respectively.
Effective with the quarter ending December 31, 1995, the basic fee paid to
BFM, Inc. ("Basic Fee"), shall be increased or decreased by applying an
incentive/penalty adjustment to the Basic Fee reflecting the investment per-
formance of the Portfolio relative to the return of the Morgan Stanley Capital
International Europe, Australia and Far East ("EAFE") Index. The following ta-
ble sets forth the fee payable by the Fund to BFM, Inc. based upon the
incentive/penalty adjustment:
<TABLE>
<CAPTION>
AVERAGE ANNUAL PERFORMANCE TOTAL FEE AS A
DIFFERENTIAL VS. THE EAFE INDEX PERCENTAGE OF BASIC FEE
------------------------------- -----------------------
<S> <C>
less than -3%.................................. 50%
greater than -3 and less than 0%............... 75%
greater than 0 and less than 1.5%.............. 100%
greater than 1.5 and less than 4.5%............ 125%
greater than 4.5%............................. 150%
</TABLE>
Through the quarter ending December 31, 1997, the incentive/penalty fee for
BFM, Inc. will be calculated according to the following transition rules:
(a) Prior to October 1, 1995. The incentive/penalty fee adjustment will
not be operable for the quarters ending prior to October 1, 1995. However,
the advisory fee payable for the first quarter of 1995 shall be reduced to
75% of the Basic Fee payable for the quarter if the performance of the
Portfolio for the quarter is less than that of the EAFE; the advisory fee
payable at the end of the second quarter of 1995 shall be reduced to 75% of
the Basic Fee payable for the quarter if the performance of the Portfolio
for the first six months of 1995 is less than that of the EAFE; and the ad-
visory fee payable at the end of the third quarter of 1995 shall be reduced
to 75% of the Basic Fee payable for the quarter if the performance of the
Portfolio for the first nine months of 1995 is less than that of the EAFE.
(b) October 1, 1995 through December 31, 1997. Beginning with the quarter
ending December 31, 1995 and through the quarter ending December 31, 1997,
the incentive/penalty fee will be computed based upon a comparison of the
investment performance of the Portfolio and that of the EAFE over the num-
ber of months that have elapsed between January 1, 1995 and the end of the
quarter for which the fee is computed. Performance differentials vs. the
EAFE listed above shall increase proportionately from quarter to quarter
from 4.5 and -3, respectively, for the twelve months ending December 31,
1995, to 13.5 and -9, respectively, for the thirty-six months ending Decem-
ber 31, 1997.
B-13
<PAGE>
(c) After December 31, 1997. For the quarter ending March 31, 1998 and
thereafter, the period used to calculate the incentive/penalty fee shall be
the 36 months through and including the end of the quarter for which the
fee is being computed, based on the following schedule:
<TABLE>
<CAPTION>
THREE YEAR
PERFORMANCE
DIFFERENTIAL VS. THE TOTAL FEE AS A
EAFE PERCENTAGE OF BASIC FEE
-------------------- -----------------------
<S> <C>
less than -9% 50%
greater than -9 and less than 0% 75%
greater than 0 and less than 4.5% 100%
greater than 4.5 andless than 13.5% 125%
greater than 13.5% 150%
</TABLE>
The investment performance of the Portfolio, for any period, expressed as a
percentage of the "Portfolio Unit Value" at the beginning of such period, will
be the sum of: (i) the change in the Portfolio Unit Value during such period;
(ii) the unit value of the Fund's cash distributions from the Portfolio's net
investment income and realized net capital gains (whether long-term or short-
term) having an ex-dividend date occurring within such period; and (iii) the
unit value of taxes paid including withholding taxes and capital gains taxes
paid or accrued during such period by the Fund for undistributed realized
long-term capital gains realized from the Portfolio.
The "Portfolio Unit Value" will be determined by dividing the total net as-
sets of the Portfolio by a given number of units. On the initial date of the
agreement, the number of units in the Portfolio will equal the total shares
outstanding of the Fund. After such initial date, as assets are added to or
withdrawn from the Portfolio, the number of units of the Portfolio will be ad-
justed based on the unit value of the Portfolio on the day such changes are
executed.
For the purposes of determining the incentive/penalty fee adjustment, the
Portfolio's net assets will be averaged over the same period as the investment
performance of those assets and the investment record of the EAFE Index are
computed.
RELATED INFORMATION CONCERNING BFM, INC. Batterymarch Financial Management,
Inc., a wholly-owned subsidiary of Legg Mason, was formed for the purpose of
acquiring all of the operating assets and business of Batterymarch Financial
Management ("Batterymarch"), the Fund's prior investment advisor. Legg Mason,
headquartered at 111 South Calvert Street, Baltimore, Maryland, is a publicly
held, New York Stock Exchange listed, holding company that provides securities
brokerage, investment advisory, corporate and public finance, and mortgage
banking services to individuals, institutions, corporations and municipali-
ties, through its wholly-owned subsidiaries.
Prior to April 1, 1992, Batterymarch served as investment adviser to the
U.S. Portfolio according to the terms of the fee schedule set forth above. For
the fiscal year ended December 31, 1992, the U.S. Portfolio paid Batterymarch
advisory fees totaling $325,000 (.35 of 1% of average net assets).
On April 1, 1992, the U.S. Portfolio entered into an Investment Advisory
Agreement with Geewax, Terker & Co. ("Geewax Terker"), 99 Starr Street, Phoe-
nixville, Pa. 19460. Under the terms of the Agreement Geewax Terker, subject
to the control and supervision of the Fund's Board of Trustees and in confor-
mance with the Fund's investment objective and policies, manages the invest-
ment and reinvestment of the assets of the Fund's U.S. Portfolio. In this re-
gard, it is the responsibility of Geewax Terker to make investment decisions
for the U.S. Portfolio and to place the Portfolio's purchase and sale orders
for investment securities. For the fiscal years ended December 31, 1993 and
1994, the U.S. Portfolio paid Geewax advisory fees totaling $507,000 (.59 of
1% of average net assets) and $563,000 (.45 of 1% of average net assets), re-
spectively.
B-14
<PAGE>
As compensation for the services rendered by Geewax Terker under the Agree-
ment, and the assumption by Geewax Terker of the expenses related thereto
(other than the cost of securities purchased for the U.S. Portfolio) and the
taxes and brokerage commissions, if any, payable in connection with such
transactions), the U.S. Portfolio pays Geewax Terker an investment advisory
fee which represents a percentage of the Portfolio's average net assets ad-
justed for the investment performance of the Portfolio relative to that of the
Standard & Poor's 500 Composite Stock Price Index ("S&P 500") over the preced-
ing 36-month period as follows:
<TABLE>
<CAPTION>
CUMULATIVE THREE YEAR PERFORMANCE
DIFFERENTIAL VS. THE S&P 500 ANNUAL FEE RATE
--------------------------------- ---------------
<S> <C>
+4.5% points or more above............................. 0.60%
+2.25% points but less than +4.5% points above......... 0.40%
Less than +2.25% points above.......................... 0.20%
</TABLE>
Prior to the quarter ending March 31, 1993, the investment advisory fee was
calculated according to the following transition rules:
(a) For the quarters ending on or prior to December 31, 1992, the
incentive/penalty fee was not operable. The advisory fee was payable at the
annual rate of .40% of the U.S. Portfolio's net assets.
(b) For the calendar quarter ended March 31, 1993, if the investment per-
formance of the Portfolio for the 12 consecutive months then ended exceeded
the investment performance of the S&P 500 by:
(i) less than .75%, the fee rate payable to Geewax Terker was .05%
(annual rate of .20%);
(ii) not less than .75% but not more than 1.5%, the fee rate payable
to Geewax Terker was .10% (annual rate of .40%); or
(iii) more than 1.5%, the fee rate payable to Geewax Terker was .15%
(annual rate of .60%).
(c) For each calendar quarter ended after March 31, 1993, the fee payable
to Geewax Terker has been paid on the same basis as provided in the previ-
ous paragraph, except that each of the investment performance percentages
set forth in (i), (ii) and (iii) above (the "original percentages") is re-
placed by a new percentage. Each new percentage is equal to the product ob-
tained by multiplying the original percentage by a fraction whose numerator
is the number of calendar quarters, not exceeding 12, that have elapsed
since April 1, 1992 and whose denominator is 4. For example, for the quar-
ter ended March 31, 1994 (the eighth quarter), the fee rate was calculated
based on the performance of the Portfolio relative to that of the S&P 500
as follows:
(i) .05% (.20% annual rate) if the return of the Portfolio for the
preceding 24 months does not exceed that of the S&P 500 by more than
1.5%;
(ii) .10% (.40% annual rate) if the return of the Portfolio for the
preceding 24 months exceeds that of the S&P 500 by more than 1.5% but
not more than 3.0%; and
(iii) .15% (.60% annual rate) if the return of the Portfolio for the
preceding 24 months exceeds that of the S&P 500 by more than 3.0%.
The period of time used to compare the investment performance of the Portfo-
lio with the investment performance of the S&P 500 is the number of consecu-
tive months that this Agreement has been in effect as of the end of the quar-
ter for which such fee is being calculated, but not longer than the most re-
cent 36 months.
The investment performance of the Portfolio and the S&P 500 is calculated
(i) as of the end of each calendar quarter on a total return basis and (ii)
for the same period of time. In calculating the
B-15
<PAGE>
investment performance of the Portfolio for any period, the value of the Port-
folio's cash distributions from net investment income and realized net capital
gains (whether long-term or short-term) having an ex-dividend date occurring
within such period and the value of capital gains taxes paid or accrued during
such period by the Portfolio for undistributed realized long-term capital
gains realized from the Portfolio, are included.
MORE INFORMATION ON ADVISERS' INCENTIVE/PENALTY FEES
In April 1972, the Securities and Exchange Commission ("SEC") issued Release
No. 7113 under the Investment Company Act of 1940 to call attention of direc-
tors and investment advisers to certain factors which must be considered in
connection with investment company incentive fee arrangements. One of these
factors is to "avoid basing significant fee adjustments upon random or insig-
nificant differences" between the investment performance of a fund and that of
the particular index with which it is being compared. The Release provides
that "preliminary studies (of the SEC staff) indicate that as a "rule of
thumb' the performance difference should be at least +10 percentage points"
annually before the maximum performance adjustment may be made. However, the
Release also states that "because of the preliminary nature of these studies,
the Commission is not recommending, at this time, that any particular perfor-
mance difference exist before the maximum fee adjustment may be made". The Re-
lease concludes that the directors of a fund "should satisfy themselves that
the maximum performance adjustment will be made only for performance differ-
ences that can reasonably be considered significant." The Board of Trustees of
the Fund has fully considered the SEC Release and believes that the perfor-
mance adjustments as included in the advisory agreements are entirely appro-
priate although not within the +10 percentage points per year range suggested
in the Release. Under the Fund's investment advisory agreement with Geewax
Terker, the maximum performance adjustment is made at a difference of +4.5
percentage points from the performance of the index over a thirty-six month
period, which would effectively be the equivalent of approximately +1.478 per-
centage points difference per year. The Fund's investment advisory agreements
provide for no performance adjustment at a difference of less than +2.25 per-
centage points from the performance of the index over a thirty-six month peri-
od, which would be the equivalent of approximately +0.744 percentage points
per year. Under the Fund's investment advisory agreement with BFM, Inc., the
maximum performance adjustment is made at a difference of ^11.25 percentage
points from the performance of the index over a thirty-six month period, which
would effectively be the equivalent of approximately ^3.75 percentage points
difference per year.
DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS
The agreement with Geewax Terker continues until March 31, 1996 and the
agreement with Batterymarch continues until January 4, 1997. The agreements
are renewable thereafter, for successive one year periods, if specifically ap-
proved at least annually by vote of the Board of Trustees of the Fund at a
meeting called for the purpose of considering such approval. The Board's ap-
proval must include the affirmative votes of a majority of the Trustees who
are neither parties to the agreement or interested persons of such parties. In
addition, the question of contining an agreement may be presented to share-
holders. In such an event, the agreement would be continued only if approved
by vote of a majority of the outstanding shares of the respective Portfolio.
If the holders of the Portfolio fail to approve the agreement, the adviser of
the Portfolio may continue to serve as investment adviser until new arrange-
ments have been made. The agreements may be terminated at any time, without
penalty, by vote of the Board of Trustees of the Fund or by vote of a majority
of the outstanding shares of the Portfolio on 60 days' written notice to the
investment advisers, or by the investment advisers on 90 days' written notice
to the Fund. An agreement will automatically terminate in the event of its as-
signment.
The Fund's Board of Trustees may, without the approval of shareholders, pro-
vide for:
(i) the employment of a new investment adviser pursuant to the terms of a
new advisory agreement, either as a replacement for an existing adviser or
as an additional adviser;
B-16
<PAGE>
(ii) a change in the terms of an advisory agreement; and
(iii) the continued employment of an existing adviser on the same advi-
sory contract terms where a contract has been assigned because of a change
in control of the adviser.
Any such change will only be made upon not less than 30 days' prior written
notice to shareholders of the affected Portfolio, which shall include the in-
formation concerning the adviser that would have normally been included in a
proxy statement.
CONTROL OF THE ADVISERS
John J. Geewax and Bruce E. Terker, Partners, are the "controlling persons"
(as that term is defined in the rules and regulations of the Securities and
Exchange Commission) of Geewax Terker.
Legg Mason, Inc., owner of Batterymarch, Inc., is the "controlling person"
(as that term is defined in the rules and regulations of the Securities and
Exchange Commission) of BFM, Inc.
PORTFOLIO TRANSACTIONS
The investment advisory agreement authorizes the investment adviser to se-
lect the brokers or dealers that will execute the purchases and sales of in-
vestment securities for the Portfolios and directs the investment adviser to
use its best efforts to obtain the best available price and most favorable ex-
ecution with respect to all transactions for the Portfolios.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified broker-
dealers who recommend the Fund to clients, and may, when a number of brokers
and dealers can provide comparable best price and execution on a particular
transaction, consider the sale of Fund shares by a broker or dealer in select-
ing among qualified broker-dealers.
Some securities considered for investment by one of the Portfolios may also
be appropriate for other clients served by the investment advisers. If pur-
chase or sale of securities consistent with the investment policies of the
Portfolio and one or more of these other clients served by the investment ad-
viser is considered at or about the same time, transactions in such securities
will be allocated among the Portfolio and clients in a manner deemed fair and
reasonable by the investment adviser. Although there is no specified formula
for allocating such transactions, the various allocation methods used by the
investment advisers, and the results of such allocations, are subject to peri-
odic review by the Fund's Board of Trustees.
During the years ended December 31, 1992, 1993 and 1994 the Fund paid
$879,366, $753,881, and $257,044 respectively, in brokerage commissions.
PERFORMANCE MEASURES
Vanguard/Trustees' Equity Fund may use one or more, of the following unman-
aged indexes for comparative performance purposes:
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX--is a well diversified list
of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES--consists of more than 6,000 common equity secu-
rities, covering all stocks in the U.S. for which daily pricing is available.
B-17
<PAGE>
WILSHIRE 4500 EQUITY INDEX--consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
RUSSELL 3000 STOCK INDEX--a diversified portfolio of approximately 3,000 com-
mon stocks accounting for over 90% of the market value of publicly traded
stocks in the U.S.
RUSSELL 2000 STOCK INDEX--a subset of approximately 2,000 of the smallest
stocks contained in the Russell 3000; a widely-used benchmark for small capi-
talization common stocks.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market val-
ue-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 67 bonds and 33
preferreds. The original list of names was generated by screening for convert-
ible issues of 100 million or greater in market capitalization. The index is
priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mort-
gage Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years
or greater.
LEHMAN LONG-TERM TREASURY BOND--is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND--consists of over 4,500 U.S. Trea-
sury, Agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX--all publicly offered fixed-rate, noncon-
vertible domestic corporate bonds rated Baa by Moody's, with a maturity longer
than 1 year and with more than $25 million outstanding. This index includes
over 1,000 issues.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND--is a yield index on current coupon
high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average
yield of four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial In-
dex.
COMPOSITE INDEX--35% Standard & Poor's 500 Index and 65% Salomon Brothers
High-Grade Bond Index.
COMPOSITE INDEX--65% Standard & Poor's 500 Index and 35% Salomon Brothers
High-Grade Bond Index.
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-
through securities corporate rated BBB- or better. The Index has a market
value of over $4 trillion.
B-18
<PAGE>
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX--is a mar-
ket weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities be-
tween 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX--is
a market weighted index that contains individually priced U.S. Treasury, agen-
cy, and corporate securities rated BBB- or better with maturities between 5
and 10 years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX--is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated BBB- or better with maturities greater than 10
years. The index has a market value of over $900 billion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE--the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper de-
fines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average perfor-
mance and/or the average expense ratio of the small company growth funds.
(This fund category was first established in 1982. For years prior to 1982,
the results of the Lipper Small Company Growth category were estimated using
the returns of the Funds that constituted the Group at its inception.)
LIPPER BALANCED FUND AVERAGE--An industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper Analyt-
ical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE--An industry benchmark of av-
erage non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE--An industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund was established as a "business trust" under Pennsylvania law under
a Declaration of Trust dated May 16, 1984. The Declaration of Trust permits
the Trustees to issue an unlimited number of shares of beneficial interest,
without par value, from an unlimited number of separate classes ("Portfolios")
of shares. Currently the Fund is offering shares of two Portfolios.
The shares of each Portfolio are fully paid and non-assessable, except as
set forth below under "Shareholder and Trustee Liability," and have no prefer-
ence as to conversion, exchange, dividends, retirement or other features. The
shares have no preemptive rights. The shares have non-cumulative voting
rights, which means that the holders of more than 50% of the shares voting for
the election of Trustees can elect 100% of the Trustees if they choose to do
so. A shareholder is entitled to one vote for each full share held (and a
fractional vote for each fractional share held), then standing in his name on
the books of the Fund. On any matter submitted to a vote of shareholders, all
shares of the Fund then issued and outstanding and entitled to vote, irrespec-
tive of the class, shall be voted in the aggregate and not by class: except
(i) when required by the Investment Company Act of 1940, shares shall be voted
by individual class; and (ii) when the matter does not affect any interest of
a particular class, then only shareholders of the affected class or classes
shall be entitled to vote thereon.
B-19
<PAGE>
The Fund will continue without limitation of time, provided however that:
1) Subject to the majority vote of the holders of shares of any Portfolio
of the Fund outstanding, the Trustees may sell or convert the assets of
such Portfolio to another investment company in exchange for shares of such
investment company, and distribute such shares, ratably among the share-
holders of such Portfolio; and
2) Subject to the majority of shares of any Portfolio of the Fund out-
standing, the Trustees may sell and convert into money the assets of such
Portfolio and distribute such assets ratably among the shareholders of such
Portfolio.
Upon completion of the distribution of the remaining proceeds or the remain-
ing assets of any Portfolio as provided in paragraphs 1) and 2) above, the
Fund shall terminate as to that Portfolio and the Trustees shall be discharged
of any and all further liabilities and duties hereunder and the right, title
and interest of all parties shall be cancelled and discharged.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Pennsylvania law, shareholders of a trust may, under certain circum-
stances, be held personally liable as partners for the obligations of the
Trust. Therefore, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund and requires that
notice of such disclaimer be given in each agreement, obligation, or instru-
ment entered into or executed by the Fund or the Trustees. The Declaration of
Trust provides for indemnification out of the Fund property of any shareholder
held personally liable for the obligations of the Fund. The Declaration of
Trust also provides that the Fund shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of the Fund
and satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Fund itself would be unable to meet its obligations. The Trustees
and officers of the Fund believe that, in view of the above, the risk of per-
sonal liability to shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be lia-
ble for errors of judgment or mistakes of fact or law, but nothing in the Dec-
laration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross negli-
gence, or reckless disregard of the duties involved in the conduct of his of-
fice.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended December 31, 1994, in-
cluding the financial highlights for each of the five years in the year ended
December 31, 1994, appearing in the Fund's 1994 Annual Report to Shareholders,
and the report thereon of Price Waterhouse LLP, independent accountants, also
appearing therein, are incorporated by reference in this Statement of Addi-
tional Information. The Fund's 1994 Annual Report to Shareholders is enclosed
with this Statement of Additional Information.
B-20
