<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-65955) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 19
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 20
VANGUARD/TRUSTEES' EQUITY FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
IT IS PROPOSED THAT THE AMENDMENT BECOME EFFECTIVE:
on April 29, 1996, pursuant to paragraph (a) of Rule 485 of the Securities Act
of 1933.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24F-2 NOTICE FOR THE YEAR ENDED DECEMBER 31, 1995 ON FEBRUARY 28, 1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
VANGUARD TRUSTEES' EQUITY FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Not Applicable
Item 3. Condensed Financial Information............... Financial Highlights
Item 4. General Description of Registrant............. Investment Objective; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Fund........................ Management of the Fund; Investment
Advisers
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; The
Share Price of Each Portfolio;
Dividends, Capital Gains and Taxes;
General Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment Objectives and Policies;
General Information
Item 13. Investment Objective and Policies............. Investment Objectives and Policies;
Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund; Investment
Advisory Services
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund; General
Information
Item 16. Investment Advisory and Other Services........ Management of the Fund; Investment
Advisory Services
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ General Information; Financial
Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares;
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3
VANGUARD/TRUSTEES'
EQUITY FUND-
U.S. PORTFOLIO
Prospectus
April 29, 1996
This prospectus contains
financial data for the
Portfolio through the
fiscal year ended
December 31, 1995.
[THE VANGUARD GROUP LOGO]
<PAGE> 4
VANGUARD/TRUSTEES' EQUITY FUND-U.S. PORTFOLIO
A Growth and Income Stock Mutual Fund
CONTENTS
Portfolio Expenses 2
Financial Highlights 3
A Word About Risk 4
The Portfolio's Objectives 4
Who Should Invest 4
Investment Strategies 5
Investment Policies 7
Investment Limitations 8
Investment Performance 8
Share Price 9
Dividends, Capital Gains, and Taxes 9
The Portfolio and Vanguard 10
Investment Adviser 10
General Information 11
Investing with Vanguard 12
Services and
Account Features 13
Types of Accounts 13
Distribution Options 14
Buying Shares 15
Redeeming Shares 16
Fund and Account Updates 18
Prospectus Postscript 20
Glossary Inside Back Cover
INVESTMENT OBJECTIVES AND POLICIES
Vanguard/Trustees' Equity Fund-U.S. Portfolio (the "Portfolio") is a diversified
mutual fund, a part of Vanguard/Trustees' Equity Fund, Inc. (the "Fund"), an
open-end investment management company.
The Portfolio seeks to provide long-term capital growth and a modest amount
of income by investing in equity securities of U.S. companies. The Portfolio
uses both "value" and "growth" investment strategies. About 50% to 70% of the
Portfolio's assets are invested in companies whose stocks, according to the
Portfolio's adviser, are undervalued; these companies tend to be currently out
of favor with investors. The remaining 30% to 50% of assets are invested in
companies with a history of sales and earnings growth or, the adviser believes,
an expectation of growth.
IT IS IMPORTANT TO NOTE THAT THE PORTFOLIO'S SHARES ARE NOT GUARANTEED OR
INSURED BY THE FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT. AS WITH ANY
INVESTMENT IN COMMON STOCKS, WHICH ARE SUBJECT TO WIDE FLUCTUATIONS IN MARKET
VALUE, YOU COULD LOSE MONEY BY INVESTING IN THE PORTFOLIO.
FEES AND EXPENSES
The Portfolio is offered on a no-load basis, which means that you pay no sales
commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the expense ratio.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
A Statement of Additional Information containing more information about the
Portfolio is, by reference, part of this prospectus and may be obtained without
charge by writing to Vanguard or by calling our Investor Information Department
at 1-800-662-7447.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, risks, and strategies of the U.S.
Portfolio of Vanguard/Trustees' Equity Fund. To highlight terms and concepts
important to mutual fund investors, we have provided "Plain Talk" explanations
along the way. Reading the prospectus will help you to decide whether the
Portfolio is the right investment for you. We suggest that you keep it for
future reference.
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
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
<PAGE> 5
PORTFOLIO PROFILE Vanguard/Trustees' Equity Fund-U.S. Portfolio
WHO SHOULD INVEST (page 4)
- - Investors seeking a growth and income stock mutual fund as part of a
balanced and diversified investment program.
- - Investors seeking capital growth and some income over the long term--at
least five years.
- - Investors seeking a fund that employs both value and growth investment
strategies.
WHO SHOULD NOT INVEST
- - Investors seeking significant current income.
- - Investors unwilling to accept significant fluctuations in share price.
RISKS OF THE PORTFOLIO (pages 4-7)
This Portfolio's total return will fluctuate within a wide range, so an investor
could lose money over short or even extended periods. The Portfolio is subject
to manager risk (the chance that poor security selection will cause it to lag
the stock market as a whole) and to objective risk (the chance that returns from
either value stocks or growth stocks will trail returns from the overall stock
market).
DIVIDENDS AND CAPITAL GAINS (page 9)
Dividends are paid in March, June, September, and December. Capital gains, if
any, are paid in December.
INVESTMENT ADVISER (page 10)
Geewax, Terker & Company, Phoenixville, PA.
INCEPTION DATE: January 31, 1980
NET ASSETS AS OF 12/31/95: $137.4 million
PORTFOLIO'S EXPENSE RATIO FOR THE YEAR ENDED 12/31/95: 0.56%
LOADS, 12B-1 MARKETING FEES: None
SUITABLE FOR IRAs: Yes
MINIMUM INITIAL INVESTMENT: $3,000; $1,000 for IRAs and accounts for minors
NEWSPAPER ABBREVIATION: TrUS
VANGUARD FUND NUMBER: 025
ACCOUNT FEATURES (page 13)
- - Telephone Redemption
- - Vanguard Direct Deposit Servicesm
- - Vanguard Automatic Exchange Servicesm
- - Vanguard Fund Express(R)
- - Vanguard Dividend Expresssm
AVERAGE ANNUAL TOTAL RETURN--PERIODS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Portfolio +33.2% +15.1% +12.2%
S&P 500 Index +37.6 +16.6 +14.9
</TABLE>
QUARTERLY RETURNS (%) 1986-1995
[BAR GRAPH]
In evaluating past performance, remember that it is not indicative of future
performance and that returns from stocks before adjusting for inflation were
relatively high during the periods shown. Performance figures include the
reinvestment of any dividends and capital gains distributions. The returns shown
are net of expenses, but they do not reflect income taxes an investor would have
incurred. Note, too, that both the return and principal value of an investment
will fluctuate so that investors' shares, when redeemed, may be worth more or
less than their original cost.
1
<PAGE> 6
Plain Talk About
The Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time, have
a dramatic impact on a fund's performance.
PORTFOLIO EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Portfolio.
As noted in this table, you do not pay fees of any kind when you buy, sell,
or exchange shares of the Portfolio:
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
The next table illustrates the operating expenses that you would incur as a
shareholder of the Portfolio. These expenses are deducted from the Portfolio's
income before it is paid to you. Expenses include investment advisory fees as
well as the costs of maintaining accounts, administering the Portfolio,
providing shareholder services, and other activities. The expenses shown in the
table are for the fiscal year ended December 31, 1995.
Plain Talk About
Fund Expenses
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. The U.S. Portfolio's expense ratio in fiscal year 1995 was 0.56%, or
$5.60 per $1,000 of average net assets. The average growth and income equity
mutual fund had expenses in 1995 of 1.17%, or $11.70 per $1,000 of average net
assets, according to Lipper Analytical Services, Inc., which reports on the
mutual fund industry.
ANNUAL PORTFOLIO OPERATING EXPENSES
<TABLE>
<S> <C> <C>
Management and Administrative Expenses: 0.20%
Investment Advisory Expenses: 0.30%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.04%
----
Total Other Expenses: 0.06%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.56%
====
</TABLE>
The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes (1) that
the Portfolio provides a return of 5% a year and (2) that you redeem your
investment at the end of each period.
<TABLE>
<CAPTION>
---------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------
<S> <C> <C> <C> <C>
$6 $18 $31 $70
---------------------------------------------
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 7
Financial Highlights
The following financial highlights table shows the results for each share
outstanding for each of the last ten years ended December 31, 1995. The
financial highlights were audited by Price Waterhouse LLP, independent
accountants. You should read this information in conjunction with the
Portfolio's financial statements and accompanying notes, which appear, along
with the audit report from Price Waterhouse, in the Portfolio's most recent
Annual Report to shareholders. The Annual Report is incorporated by reference in
the Statement of Additional Information and in this prospectus, and contains a
more complete discussion of the Portfolio's performance. You may have the Report
sent to you without charge by writing to Vanguard or by calling our Investor
Information Department.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $29.09 $30.65 $28.43 $28.20 $22.90 $26.15 $26.35 $22.77 $28.69 $31.15
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income .62 .34 .43 .68 .71 1.02 .87 1.02 .92 1.16
Net Realized and
Unrealized Gain (Loss)
on Investments 8.96 (1.53) 4.38 1.08 5.30 (3.19) 3.62 4.53 (.24) 3.69
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS 9.58 (1.19) 4.81 1.76 6.01 (2.17) 4.49 5.55 .68 4.85
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.61) (.34) (.43) (.67) (.71) (1.08) (.88) (.97) (.72) (1.16)
Distributions from Realized
Capital Gains (1.05) (.03) (2.16) (.86) -- -- (3.81) (1.00) (5.88) (6.15)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS (1.66) (.37) (2.59) (1.53) (.71) (1.08) (4.69) (1.97) (6.60) (7.31)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $37.01 $29.09 $30.65 $28.43 $28.20 $22.90 $26.15 $26.35 $22.77 $28.69
============================================================================================================================
TOTAL RETURN 33.21% (3.91)% 17.24% 6.45% 26.57% (8.33)% 17.23% 24.64% 1.68% 15.26%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $ 137 $ 113 $ 119 $ 68 $ 115 $ 100 $ 121 $ 115 $ 122 $ 163
Ratio of Expenses to
Average Net Assets .56% .73% .90% .65% .44% .52% .51% .58% .52% .52%
Ratio of Net Investment
Income to Average
Net Assets 1.79% 1.14% 1.43% 2.33% 2.67% 4.18% 2.90% 3.86% 2.77% 3.46%
Portfolio Turnover Rate 77% 151% 139% 209% 84% 81% 72% 90% 44% 19%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
From time to time, the Vanguard Funds advertise yield and total return
figures. Yield is an historical measure of dividend income, and total return is
a measure of past dividend income (assuming that it has been reinvested) plus
capital appreciation. Neither yield nor total return should be used to predict
the future performance of a fund.
Plain Talk About
How to Read the Financial Highlights Table
The Portfolio began fiscal 1995 with a net asset value (price) of $29.09 per
share. During the year, the Portfolio earned $0.62 per share from investment
income (interest and dividends) and $8.96 per share from investments that had
appreciated in value or that were sold for higher prices than the Portfolio paid
for them. Of those total earnings of $9.58 per share, $1.66 per share was
returned to shareholders in the form of distributions ($0.61 in dividends, $1.05
in capital gains). The earnings ($9.58 per share) less distributions ($1.66 per
share) resulted in a share price of $37.01 at the end of the year, an increase
of $7.92 per share (from $29.09 at the beginning of the period to $37.01 at the
end of the period). Assuming that the shareholder had reinvested the
distribution in the purchase of more shares, total return from the Portfolio was
33.21% for the year.
As of December 31, 1995, the Portfolio had $137 million in net assets; an
expense ratio of 0.56% ($5.60 per $1,000 of net assets); and net investment
income amounting to 1.79% of its average net assets. It sold and replaced
securities valued at 77% of its total net assets.
3
<PAGE> 8
Plain Talk About
Investing for the Long Term
The Portfolio is intended to be a long-term
investment vehicle and is not designed to provide investors with a means of
speculating on short-term fluctuations in the stock market.
================================================================================
A WORD ABOUT RISK
This prospectus describes the risks you will face as an investor in the U.S.
Portfolio of Vanguard/Trustees' Equity Fund. It is important to keep in mind one
of the main axioms of investing: the higher the risk of losing money, the higher
the potential reward. The reverse, also, is generally true: the lower the risk,
the lower the potential reward. However, as you consider an investment in the
U.S. Portfolio, you should also take into account your personal tolerance for
the daily fluctuations of the stock market.
Look for this "warning flag" symbol [FLAG GRAPHIC] throughout the
prospectus. It is used to mark detailed information about each type of risk that
you, as a shareholder of the Portfolio, will confront.
================================================================================
THE PORTFOLIO'S OBJECTIVES
Vanguard/Trustees' Equity Fund-U.S. Portfolio seeks to provide long-term capital
growth and a modest amount of income. These objectives are fundamental, which
means that they cannot be changed unless a majority of shareholders vote to do
so.
[FLAG GRAPHIC] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING
PAGES, YOUR INVESTMENT IN THE PORTFOLIO, AS WITH ANY INVESTMENT
IN COMMON STOCKS, COULD LOSE MONEY.
WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:
- - You wish to add a growth and income stock fund to your existing holdings,
which could include other stock--as well as bond, money market, and
tax-exempt--investments.
- - You are seeking growth of capital over the long term--at least five years.
- - You are looking for some dividend income.
- - You characterize your investment temperament as "relatively aggressive."
This Portfolio is not an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of the Portfolio's shareholders. To
minimize such costs, which reduce the ultimate returns achieved by you and other
shareholders, the Portfolio has adopted the following policies:
- - The Portfolio reserves the right to reject any purchase request--including
exchanges from other Vanguard Funds--that it regards as disruptive to the
efficient management of the Portfolio. This
4
<PAGE> 9
could be because of the timing of the investment or because of a history of
excessive trading by the investor.
- - There is a limit on the number of times you can exchange into or out of the
Portfolio (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Portfolio reserves the right to stop offering shares at any time.
Plain Talk About
Costs and Market Timing
Some investors try to profit from "market timing"--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Portfolio discourages short-term trading by, among other things,
limiting the number of exchange redemptions it permits.
Plain Talk About
Value Funds and Growth Funds
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize companies that, considering their
assets and earnings history, are attractively priced; these companies often pay
regular dividend income to shareholders. Growth funds generally focus on
companies that, due to their strong earnings and revenue potential, offer
above-average prospects for capital growth, with less emphasis on dividend
income. Value and growth stocks have, in the past, produced similar long-term
returns, though each has periods when it outperforms the other. In general,
value funds are appropriate for investors who want some dividend income and the
potential for capital gains but are less tolerant of share-price fluctuations,
while growth funds appeal to investors who will accept more volatility in hope
of a greater increase in share price.
INVESTMENT STRATEGIES
This section explains how the Portfolio's investment adviser pursues the
objectives of long-term capital growth and some income. It also explains three
important risks--market risk, objective risk, and manager risk--faced by
investors in the Portfolio. Unlike the Portfolio's investment objectives, the
adviser's investment strategies are not fundamental and can be changed by the
Portfolio's Board of Trustees without shareholder approval. However, before
making any important change in its strategies, the Portfolio will give
shareholders 30-days notice, in writing.
MARKET EXPOSURE
The Portfolio invests in common stocks of U.S. companies. Between 50% and 70% of
the Portfolio's assets are invested in common stocks that display value
investment characteristics; the remaining portion of the Portfolio's assets are
invested in growth-oriented common stocks.
[FLAG GRAPHIC] The Portfolio is subject to market risk, which is the
possibility that stock prices overall will decline over short
or even extended periods. Stock markets tend to move in
cycles, with periods of rising stock prices and periods of
falling stock prices.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns (dividend income plus change in market
value) for the U.S. stock market over various periods as measured by the
Standard & Poor's 500 Composite Stock Price Index, a widely used barometer of
stock market activity. Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, how the gap between best and worst tends to
narrow over the long term.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1995)
- -------------------------------------------------------------------------------
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 +12.5 +10.3 +10.7 +10.7
- -------------------------------------------------------------------------------
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1995. For example, while the average return on stocks
5
<PAGE> 10
for all of the 5-year periods was +10.3%, returns for these 5-year periods
ranged from a -12.5% average (from 1928 through 1932), to +23.9% (from 1951
through 1955). These average returns reflect past performance on common stocks
and should not be regarded as an indication of future returns from either the
stock market as a whole or this Portfolio in particular.
Finally, the U.S. Portfolio invests in large-, mid-, and small-capitalization
stocks. Mid- and small-cap stocks have historically been more volatile than--and
at times have performed quite differently from--the large-cap stocks found in
the S&P 500 Index. For this reason and because the U.S. Portfolio does not hold
the same securities held in the S&P Index or any other market index, the
performance of the Portfolio will not mirror the returns of any particular
index.
[FLAG GRAPHIC] THE PORTFOLIO IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE
POSSIBILITY THAT RETURNS FROM EITHER VALUE OR GROWTH STOCKS
WILL TRAIL RETURNS FROM THE OVERALL STOCK MARKET. AS GROUPS,
VALUE STOCKS AND GROWTH STOCKS TEND TO GO THROUGH CYCLES OF
RELATIVE UNDERPERFORMANCE AND OUTPERFORMANCE IN COMPARISON TO
COMMON STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST,
LASTED FOR AS LONG AS SEVERAL YEARS.
Plain Talk About
Large-Cap, Mid-Cap, and Small-Cap Stocks
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Vanguard defines large-capitalization, or large-cap, funds as those holding
stocks of companies with an average total market value exceeding $5 billion.
Mid-cap funds hold stocks of companies with an average market value between $750
million and $5 billion. Small-cap funds hold stocks of companies with an average
market value of less than $750 million.
Plain Talk About
Portfolio Diversification
In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average U.S. equity mutual fund has
about 25% of its assets invested in its ten largest holdings, while some
less-diversified mutual funds have more than 50% of their assets invested in the
stocks of just ten companies.
SECURITY SELECTION
Geewax, Terker & Company (Geewax, Terker), adviser to the Portfolio, uses a
multi-step process in evaluating and picking stocks for the Portfolio.
In screening stocks for the value portion of the Portfolio, Geewax, Terker
examines a company's financial statements; measures the market's response to the
company's recent earnings announcements; and reviews analyst data to find
problems that may not be detected from the company's financial reports.
To be considered for the U.S. Portfolio's growth portion, a company must, in
Geewax, Terker's opinion, be financially sound and have the ability to finance
future growth; be considered a "growth stock" by the general market; and have
earnings that are growing at a higher-than-expected rate.
All value and growth stocks that pass this screening process are owned by the
Portfolio. The top ten holdings (which amounted to 23% of the Portfolio's total
net assets) as of December 31, 1995, follow.
1. NYNEX Corp.
2. Philip Morris Cos., Inc.
3. Bristol-Myers Squibb Co.
4. BellSouth Corp.
5. American Home Products
6. Bell Atlantic Corp.
7. GTE Corp.
8. Chevron Corp.
9. Texaco, Inc.
10. Ameritech Corp.
6
<PAGE> 11
Keep in mind that, because the makeup of the Portfolio changes daily, this
listing is only a "snapshot" at one point in time.
The Portfolio is run by Geewax, Terker according to traditional methods of
active investment management, which means securities are bought and sold
according to Geewax, Terker's judgments about companies and their financial
prospects, and about the stock market and the economy in general.
[FLAG GRAPHIC] THE PORTFOLIO IS SUBJECT TO MANAGER RISK, WHICH IS THE
POSSIBILITY THAT GEEWAX, TERKER MAY DO A POOR JOB OF SELECTING
STOCKS.
PORTFOLIO TURNOVER
Although the Portfolio generally seeks to invest for the long term, it retains
the right to sell securities regardless of how long they have been held. The
Portfolio's average turnover rate for the past ten years has been high--about
96%--and has exceeded 100% in three of the past five years. (A turnover rate of
100% would occur, for example, if the Portfolio sold and replaced securities
valued at 100% of its total net assets within a one-year period.)
INVESTMENT POLICIES
Besides investing in common stocks of growth companies, the Portfolio may follow
a number of investment policies to achieve its objectives.
[FLAG GRAPHIC] ALTHOUGH IT HAS NOT DONE SO IN THE PAST, THE PORTFOLIO
RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN STOCK
FUTURES AND OPTIONS CONTRACTS, WHICH ARE TRADITIONAL TYPES OF
DERIVATIVES.
Losses (or gains) involving futures can sometimes be substantial--in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a Portfolio. This Portfolio will
not use futures and options for speculative purposes or as leveraged investments
that magnify the gains or losses of an investment. Rather, the Portfolio will
keep separate cash reserves or short-term cash-equivalent securities in the
amount of the obligation underlying the futures contract. Only a limited
percentage of the Portfolio's assets--up to 5% if required for deposit and no
more than 20% of total assets--may be committed to such contracts.
The reasons for which the Portfolio may use futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To make it easier to trade.
- - To reduce costs by buying futures instead of actual stocks when futures are
cheaper.
The Portfolio will usually hold only a small percentage of its assets in cash
reserves, although if the investment adviser believes that market conditions
warrant a temporary defensive measure, the Portfolio may hold cash reserves
without limit.
Plain Talk About
Portfolio Turnover
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. Also, funds with high portfolio turnover rates
may be more likely than low-turnover funds to generate capital gains that must
be distributed to shareholders as taxable income. The average turnover rate for
actively managed funds investing in common stocks is 75%.
Plain Talk About
Derivatives
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new, exotic types of derivatives--some of which can
carry considerable risks.
7
<PAGE> 12
Plain Talk About
Past Performance
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
INVESTMENT LIMITATIONS
To reduce risk and maintain diversification, the Portfolio has adopted limits on
some of its investment policies. Specifically, the Portfolio will not:
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for the purpose of meeting shareholder requests to
redeem shares. With respect to 75% of its assets, this Portfolio will not:
- - Invest more than 5% in the securities of any one company.
- - Buy more than 10% of the outstanding voting securities of any company.
The limitations listed in this prospectus and in the Statement of Additional
Information are fundamental and may be changed only by approval of a majority of
the Portfolio's shareholders.
INVESTMENT PERFORMANCE
Vanguard/Trustees' Equity Fund-U.S. Portfolio invests primarily in common
stocks, so its performance is closely correlated to the performance of the
overall stock market. Historically, stock market performance has been
characterized by sharp up-and-down swings in the short term and by more stable
growth over the long term.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 12/31/95
- -------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
U.S. Portfolio 33.2% 14.5% 15.1% 12.2%
S&P 500 Index 37.6% 15.3% 16.6% 14.9%
</TABLE>
The results shown above represent the Portfolio's "average annual total
return" performance, which assumes that any distributions of capital gains and
dividends were reinvested for the indicated periods. Also included is
comparative information on the unmanaged Standard & Poor's 500 Index. The chart
does not make any allowance for Federal, state, or local income taxes that
shareholders must pay on a current basis.
In weighing these performance figures, note that the U.S. Portfolio has been
in operation since January 31, 1980, and managed by Geewax, Terker since April
1, 1992.
8
<PAGE> 13
SHARE PRICE
The Portfolio's share price, called its net asset value, is calculated each
business day after the close of regular trading (generally 4:00 p.m. Eastern
time) of the New York Stock Exchange. Net asset value per share is computed by
adding up the total value of the Portfolio's investments and other assets,
subtracting any of its liabilities, or debts, and then dividing by the number of
Portfolio shares outstanding:
TOTAL ASSETS - LIABILITIES
----------------------------
NET ASSET VALUE = NUMBER OF SHARES OUTSTANDING
Daily net asset value, or NAV, is useful to you as a shareholder because the
NAV, multiplied by the number of Portfolio shares you own, gives you the dollar
amount you would have received had you sold all of your shares back to the
Portfolio that day.
The Portfolio's share price can be found daily in the mutual fund listings of
most major newspapers under the heading Vanguard Group. Different newspapers use
different abbreviations of the Portfolio's name, but the most common is TrUS.
Plain Talk About
Distributions
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from the dividends that the fund earns from its holdings as well
as interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term depending
on whether the fund held the securities for less than or more than one year.
Plain Talk About
"Buying a Dividend"
Unless you are investing in a tax-deferred retirement account (such as an IRA),
it is not to your advantage to buy shares of a fund shortly before it makes a
distribution, because part of your investment will come back to you as a taxable
distribution. This is known as "buying a dividend." For example: on December 15,
you invest $5,000, buying 250 shares for $20 each. If the fund pays a
distribution of $1 per share on December 16, its share price would drop to $19
(not counting market change). You would still have only $5,000 (250 shares x $19
= $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you
would owe tax on the $250 distribution you received, even if you had reinvested
the dividends in more shares. To avoid "buying a dividend," check a fund's
distribution schedule before you invest.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each March, June, September, and December, the Portfolio distributes to
shareholders virtually all of its income from interest and dividends. Any
capital gains realized from the sale of securities are distributed in December.
You can receive distributions of income or capital gains in cash, or you may
have them automatically reinvested in more shares of the Portfolio. In either
case, distributions of dividends and capital gains that are declared in
December--even if paid to you in January--are taxed as if they had been paid to
you in December. Vanguard will process your dividend distribution and send you a
statement each year showing the tax status of all your distributions.
- - The dividends and short-term capital gains that you receive are taxable to
you as ordinary dividend income. Any distributions of net long-term capital
gains by the Portfolio are taxable to you as long-term capital gains, no
matter how long you've owned shares in the Portfolio. Both dividends and
capital gains distributions are taxable to you whether received in cash or
reinvested in additional shares. Although the Portfolio does not seek to
realize any particular amount of capital gains during a year, such gains are
realized from time to time as byproducts of the ordinary investment
activities of the Portfolio. Consequently, distributions may vary
considerably from year to year.
- - If you sell or exchange shares, any gain or loss you have is a taxable event,
which means that you may have a capital gain to report as income, or a
capital loss to report as a deduction, when you complete your Federal income
tax return.
9
<PAGE> 14
- - Distributions of dividends or capital gains, and capital gains or losses from
your sale or exchange of Portfolio shares, may be subject to state and local
income taxes as well.
The tax information in this prospectus is provided as general information and
will not apply to you if you are investing in a tax-deferred account such as an
IRA. You should consult your own tax adviser about the tax consequences of an
investment in the Portfolio.
THE PORTFOLIO AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 30 investment
companies with more than 90 distinct investment portfolios and total net assets
of more than $180 billion. All of the Vanguard Funds share in the expenses
associated with business operations, such as personnel, office space, equipment,
and advertising.
Vanguard also provides marketing services to the Funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each Fund pays its
allocated share of The Vanguard Group's costs.
A list of the Fund's Trustees and Officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.
INVESTMENT ADVISER
The Portfolio employs Geewax, Terker & Company, 99 Starr Street, Phoenixville,
PA 19460, as its investment adviser. Geewax, Terker manages the Portfolio
subject to the control of the Officers and Trustees of the Fund.
Geewax, Terker is paid an advisory fee at the end of each fiscal quarter. The
fee is based on the Portfolio's average month-end net assets during the quarter,
multiplied by an annual percentage rate of 0.40%.
The advisory fee may be increased or decreased by an incentive/penalty fee
based on the difference between the Portfolio's cumulative 36-month total
return performance and that of the S&P 500 Index.
For the year ended December 31, 1995, the investment advisory fee paid to
Geewax, Terker was $383,000.
The agreement authorizes Geewax, Terker to choose brokers or dealers to
handle the purchase and sale of the Portfolio's securities, and directs Geewax,
Terker to get the best available price and most favorable execution from these
brokers with respect to all transactions.
The Board of Trustees may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser, either as
a replacement for Geewax, Terker or as an additional adviser. However, no such
change would be made before giving shareholders 30-days notice, in writing.
Plain Talk About
Vanguard's Unique Corporate Structure
The Vanguard Group, Inc. is the only MUTUAL mutual fund company. It is owned
jointly by the Funds it oversees and by the shareholders in those Funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its Funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to Fund shareholders in
the form of lower operating expenses.
Plain Talk About
The Portfolio's Adviser
Geewax, Terker & Company, an investment advisory firm founded in 1982, currently
manages about $2 billion in assets for institutional endowment and pension
funds. The manager responsible for overseeing the implementation of Geewax,
Terker's strategy for Vanguard/ Trustees' Equity Fund-U.S. Portfolio is:
JOHN J. GEEWAX, Partner and Founder, Geewax, Terker & Company; 16 years
investment experience; B.S., M.B.A., and J.D. from the University of
Pennsylvania.
Mr. Geewax has served in this capacity since Geewax, Terker became the
Portfolio's adviser in April 1992.
10
<PAGE> 15
GENERAL INFORMATION
The U.S. Portfolio is one of two Portfolios of Vanguard/Trustees' Equity Fund,
Inc., a Pennsylvania business trust. The other Portfolio is the International
Portfolio. The Portfolios are combined under one corporation for administrative
purposes, but in virtually all respects operate like separate corporations.
Shareholders of the U.S. Portfolio have rights and privileges similar to
those enjoyed by other corporate shareholders. For example, shareholders will
not be responsible for any liabilities of the corporation. If any matters are to
be voted on by shareholders (such as a change in a fundamental investment
objective or the election of Trustees), each share outstanding at that point
would be entitled to one vote. Although the Portfolio does not usually hold an
annual meeting, shareholders may request one under certain circumstances, which
are described in the Statement of Additional Information.
11
<PAGE> 16
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to Fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer you as a Vanguard/Trustees' Equity Fund-U.S. Portfolio shareholder.
Booklets providing detailed information are available on the services marked
with a [BOOK GRAPHIC]. Please call us to request copies.
SERVICES AND ACCOUNT FEATURES
We offer a variety of options designed to fit your financial planning needs,
including . . .
- - Automatic methods for depositing your paycheck or government check, and
moving money between Vanguard Fund accounts or between your Vanguard Fund
account and your bank account.
- - A cost-effective way to complement your Vanguard mutual fund shares with
individual stocks, bonds, and options.
TYPES OF ACCOUNTS
You can establish an account for yourself (or yourself and another party), a
minor child, a trust, or an organization, or as a third-party trustee retirement
investment. We also offer retirement accounts for individuals, self-employed
people, small businesses, partnerships, corporations, and tax-exempt
institutions.
DISTRIBUTION OPTIONS
You can receive your dividends and capital gains in cash, or reinvest them in
additional Portfolio shares.
BUYING SHARES
It's easy to open an account or add money to an existing account.
REDEEMING SHARES
You can withdraw money you have invested in the Portfolio by selling or
exchanging shares.
FUND AND ACCOUNT UPDATES
- - Our clear, concise Portfolio Summaries and tax statements help you keep track
of your Vanguard investments throughout the year as well as when you are
preparing your income tax returns.
- - Twice each year, you will receive comprehensive fund reports about
Vanguard/Trustees' Equity Fund-U.S. Portfolio. These reports include an
assessment of the Portfolio's performance (and a comparison to its benchmark
index) as well as a complete listing of its holdings.
- - Vanguard Tele-Account(R) offers toll-free Fund and account information 24
hours a day from any TouchTone(TM) telephone.
- - You can use your personal computer to obtain share price, yield, and total
return--as well as general investment information--through Vanguard
Online(SM) and the World Wide Web.
12
<PAGE> 17
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to purchase, sell, or
exchange shares.
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Portfolio unless you notify us otherwise.
Vanguard Direct Deposit Service [BOOK GRAPHIC]
Automatic method for depositing your paycheck or U.S. Government payment
(including Social Security and Government pension checks) into your account.
VANGUARD AUTOMATIC EXCHANGE SERVICE
Automatic method for moving a fixed amount of money from one Vanguard Fund
account to another.*
VANGUARD FUND EXPRESS [BOOK GRAPHIC]
Electronic method for purchasing or selling shares: transferring money between
your Vanguard Fund account and an account at your bank, savings and loan, or
credit union--on a systematic schedule or whenever you wish.*
VANGUARD DIVIDEND EXPRESS [BOOK GRAPHIC]
Electronic method for transferring dividends and/or capital gains distributions
directly from your Vanguard Fund account to your bank, savings and loan, or
credit union account or to another Vanguard Fund account.
Vanguard Brokerage Services (VBS) [BOOK GRAPHIC]
A way to trade stocks, bonds, and options on major exchanges, Nasdaq, and other
domestic over-the-counter markets at reduced rates, and to buy and sell shares
of non-Vanguard mutual funds. Call VBS (1-800-992-8327) for additional
information and the appropriate forms.
*Can be used to "dollar-cost average" [BOOK GRAPHIC] or to contribute to an IRA
or other retirement plan.
TYPES OF ACCOUNTS
INDIVIDUAL OR OTHER ENTITY
Vanguard's account registration form can be used to establish a variety of
account types.
FOR ONE OR MORE PEOPLE
To open an account in the name of one (individual) or more (joint tenants)
people. $3,000 minimum initial investment.
FOR A MINOR CHILD [BOOK GRAPHIC]
To open an account as an UGMA/UTMA (Uniform Gifts/Transfers to Minors Act). Age
of majority and other transfer requirements are set by state law. $1,000 minimum
initial investment.
FOR HOLDING TRUST ASSETS [BOOK GRAPHIC]
To register assets held in an existing trust. $3,000 minimum initial investment.
13
<PAGE> 18
TYPES OF ACCOUNTS (continued)
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
(Vanguard is not the custodian or trustee)
To open an account as a retirement trust or plan based on an existing corporate
or institutional plan. These accounts are established by the custodian or
trustee of the existing plan.
FOR AN ORGANIZATION
To open an account as a corporation, partnership, or other entity. These
accounts may require a corporate resolution or other documents to name the
individuals authorized to act. $3,000 minimum initial investment.
RETIREMENT
These accounts must be established with a Vanguard adoption agreement--not a
Vanguard account registration form--and may require additional documentation. To
request the appropriate adoption agreement and forms or to receive answers to
your questions about investing for retirement, call Investor Information.
FOR AN INDIVIDUAL RETIREMENT ACCOUNT (IRA)
(Vanguard Fiduciary Trust Company is the custodian)
To open a retirement account in the name of an individual. Account (IRA) IRAs
can be established through a regular contribution, a direct rollover from an
employer's plan such as a 401(k), or through an asset transfer or rollover from
another financial institution such as a bank or mutual fund company. $1,000
minimum initial investment.
FOR A SIMPLIFIED EMPLOYEE PENSION PLAN ACCOUNT (SEP-IRA)
(Vanguard Fiduciary Trust Company is the custodian)
To open a retirement account in the name of an employee. SEPs allow employers to
make deductible contributions directly to IRAs established by their employees. A
SEP can be established by self-employed individuals, small businesses,
partnerships, or corporations.
FOR A QUALIFIED RETIREMENT PROGRAM ACCOUNT
(Vanguard Fiduciary Trust Company is the custodian)
To open a retirement account that allows small business owners or self-employed
individuals to make tax-deductible retirement contributions for themselves and
their employees into Profit-Sharing and Money Purchase Pension (Keogh) plans.
FOR A 403(b)(7) CUSTODIAL ACCOUNT
(Vanguard Fiduciary Trust Company is the custodian)
To open a retirement account that allows employees of tax-exempt institutions
(for example, schools or hospitals) to make pre-tax retirement contributions.
DISTRIBUTION OPTIONS
You can receive distributions of dividends and/or capital gains in a number of
ways:
REINVESTMENT
Dividends and capital gains are reinvested in additional shares of the
Portfolio.
DIVIDENDS IN CASH
Dividends are paid by check and mailed to your account's address of record, and
capital gains are reinvested in additional shares of the Portfolio.
Investor Information 1-800-662-7447 -- Client Services 1-800-662-2739 --
Tele-Account 1-800-662-6273
14
<PAGE> 19
DISTRIBUTION OPTIONS (continued)
DIVIDENDS AND CAPITAL GAINS IN CASH
Both dividends and capital gains are paid by check and mailed to your account's
address of record.
- --------------------------------------------------------------------------------
To electronically transfer cash dividends and/or capital gains to your bank,
savings and loan, or credit union account, or to another Vanguard Fund
account, see Vanguard Dividend Express under "Services and Account Features."
- --------------------------------------------------------------------------------
BUYING SHARES
The price you pay for your shares is the Portfolio's next-determined net asset
value after Vanguard receives your request, provided we receive your request
before 4:00 p.m. Eastern time (the close of trading on the New York Stock
Exchange). The Portfolio is offered on a no-load basis, meaning that you do not
pay sales commissions or 12b-1 marketing fees.
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
<S> <C> <C>
MINIMUM INVESTMENT $3,000 (regular account); $1,000 $100 by mail or exchange; $1,000
(IRAs and accounts for minors). by wire.
BY MAIL Complete and sign the application Mail your check with an Invest-By-
[ENVELOPE GRAPHIC] form. Mail form detached from your
confirmation statement to the
address listed on the form.
FIRST-CLASS mail to:
The Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482 Make your check payable to: Make your check payable to:
The Vanguard Group-25. The Vanguard Group-25.
EXPRESS or REGISTERED mail to:
The Vanguard Group All purchases must be made in All purchases must be made in
455 Devon Park Drive U.S. dollars, and checks must be U.S. dollars, and checks must be
Wayne, PA 19087 drawn on U.S. banks. drawn on U.S. banks.
</TABLE>
- --------------------------------------------------------------------------------
Important Note: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
BY TELEPHONE Call Vanguard Tele-Account* 24 Call Vanguard Tele-Account* 24
hours a day--or Client Services hours a day--or Client Services
[TELEPHONE GRAPHIC] during business hours--to during business hours--to
exchange from another Vanguard exchange from another Vanguard
1-800-662-6273 Fund account with the same Fund account with the same
Vanguard Tele-Account registration (name, address, and registration (name, address, and
taxpayer I.D. number). Call taxpayer I.D. number). Call
1-800-662-2739 Vanguard Tele-Account* 24 hours Vanguard Tele-Account* 24 hours
Client Services a day--or Client Services during a day--or Client Services during
business hours--to exchange from business hours--to exchange from
another Vanguard Fund account another Vanguard Fund account
with the same registration with the same registration
(name, address, and taxpayer (name, address, and taxpayer
I.D. number). I.D. number).
Use Vanguard Fund Express (see
"Services and Account Features")
to transfer assets from your
bank account. Call Client
Services before your first use
to verify that this option is in
place.
*You must obtain a Personal Identification Number through Tele-Account
at least seven days before you request your first exchange.
</TABLE>
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once a telephone transaction has been approved by you and a
confirmation number assigned, it cannot be revoked. We reserve the right to
refuse any purchase.
- --------------------------------------------------------------------------------
15
<PAGE> 20
BUYING SHARES (continued)
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
<S> <C> <C>
BY WIRE Call Client Services to arrange your Call Client Services to arrange your
[WIRE GRAPHIC] wire transaction. wire transaction.
Wire to: Wire transactions are not available Wire transactions are not available
CoreStates Bank, N.A. for retirement accounts. for retirement accounts.
ABA 031000011
CoreStates No 01019897
[Temporary Account Number]
Vanguard/Trustees' Equity Fund-
U.S. Portfolio
[Account Registration]
Attn Vanguard
AUTOMATICALLY -- Vanguard offers a variety of ways
that you can add to your account
automatically. See "Services and
Account Features."
</TABLE>
- --------------------------------------------------------------------------------
Shares purchased by check or Vanguard Fund Express can be redeemed at any
time. However, while your redemption request will be processed as soon as it
is received, your redemption proceeds will not be available until payment for
your purchase is collected, which may take up to ten days.
- --------------------------------------------------------------------------------
It is important that you call Vanguard before you invest a large dollar
amount by wire or check. Vanguard must consider the interests of all Portfolio
shareholders and so reserves the right to delay or refuse any purchase that may
disrupt the Portfolio's operation or performance.
REDEEMING SHARES
- --------------------------------------------------------------------------------
IMPORTANT TAX NOTE: Any sale or exchange of shares in a non-retirement account
could result in a taxable gain or a loss.
- --------------------------------------------------------------------------------
The ability to redeem (that is, sell or exchange) Portfolio shares by telephone
is automatically established for your account unless you tell us in writing that
you do not want this option.
To protect your account from unauthorized or fraudulent telephone
instructions, Vanguard follows specific security procedures. When we receive a
call requesting an account transaction, we require the caller to provide:
x Portfolio name.
x 10-digit account number.
x Name and address exactly as registered on that account.
x Social Security or Employer Identification number as registered on that
account.
If you call to sell shares, the sale proceeds will be made payable to you, as
the registered shareholder, and mailed to your account's address of record.
If we follow reasonable security procedures, neither the Portfolio nor
Vanguard will be responsible for the authenticity of transaction instructions
received by telephone. We believe that these procedures are reasonable and that,
if we follow them, you bear the risk of any losses resulting from unauthorized
or fraudulent telephone transactions on your account. However, if we do not
follow these or other reasonable procedures, Vanguard may be liable for any
losses resulting from unauthorized or fraudulent transactions.
16
<PAGE> 21
REDEEMING SHARES (continued)
HOW TO SELL SHARES
You may withdraw any part of your account, at any time, by selling shares;
however, the Portfolio reserves the right to close any non-retirement or
UGMA/UTMA account whose balance falls below the minimum initial investment. The
Portfolio will deduct a $10 annual fee if your non-retirement account balance
falls below $2,500 or if your UGMA/UTMA account balance falls below $500. The
fee is waived if your total Vanguard Fund account assets are $50,000 or more.
Sale proceeds are normally mailed within two business days after Vanguard
receives your request. The sale price of your shares will be the Portfolio's
next-determined net asset value after Vanguard receives all required documents
in good order.
Good order means that the request includes:
x Portfolio name and account number.
x Amount of the transaction (in dollars or shares).
x Signatures of all owners exactly as registered on the account.
x Signature guarantees (if required).
x Any supporting legal documentation that may be required.
x Any certificates you are holding for the account.
Sales or exchange requests received after the close of trading on the New
York Stock Exchange (generally 4:00 p.m. Eastern time) are processed at the next
business day's net asset value.
- --------------------------------------------------------------------------------
Some written requests require a signature guarantee from a bank, broker, or
other acceptable institution. A notary public cannot provide a signature
guarantee.
- --------------------------------------------------------------------------------
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one Vanguard Fund to purchase shares of
another.
Although every effort will be made to maintain the exchange privilege,
Vanguard reserves the right to revise or terminate the exchange privilege, limit
the amount of an exchange, or reject any exchange, at any time, without notice.
Because excessive exchanges can potentially disrupt the management of the
Portfolio and increase transaction costs, Vanguard has established a policy of
limiting exchange activity to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (at least 30
days apart) from the Portfolio during any 12-month period. "Substantive" means
either a dollar amount large enough to have a negative impact on the Portfolio
or a series of movements between Vanguard Funds.
Before you exchange into a new Vanguard Fund, please read its prospectus. For
a copy and for answers to questions you might have, please call Investor
Information.
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
- ---------------------------- -------------------------------------------------
BY TELEPHONE ALL TYPES EXCEPT RETIREMENT:
[TELEPHONE GRAPHIC]
Call Vanguard Tele-Account* 24 hours a day--or
1-800-662-6273 Client Services during business hours--to
Vanguard Tele-Account request a sale or exchange of shares. You can
1-800-662-2739 exchange shares from this Portfolio to open an
Client Services account in another Vanguard Fund or to add to
an existing Vanguard Fund account with
an identical registration.
RETIREMENT:
You can exchange--but not sell--shares by
calling Tele- Account or Client Services.
*You must obtain a Personal Identification
Number through Tele-Account at least seven days
before you request your first redemption.
17
<PAGE> 22
Redeeming Shares (continued)
<TABLE>
<CAPTION>
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
- ---------------------------- -----------------------------------------------
<S> <C>
BY MAIL ALL TYPES EXCEPT RETIREMENT:
[MAIL GRAPHIC]
FIRST-CLASS mail to: Send a letter of instruction signed by all
The Vanguard Group registered account holders. Include the
Vanguard/Trustees' Equity Fund- Portfolio name and account number and (if you
U.S. Portfolio are selling) a dollar amount or number of
P.O. Box 1120 shares OR (if you are exchanging) the name of
Valley Forge, PA 19482 the Fund you want to exchange into and a dollar
amount or number of shares.
RETIREMENT:
EXPRESS or REGISTERED mail to: Call Client Services (for IRAs) or Individual
The Vanguard Group Retirement Services (for SEP-IRAs, 403(b)(7)
Vanguard/Trustees' Equity Fund- custodial accounts, Profit-Sharing and Money
U.S. Portfolio Purchase Pension [Keogh] plans: 1-800-662-2003)
455 Devon Park Drive for information on how to request a
Wayne, PA 19087 distribution. Depending on your account
registration type, additional documentation may
be required.
AUTOMATICALLY ALL TYPES EXCEPT RETIREMENT:
Vanguard offers several ways to sell or
exchange shares automatically (see "Services
and Account Features"). Call Investor
Information for the appropriate booklet and
application if you did not elect a feature when
you opened your account.
</TABLE>
It is important that you call Vanguard before you redeem a large dollar
amount. In protecting the interests of all Portfolio shareholders, Vanguard may
not be able to deliver your redemption proceeds immediately if the amount is
considered to be disruptive to the Portfolio's operation or performance.
Vanguard reserves the right to take up to seven days to deliver your redemption
proceeds.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares 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 you experience difficulty making a
telephone redemption during periods of drastic economic or market change, you
can send us your request by regular or express mail. Follow the instructions
on selling or exchanging shares by mail in the "Redeeming Shares" section.
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you a variety of statements to help you monitor your account
activity and to help you complete your tax returns. You will also receive annual
and semi-annual financial reports on the Portfolio's operation and performance.
CONFIRMATION STATEMENT
Sent each time you purchase, exchange, or redeem shares; confirms the date and
the amount of the transaction.
Investor Information 1-800-662-7447 -- Client Services 1-800-662-2739 --
Tele-Account 1-800-662-6273
18
<PAGE> 23
FUND AND ACCOUNT UPDATES (continued)
PORTFOLIO SUMMARY
Mailed quarterly; shows the market value of your account as of the close of the
statement period, as well as distributions, purchases, exchanges, and
redemptions for the current calendar year.
FUND FINANCIAL REPORTS
Mailed in February and August for this Portfolio.
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
AVERAGE COST STATEMENT [BOOK GRAPHIC]
Issued quarterly for taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the previous quarter,
using the average cost single category method.
AUTOMATED TELEPHONE ACCESS
Vanguard Tele-Account
1-800-662-6273
Any time, seven days a week, from anywhere in the continental United States and
Canada.
[BOOK GRAPHIC]
Toll-free access to total return, share price, price change, and yield
quotations through any TouchTone telephone. Also provides your account balance
(in dollars and shares), last transaction, redemptions by check during the last
three months, and the latest dividend or capital gains distribution. Permits
exchanges and sales of Portfolio shares.
COMPUTER ACCESS
VANGUARD ONLINE
KEYWORD: vanguard
Information via your personal computer on Fund share price, yield, and total
return; offered through America Online (AOL). To establish an AOL account, call
1-800-238-6336.
VANGUARD ON THE WORLD WIDE WEB
http://www.vanguard.com
An education-oriented website offering news and information about Vanguard Funds
and services, as well as interactive, easy-to-use investment planning tools.
SHARES OF THE PORTFOLIO MAY ONLY BE SOLD IN THOSE STATES IN WHICH THEY ARE
REGISTERED. THE PORTFOLIO'S SHARES ARE CURRENTLY REGISTERED FOR SALE IN ALL 50
STATES, AND THE PORTFOLIO INTENDS TO MAINTAIN SUCH REGISTRATION.
19
<PAGE> 24
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about
Vanguard/Trustees' Equity Fund-U.S. Portfolio, including its investment
objectives, risks, strategies, and expenses, as well as services available to
you as a shareholder.
It is important that you understand these facts so that you can decide
whether an investment in this Portfolio is right for you. The following
questions offer a quick review of some of the subjects covered by this
prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN . . .
/ / The Portfolio's objectives? (page 4)
/ / The Portfolio's investment strategies? (page 5)
/ / Who should invest in the Portfolio? (page 4)
/ / The risks associated with the Portfolio? (pages 4-7)
/ / Whether the Portfolio is Federally insured?
(inside front cover)
/ / The Portfolio's expenses? (page 2)
/ / The background of the Portfolio's investment manager?
(page 10)
/ / How to open an account? (page 15)
/ / How to sell or exchange shares? (page 16)
/ / How often you'll receive statements and financial reports?
(page 19)
Plain Talk About
Keeping Your Prospectus
Reading this prospectus will help you to decide whether Vanguard/ Trustees'
Equity Fund-U.S. Portfolio is suitable for your investment goals. If you decide
to invest, don't throw the prospectus out: you will no doubt need it for future
reference.
20
<PAGE> 25
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments, and
U.S. Treasury bills.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
DOLLAR-COST AVERAGING
Investing equal amounts of money at regular intervals on an ongoing basis. This
technique ensures that an investor buys fewer shares when prices are high and
more shares when prices are low.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
marketing fees.
FIXED-INCOME SECURITIES
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
GROWTH AND INCOME STOCK FUND
A mutual fund that emphasizes stocks of companies that are believed to offer
growth potential as well as market or above-average dividend income.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies whose strong earnings and
revenue potential indicate above-average prospects for capital growth -- with
less emphasis on dividend income.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a portfolio's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security or industry.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
PRINCIPAL
The amount of your own money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that focuses on the stocks of companies that, considering their
earnings and dividends, are attractively priced, these companies often pay
regular dividend income to shareholders.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 26
[THE VANGUARD GROUP LOGO]
HMS Vanguard was the flagship
of Lord Nelson at the Battle
of the Nile in 1798. Vanguard
was chosen as the name of The
Vanguard Group because of the
significance of its
traditional meaning: "the
advance guard" or "leadership
of a new trend."
THE VANGUARD GROUP
Post Office Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
For information on our Funds, Fund services, and retirement accounts; requests
for literature
CLIENT SERVICES DEPARTMENT
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-662-2738
For information on your account, account transactions, account statements
VANGUARD BROKERAGE SERVICES
1-800-992-8327
For information on trading stocks, bonds, and options at reduced commissions
VANGUARD TELE-ACCOUNT(R)
1-800-662-6273 (ON-BOARD)
For 24-hour automated access to price and yield, information on your account,
certain transactions
ELECTRONIC ACCESS TO THE VANGUARD MUTUAL FUND EDUCATION AND INFORMATION CENTER
On America Online(R)
Keyword: vanguard
To Send E-Mail to Vanguard
[email protected]
On the World Wide Web
http://www.vanguard.com
(C) 1996 Vanguard Marketing Corporation, Distributor
P025N
<PAGE> 27
Vanguard/Trustees'
Equity Fund-International
Portfolio
Prospectus
April 29, 1996
This prospectus contains financial
data for the Portfolio through the
fiscal year ended December 31, 1995.
[VANGUARD LOGO]
<PAGE> 28
VANGUARD/TRUSTEES' EQUITY FUND-
INTERNATIONAL PORTFOLIO An International Stock Mutual Fund
CONTENTS
Portfolio Expenses 2
Financial Highlights 3
A Word About Risk 4
The Portfolio's Objectives 4
Who Should Invest 4
Investment Strategies 5
Investment Policies 7
Investment Limitations 8
Investment Performance 9
Share Price 9
Dividends, Capital Gains, and Taxes 10
The Portfolio and Vanguard 11
Investment Adviser 11
General Information 12
Investing with Vanguard 13
Services and Account Features 14
Types of Accounts 14
Distribution Options 15
Buying Shares 16
Redeeming Shares 17
Fund and Account Updates 19
Glossary Inside Back Cover
INVESTMENT OBJECTIVES AND POLICIES
Vanguard/Trustees' Equity Fund--International Portfolio (the "Portfolio") is a
diversified mutual fund, a part of Vanguard/Trustees' Equity Fund, Inc. (the
"Fund"), an open-end investment management company.
The International Portfolio seeks to provide long-term growth and income by
investing primarily in equity securities of large and medium-size companies
located outside the United States. The Portfolio uses a "value" investment
approach, emphasizing companies that--considering their histories and compared
to similar companies --are attractively priced. These companies tend to be out
of favor with investors.
IT IS IMPORTANT TO NOTE THAT THE PORTFOLIO'S SHARES ARE NOT GUARANTEED OR
INSURED BY THE FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT OR FOREIGN
GOVERNMENTS. AS WITH ANY INVESTMENT IN COMMON STOCKS, WHICH ARE SUBJECT TO WIDE
FLUCTUATIONS IN MARKET VALUE, YOU COULD LOSE MONEY BY INVESTING IN THE
PORTFOLIO.
FEES AND EXPENSES
The Portfolio is offered on a no-load basis, which means that you pay no sales
commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the expense ratio.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
A Statement of Additional Information containing more information about the
Portfolio is, by reference, part of this prospectus and may be obtained without
charge by writing to Vanguard or by calling our Investor Information Department
at 1-800-662-7447.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, risks, and strategies of the
International Portfolio of Vanguard/Trustees' Equity Fund. To highlight terms
and concepts important to mutual fund investors, we have provided "Plain Talk"
explanations along the way. Reading the prospectus will help you to decide
whether the Portfolio is the right investment for you. We suggest that you keep
it for future reference.
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
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE> 29
PORTFOLIO PROFILE Vanguard/Trustees' Equity Fund-International Portfolio
WHO SHOULD INVEST (page 4)
- - Investors seeking investment opportunities outside the United States.
- - Investors seeking capital growth and some income over the long term--at
least five years.
- - Investors willing to accept the additional risks associated with
international investing.
WHO SHOULD NOT INVEST
- - Investors seeking significant current income.
- - Investors unwilling to accept significant fluctuations in share price.
RISKS OF THE PORTFOLIO (pages 4-8)
This Portfolio's total return will fluctuate within a wide range, so an investor
could lose money over short or even extended periods. In addition to the risks
of U.S. stock funds (market risk, etc.), the Portfolio is subject to risks
associated with foreign investing. Among these are country risk (the chance that
a country's economy will be hurt by political or financial problems or natural
disasters) and currency risk (the chance that Americans investing abroad could
lose money because of a rise in the value of the U.S. dollar versus foreign
currencies).
DIVIDENDS AND CAPITAL GAINS (page 10)
Dividends are paid in March, June, September, and December. Capital gains, if
any, are paid in December.
INVESTMENT ADVISER (page 11)
UBS International Investment London Limited, London, England (replaced
Batterymarch Financial Management, Inc., as adviser on March 31, 1996).
INCEPTION DATE: May 16, 1983
NET ASSETS AS OF 12/31/95: $988 million
PORTFOLIO'S EXPENSE RATIO FOR THE YEAR ENDED 12/31/95: 0.47%
LOADS, 12b-1 MARKETING FEES: None
SUITABLE FOR IRAs: Yes
MINIMUM INITIAL INVESTMENT: $3,000; $1,000 for IRAs and accounts for minors
NEWSPAPER ABBREVIATION: TrIntl
VANGUARD FUND NUMBER: 046
ACCOUNT FEATURES (page 14)
- - Telephone Redemption
- - Vanguard Direct Deposit Service(sm)
- - Vanguard Automatic Exchange Service(sm)
- - Vanguard Fund Express(R)
- - Vanguard Dividend Express(sm)
AVERAGE ANNUAL TOTAL RETURN--
PERIODS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
International Portfolio +9.7% +8.6% +14.0%
MSCI EAFE Index +11.6 +9.7 +14.0
</TABLE>
QUARTERLY RETURNS (%) 1986-1995
[BAR GRAPH]
In evaluating past performance, remember that it is not indicative of future
performance (a point especially valid in this case, since the Portfolio changed
its adviser on March 31, 1996). Performance figures include the reinvestment of
any dividends and capital gains distributions. The returns shown are net of
expenses, but they do not reflect income taxes an investor would have incurred.
Note, too, that both the return and principal value of an investment will
fluctuate so that investors' shares, when redeemed, may be worth more or less
than their original cost.
1
<PAGE> 30
PORTFOLIO EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Portfolio.
As noted in this table, you do not pay fees of any kind when you buy, sell,
or exchange shares of the Portfolio:
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
The next table illustrates the operating expenses that you would incur as a
shareholder of the Portfolio. These expenses are deducted from the Portfolio's
income before it is paid to you. Expenses include investment advisory fees as
well as the costs of maintaining accounts, administering the Portfolio,
providing shareholder services, and other activities. The expenses shown in the
table are for the fiscal year ended December 31, 1995.
ANNUAL PORTFOLIO OPERATING EXPENSES
<TABLE>
<S> <C> <C>
Management and Administrative Expenses: 0.23%
Investment Advisory Expenses: 0.12%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.10%
----
Total Other Expenses: 0.12%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.47%
====
</TABLE>
The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes (1) that
the Portfolio provides a return of 5% a year and (2) that you redeem your
investment at the end of each period.
<TABLE>
<CAPTION>
---------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------
<S> <C> <C> <C> <C>
$5 $15 $26 $59
---------------------------------------------
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
Plain Talk About
The Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time, have
a dramatic impact on a fund's performance.
Plain Talk About
Fund Expenses
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard/Trustees' Equity Fund-International Portfolio's expense ratio
in fiscal year 1995 was 0.47%, or $4.70 per $1,000 of average net assets. The
average actively managed international equity mutual fund had expenses in 1995
of 1.58%, or $15.80 per $1,000 of average net assets, according to Lipper
Analytical Services, Inc., which reports on the mutual fund industry.
2
<PAGE> 31
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended December 31, 1995. The
financial highlights were audited by Price Waterhouse LLP, independent
accountants. You should read this information in conjunction with the
Portfolio's financial statements and accompanying notes, which appear, along
with the audit report from Price Waterhouse, in the Portfolio's most recent
Annual Report to shareholders. The Annual Report is incorporated by reference in
the Statement of Additional Information and in this prospectus, and contains a
more complete discussion of the Portfolio's performance. You may have the Report
sent to you without charge by writing to Vanguard or by calling our Investor
Information Department.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $31.48 $31.04 $24.44 $27.78 $26.58 $32.44 $28.27 $28.66 $38.68 $30.91
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income .75 .55 .50 .66 .78 1.02 .82 .77 1.14 1.03
Net Realized and
Unrealized Gain (Loss)
on Investments 2.185 1.08 6.91 (3.05) 1.80 (4.92) 6.22 4.41 7.91 14.32
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS 2.935 1.63 7.41 (2.39) 2.58 (3.90) 7.04 5.18 9.05 15.35
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.79) (.56) (.81) (.67) (.77) (.95) (.79) (.99) (.75) (1.03)
Distributions from Realized
Capital Gains (2.515) (.63) -- (.28) (.61) (1.01) (2.08) (4.58) (18.32) (6.55)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS (3.305) (1.19) (.81) (.95) (1.38) (1.96) (2.87) (5.57) (19.07) (7.58)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $31.11 $31.48 $31.04 $24.44 $27.78 $ 26.58 $32.44 $28.27 $28.66 $38.68
==============================================================================================================================
TOTAL RETURN 9.65% 5.25% 30.49% (8.72)% 9.96% (12.26)% 25.97% 18.78% 23.88% 50.71%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $988 $1,053 $ 982 $ 678 $ 878 $ 796 $ 646 $ 467 $ 657 $ 719
Ratio of Expenses to
Average Net Assets .47% .34% .40% .42% .38% .44% .46% .51% .50% .52%
Ratio of Net Investment
Income to Average
Net Assets 2.29% 1.71% 1.76% 2.48% 2.87% 3.62% 2.61% 2.55% 2.44% 2.65%
Portfolio Turnover Rate 47% 40% 39% 51% 46% 18% 25% 14% 48% 24%
</TABLE>
From time to time, the Vanguard Funds advertise yield and total return
figures. Yield is an historical measure of dividend income, and total return is
a measure of past dividend income (assuming that it has been reinvested) plus
capital appreciation. Neither yield nor total return should be used to predict
the future performance of a fund.
Plain Talk About
How to Read the Financial Highlights Table
The Portfolio began fiscal 1995 with a net asset value (price) of $31.48 per
share. During the year, the Portfolio earned $0.75 per share from investment
income (interest and dividends) and $2.185 per share from investments that had
appreciated in value or that were sold for higher prices than the Portfolio paid
for them. Of those total earnings of $2.935 per share, $3.305 per share was
returned to shareholders in the form of distributions ($0.79 in dividends,
$2.515 in capital gains). The earnings ($2.935 per share) less distributions
($3.305 per share) resulted in a share price of $31.11 at the end of the year, a
decrease of $0.37 per share (from $31.48 at the beginning of the period to
$31.11 at the end of the period). Assuming that the shareholder had reinvested
the distribution in the purchase of more shares, total return from the Portfolio
was 9.65% for the year.
As of December 31, 1995, the Portfolio had $988 million in net assets; an
expense ratio of 0.47% ($4.70 per $1,000 of net assets); and net investment
income amounting to 2.29% of its average net assets. It sold and replaced
securities valued at 47% of its total net assets.
3
<PAGE> 32
Plain Talk About
Investing for the Long Term
The Portfolio is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on short-term
fluctuations in the stock market.
================================================================================
A WORD ABOUT RISK
This prospectus describes the risks you will face as an investor in the
International Portfolio of Vanguard/Trustees' Equity Fund. It is important to
keep in mind one of the main axioms of investing: the higher the risk of losing
money, the higher the potential reward. The reverse, also, is generally true:
the lower the risk, the lower the potential reward. However, as you consider an
investment in the International Portfolio, you should also take into account
your personal tolerance for the daily fluctuations of the stock market.
Look for this "warning flag" symbol [FLAG GRAPHIC] throughout the prospectus.
It is used to mark detailed information about each type of risk that you, as a
shareholder of the Portfolio, will confront.
================================================================================
THE PORTFOLIO'S OBJECTIVES
Vanguard/Trustees' Equity Fund-International Portfolio seeks to provide
long-term capital growth and income. These objectives are fundamental, which
means that they cannot be changed unless a majority of shareholders vote to do
so.
[FLAG GRAPHIC] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING
PAGES, YOUR INVESTMENT IN THE PORTFOLIO, AS WITH ANY INVESTMENT
IN COMMON STOCKS, COULD LOSE MONEY.
WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:
- - You are seeking investment opportunities outside the United States.
- - You wish to add a value-oriented international stock fund to your existing
holdings, which could include U.S. stock, bond, money market, and tax-exempt
investments.
- - You are willing to accept the additional risks (country risk, currency risk,
etc.) associated with international investments.
- - You are seeking growth of capital over the long term--at least five years.
This Portfolio is not an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of the Portfolio's shareholders. To
minimize such costs, which reduce the ultimate returns achieved by you and other
shareholders, the Portfolio has adopted the following policies:
- - The Portfolio reserves the right to reject any purchase request--including
exchanges from other Vanguard Funds--that it regards
4
<PAGE> 33
as disruptive to the efficient management of the Portfolio. This could be
because of the timing of the investment or because of a history of excessive
trading by the investor.
- - There is a limit on the number of times you can exchange into or out of the
Portfolio (see "Redeeming Shares" in the INVESTING WITH VANGUARD section). n
The Portfolio reserves the right to stop offering shares at any time.
INVESTMENT STRATEGIES
This section explains how the Portfolio's investment adviser pursues the
objectives of long-term growth and income. It also explains several of the
risks--market risk, objective risk, country risk, manager risk, and currency
risk--faced by investors in the Portfolio. Unlike the Portfolio's investment
objectives, the adviser's investment strategies are not fundamental and can be
changed by the Portfolio's Board of Trustees without shareholder approval.
However, before making any important change in its policies, the Portfolio will
give shareholders 30-days notice, in writing.
MARKET EXPOSURE
The Portfolio is a value-oriented fund that invests primarily in the stocks of
large and medium-size non-U.S. companies.
[FLAG GRAPHIC] THE PORTFOLIO IS SUBJECT TO MARKET RISK, WHICH IS THE
POSSIBILITY THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT
OR EVEN EXTENDED PERIODS. STOCK MARKETS TEND TO MOVE IN
CYCLES, WITH PERIODS OF RISING STOCK PRICES AND PERIODS OF
FALLING STOCK PRICES. IN ADDITION, INVESTMENTS IN FOREIGN
STOCK MARKETS CAN BE AS RISKY, IF NOT MORE RISKY, THAN U.S.
STOCK INVESTMENTS.
To illustrate the volatility of international stock prices, the following
table shows the best, worst, and average total returns (dividend income plus
change in market value) for foreign stock markets over various periods as
measured by the Morgan Stanley Capital International Europe, Australia, and Far
East (EAFE) Index, a widely used barometer of international stock market
activity. Note that the returns shown do not include the costs of buying and
selling stocks or other expenses that a real-world investment portfolio would
incur. Note, also, how the gap between best and worst tends to narrow over the
long term.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1995)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Best +69.9% +36.5% +22.8% +16.3%
Worst -23.2 +1.5 +7.0 +12.0
Average +15.3 +14.2 +16.2 +14.9
- --------------------------------------------------------------------------------
</TABLE>
Plain Talk About
Costs and Market Timing
Some investors try to profit from "market timing"--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Portfolio discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
Plain Talk About
Value Funds and
Growth Funds
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize companies that, considering their
assets and earnings history, are attractively priced; these companies often pay
regular dividend income to shareholders. Growth funds generally focus on
companies that, due to their strong earnings and revenue potential, offer
above-average prospects for capital growth, with less emphasis on dividend
income. Value and growth stocks have, in the past, produced similar long-term
returns, though each has periods when it outperforms the other. In general,
value funds are appropriate for investors who want some dividend income and the
potential for capital gains but are less tolerant of share-price fluctuations,
while growth funds appeal to investors who will accept more volatility in hope
of a greater increase in share price.
5
<PAGE> 34
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1995. Keep in mind that this was a particularly favorable period for
foreign markets. For instance, over 10-year periods, foreign stocks provided an
average return of +16.2%, compared to +13.1% for U.S. stocks (as measured by the
Standard & Poor's 500 Composite Stock Price Index) during the same time frame.
These average returns reflect past performance and should not be regarded as an
indication of future returns from either foreign markets as a whole or this
Portfolio in particular.
Note, too, that, while the Portfolio emphasizes stocks of large and
medium-size companies, it also includes stocks of small companies. Stocks of
small companies have historically been more volatile than--and at times have
performed quite differently from--the stocks of larger companies. Keep in mind,
too, that classifications of companies as large, medium, or small vary from
country to country. For instance, a large company in one country could be
considered a small company in another.
For these reasons and because the International Portfolio does not hold the
same securities held in the EAFE Index or any other market index, the
performance of the Portfolio will not mirror the returns of any particular
index.
[FLAG GRAPHIC] THE PORTFOLIO IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE
POSSIBILITY THAT RETURNS FROM INTERNATIONAL STOCKS WILL TRAIL
RETURNS FROM THE U.S. STOCK MARKETS. THE PRICES OF
INTERNATIONAL STOCKS AND THE PRICES OF U.S. STOCKS HAVE OFTEN
MOVED IN OPPOSITE DIRECTIONS. THESE PERIODS HAVE, IN THE PAST,
LASTED FOR AS LONG AS SEVERAL YEARS.
SECURITY SELECTION
UBS International Investment London Limited (UBSII), adviser to the Portfolio,
believes that research is the key to selecting securities for an international
stock portfolio. Much of this research takes the form of on-site visits. In
1995, for instance, UBSII's investment analysts visited some 1,400 companies.
To be considered for the International Portfolio, a company must--looking at
its history and compared to similar companies--be cheap statistically (that is,
it has an above-average yield and a relatively low price considering its
earnings, book value, and cash flow); be out of favor with investors; and appear
to have a management that is motivated to make positive changes.
The adviser decides whether--and how much--to invest in each country by first
determining how many of a country's companies meet UBSII's value criteria. Other
factors in UBSII's country selection process include the size of the market and
the variety of investment opportunities available within the market.
Plain Talk About
The Risks of International Investing
Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign countries are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies, and may not be as liquid as similar U.S. companies. In addition,
foreign stock exchanges, brokers, and companies generally have less government
supervision and regulation than in the U.S. These factors--as well as possible
country risk and currency risk (which are described in detail in this
prospectus)--could negatively impact the returns that Americans receive from a
foreign investment. For more information about foreign investment risk, see the
Statement of Additional Information.
Plain Talk About
Portfolio Diversification
In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average foreign equity mutual fund
has about 25% of its assets invested in its ten largest holdings, while some
less-diversified international mutual funds have more than 50% of their assets
invested in the stocks of just ten companies.
6
<PAGE> 35
[FLAG GRAPHIC] THE PORTFOLIO IS SUBJECT TO COUNTRY RISK, WHICH IS THE
POSSIBILITY THAT POLITICAL EVENTS (A WAR, NATIONAL ELECTIONS),
FINANCIAL PROBLEMS (RISING INFLATION, GOVERNMENT DEFAULT), OR
NATURAL DISASTERS (AN EARTHQUAKE, A POOR HARVEST) WILL WEAKEN
A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN THAT COUNTRY TO
LOSE MONEY.
The Portfolio is expected to hold some 150 securities, with the top ten
holdings making up about 20% of the Portfolio's net assets. The stocks are
chosen from a diverse range of industries.
The Portfolio is run by UBSII according to traditional methods of active
investment management, which means that securities are bought and sold according
to UBSII's judgments about companies and their financial prospects, and about
foreign stock markets and economies in general.
[FLAG GRAPHIC] THE PORTFOLIO IS SUBJECT TO MANAGER RISK, WHICH IS THE
POSSIBILITY THAT UBSII MAY DO A POOR JOB OF EVALUATING FOREIGN
MARKETS AND SELECTING STOCKS.
PORTFOLIO TURNOVER
Although the Portfolio generally seeks to invest for the long term, it retains
the right to sell securities regardless of how long they have been held. The
Portfolio's average turnover rate for the past ten years has been about 35%. (A
turnover rate of 100% would occur, for example, if the Portfolio sold and
replaced securities valued at 100% of its total net assets within a one-year
period.)
Because of the Portfolio's recent change in investment adviser, the turnover
rate may approach 100% during 1996. Once this transition year is over, however,
UBSII expects the Portfolio's turnover rate to return to its historical average
of about 35%.
INVESTMENT POLICIES
Besides investing in stocks of foreign companies, the Portfolio may follow a
number of investment policies to achieve its objectives.
The Portfolio may enter into forward foreign currency contracts, which help
protect the Portfolio's securities against unfavorable short-term changes in
exchange rates. UBSII will use these contracts to eliminate some of the
uncertainty of foreign exchange rates--but will not speculate on changes in the
market.
[FLAG GRAPHIC] THE PORTFOLIO IS SUBJECT TO CURRENCY RISK, WHICH IS THE
POSSIBILITY THAT A "STRONGER" U.S. DOLLAR WILL REDUCE RETURNS
FOR AMERICANS INVESTING OVERSEAS. GENERALLY, WHEN THE DOLLAR
RISES IN VALUE AGAINST A FOREIGN CURRENCY, YOUR INVESTMENT IN
THAT COUNTRY LOSES VALUE BECAUSE ITS CURRENCY IS WORTH FEWER
U.S. DOLLARS. ON THE OTHER HAND, A "WEAKER" DOLLAR GENERALLY
LEADS TO HIGHER RETURNS FOR AMERICANS HOLDING FOREIGN
INVESTMENTS.
Plain Talk About
Portfolio Turnover
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. Also, funds with high portfolio turnover rates
may be more likely than low-turnover funds to generate capital gains that must
be distributed to shareholders as taxable income. The average turnover rate for
actively managed international stock funds is 57%.
Plain Talk About
Forward Foreign Currency Contracts
A forward foreign currency contract is an agreement to buy or sell a country's
currency at a specific price usually 30, 60, or 90 days in the future. In other
words, the contract guarantees an exchange rate on a given date. Managers of
international stock funds use these contracts to guard against sudden,
unfavorable changes in U.S. dollar/foreign currency exchange rates. The
contracts will not prevent the fund's securities from falling in value during
foreign market downswings.
7
<PAGE> 36
The Portfolio may also invest in derivatives.
[FLAG GRAPHIC] ALTHOUGH IT HAS NOT DONE SO IN THE PAST, THE PORTFOLIO
RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN STOCK
FUTURES AND OPTIONS CONTRACTS, WHICH ARE TRADITIONAL TYPES OF
DERIVATIVES.
Losses (or gains) involving futures can sometimes be substantial--in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a Portfolio. This Portfolio will
not use futures and options for speculative purposes or as leveraged investments
that magnify the gains or losses of an investment. Rather, the Portfolio will
keep separate cash reserves or short-term cash-equivalent securities in the
amount of the obligation underlying the futures or options contract. Only a
limited percentage of the Portfolio's assets--no more than 20% of total
assets--may be committed to such contracts.
The reasons for which the Portfolio may use futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To make it easier to trade.
- - To reduce costs by buying futures instead of actual stocks when futures are
cheaper.
The Portfolio will usually hold only a small percentage of its assets in cash
reserves, although if the investment adviser believes that market conditions
warrant a temporary defensive measure, the Portfolio may hold cash reserves
without limit.
INVESTMENT LIMITATIONS
To reduce risk and maintain diversification, the Portfolio has adopted limits on
some of its investment policies. Specifically, the Portfolio will not:
- - Invest more than 5% of its assets in the securities of companies that have
been in business for less than three years.
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for the purpose of meeting shareholder requests to
redeem shares.
With respect to 75% of its assets, this Portfolio will not:
- - Invest more than 5% in the securities of any one company.
- - Buy more than 10% of the outstanding voting securities of any company.
The limitations listed in this prospectus and in the Statement of Additional
Information are fundamental and may be changed only by approval of a majority of
the Portfolio's shareholders.
Plain Talk About
Derivatives
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new, exotic types of derivatives--some of which can
carry considerable risks.
Plain Talk About
Cash Reserves
With mutual funds, holding cash reserves--or "cash"--does not mean literally
that the fund holds a stack of currency. Rather, cash reserves refer to
short-term, interest-bearing securities that can easily and quickly be converted
to cash. (Most mutual funds hold at least a small percentage of assets in cash
to accommodate shareholder redemptions.) While some equity funds strive to keep
cash levels at a minimum and to always remain fully invested in stocks, other
equity funds allow investment advisers to hold up to 20% or more of a fund's
assets in cash reserves.
8
<PAGE> 37
INVESTMENT PERFORMANCE
Vanguard/Trustees' Equity Fund-International Portfolio invests in foreign
stocks, so its performance is tied to the performance of many stock markets
outside the United States. Historically, stock market performance, both foreign
and domestic, has been characterized by sharp up-and-down swings in the short
term and by more stable growth over the long term.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 12/31/95
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
INTERNATIONAL PORTFOLIO 9.7% 14.6% 8.6% 14.0%
MSCI EAFE INDEX 11.6% 17.0% 9.7% 14.0%
- --------------------------------------------------------------------------------
</TABLE>
The results shown above represent the Portfolio's "average annual total
return" performance, which assumes that any distributions of capital gains and
dividends were reinvested for the indicated periods. Also included is
comparative information on the unmanaged Morgan Stanley Capital International
Europe, Australia, and Far East (EAFE) Index. The chart does not make any
allowance for Federal, state, or local income taxes that shareholders must pay
on a current basis.
In weighing these performance figures, note that the International Portfolio
was managed by Batterymarch Financial Management, Inc., from the Portfolio's
inception on May 16, 1983, until March 31, 1996, when UBS International
Investment London Limited became the Portfolio's investment adviser.
SHARE PRICE
The Portfolio's share price, called its net asset value, is calculated each
business day after the close of regular trading (generally 4:00 p.m. Eastern
time) of the New York Stock Exchange. Net asset value per share is computed by
adding up the total value of the Portfolio's investments and other assets,
subtracting any of its liabilities, or debts, and then dividing by the number of
Portfolio shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = ----------------------------
NUMBER OF SHARES OUTSTANDING
Plain Talk About
Past Performance
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns. This is
particularly true of international markets, which historically have been more
volatile than U.S. markets.
9
<PAGE> 38
Daily net asset value, or NAV, is useful to you as a shareholder because the
NAV, multiplied by the number of Portfolio shares you own, gives you the dollar
amount you would have received had you sold all of your shares back to the
Portfolio that day.
To help determine its daily share price, the Portfolio calculates the value
of its foreign securities in U.S. dollars. The Portfolio uses the daily exchange
rate employed by Morgan Stanley Capital International in the calculation of its
own indexes. If Morgan Stanley's exchange rate is not available, the Portfolio
uses a rate according to policies set by the Fund's Board of Trustees.
The Portfolio's share price can be found daily in the mutual fund listings of
most major newspapers under the heading Vanguard Group. Different newspapers use
different abbreviations of the Portfolio's name, but the most common is TrIntl.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each March, June, September, and December, the Portfolio distributes to
shareholders virtually all of its income from interest and dividends. Any
capital gains realized from the sale of securities are distributed in December.
You can receive distributions of income or capital gains in cash, or you may
have them automatically reinvested in more shares of the Portfolio. In either
case, distributions of dividends and capital gains that are declared in
December--even if paid to you in January--are taxed as if they had been paid to
you in December. Vanguard will process your dividend distribution and send you a
statement each year showing the tax status of all your distributions.
- - The dividends and short-term capital gains that you receive are taxable to
you as ordinary dividend income. Any distributions of net long-term capital
gains by the Portfolio are taxable to you as long-term capital gains, no
matter how long you've owned shares in the Portfolio. Both dividends and
capital gains distributions are taxable to you whether received in cash or
reinvested in additional shares. Although the Portfolio does not seek to
realize any particular amount of capital gains during a year, such gains are
realized from time to time as byproducts of the ordinary investment
activities of the Portfolio. Consequently, distributions may vary
considerably from year to year.
- - If you sell or exchange shares of the Portfolio, any gain or loss you have is
a taxable event, which means that you may have a capital gain to report as
income, or a capital loss to report as a deduction, when you complete your
Federal income tax return.
- - Distributions of dividends or capital gains, and capital gains or losses from
your sale or exchange of Portfolio shares, may be subject to state and local
income taxes as well.
Plain Talk About
Distributions
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from the dividends that the fund earns from its holdings as well
as interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term depending
on whether the fund held the securities for less than or more than one year.
Plain Talk About
"Buying a Dividend"
Unless you are investing in a tax-deferred retirement account (such as an IRA),
it is not to your advantage to buy shares of a fund shortly before it makes a
distribution, because part of your investment will come back to you as a taxable
distribution. This is known as "buying a dividend." For example: on December 15,
you invest $5,000, buying 250 shares for $20 each. If the fund pays a
distribution of $1 per share on December 16, its share price would drop to $19
(not counting market change).You would still have only $5,000 (250 shares x $19
= $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you
would owe tax on the $250 distribution you received, even if you had reinvested
the dividends in more shares. To avoid "buying a dividend," check a fund's
distribution schedule before you invest.
10
<PAGE> 39
The Portfolio may "pass through" to shareholders any foreign income taxes it
is required to pay. As a shareholder, you need to report your "share" of these
taxes as part of your gross income. You can treat the tax either as an itemized
deduction or as a foreign tax credit on your tax return.
The tax information in this prospectus is provided as general information and
will not apply to you if you are investing in a tax-deferred account such as an
IRA. You should consult your own tax adviser about the tax consequences of an
investment in the Portfolio.
THE PORTFOLIO AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 30 investment
companies with more than 90 distinct investment portfolios and total net assets
of more than $180 billion. All of the Vanguard Funds share in the expenses
associated with business operations, such as personnel, office space, equipment,
and advertising.
Vanguard also provides marketing services to the Funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each Fund pays its
allocated share of The Vanguard Group's costs.
A list of the Fund's Trustees and Officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.
INVESTMENT ADVISER
The Portfolio employs UBS International Investment London Limited (UBSII),
Triton Court, 14 Finsbury Square, London EC2A 1PD, as its investment adviser.
UBSII manages the Portfolio subject to the control of the Officers and Trustees
of the Fund.
UBSII's advisory fee is calculated at the end of each fiscal quarter and is
based on the Portfolio's average month-end net assets during that quarter:
<TABLE>
<CAPTION>
---------------------------------------
Net Assets Fee
---------------------------------------
<S> <C>
First $50 million 0.475%
Next $450 million 0.150
Next $500 million 0.120
Assets over $1 billion 0.110
---------------------------------------
</TABLE>
The advisory fee may be increased or decreased by an incentive/ penalty fee
based on the Portfolio's total return performance as compared to that of the
MSCI EAFE Index. Under the fee schedule, the basic fee may be increased or
decreased by as much as 50%. The incentive/penalty fee will not be fully
operable until June 30, 1999. Until that date, the incentive/penalty fee will be
calculated using certain transition rules that are explained in the Statement of
Additional Information.
Plain Talk About
Vanguard's Unique Corporate Structure
The Vanguard Group, Inc. is the only mutual mutual fund company. It is owned
jointly by the Funds it oversees and by the shareholders in those Funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, a group of individuals, or by investors who bought the management
company's publicly traded stock. Because of its structure, Vanguard operates its
Funds at cost. Instead of distributing profits from operations to a separate
management company, Vanguard returns profits to Fund shareholders in the form of
lower operating expenses.
11
<PAGE> 40
The agreement authorizes UBSII to choose brokers or dealers to handle the
purchases and sales of the Portfolio's securities, and directs UBSII to use
every effort to get the best available price and most favorable execution from
these brokers with respect to all transactions.
The Board of Trustees may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser, either as
a replacement for UBSII or as an additional adviser. However, no such change
would be made before giving shareholders 30-days notice, in writing.
GENERAL INFORMATION
The International Portfolio is one of two Portfolios of Vanguard/ Trustees'
Equity Fund, Inc., a Pennsylvania business trust. The other Portfolio is the
U.S. Portfolio. The Portfolios are combined under one corporation for
administrative purposes, but in virtually all respects operate like separate
corporations.
Shareholders of the International Portfolio have rights and privileges
similar to those enjoyed by other corporate shareholders. For example,
shareholders will not be responsible for any liabilities of the corporation. If
any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of Trustees), each share
outstanding at that point would be entitled to one vote. Although the Portfolio
does not usually hold an annual meeting, shareholders may request one under
certain circumstances, which are described in the Statement of Additional
Information.
Plain Talk About
The Portfolio's Adviser
UBS International Investment London Limited (UBSII) traces its roots to the
British brokerage firm, Phillips & Drew, which was acquired by the Union Bank of
Switzerland in 1985. UBSII, which was created two years later to provide
investment management services to clients outside the United Kingdom, currently
manages some $6 billion in assets. Although the adviser uses a team approach,
the managers with primary responsibility for the International Portfolio are:
WILSON PHILLIPS, CFA, Investment Manager, UBSII; 16 years investment
experience (14 years with the firm); B.S., Glasgow University.
ROBIN APPS, Investment Manager and Investment Committee Member, UBSII; 12
years investment experience (10 years with the firm); B. Soc. SC., Birmingham
University.
12
<PAGE> 41
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to Fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer you as a Vanguard/Trustees' Equity Fund-International Portfolio
shareholder. Booklets providing detailed information are available on the
services marked with a [BOOK GRAPHIC]. Please call us to request copies.
SERVICES AND ACCOUNT FEATURES
We offer a variety of options designed to fit your financial planning needs,
including . . .
- - Automatic methods for depositing your paycheck or government check, and
moving money between Vanguard Fund accounts or between your Vanguard Fund
account and your bank account.
- - A cost-effective way to complement your Vanguard mutual fund shares with
individual stocks, bonds, and options.
TYPES OF ACCOUNTS
You can establish an account for yourself (or yourself and another party), a
minor child, a trust, or an organization, or as a third-party trustee retirement
investment. We also offer retirement accounts for individuals, self-employed
people, small businesses, partnerships, corporations, and tax-exempt
institutions.
DISTRIBUTION OPTIONS
You can receive your dividends and capital gains in cash, or reinvest them in
additional Portfolio shares.
BUYING SHARES
It's easy to open an account or add money to an existing account.
REDEEMING SHARES
You can withdraw money you have invested in the Portfolio by selling or
exchanging shares.
FUND AND ACCOUNT UPDATES
- - Our clear, concise Portfolio Summaries and tax statements help you keep track
of your Vanguard investments throughout the year as well as when you are
preparing your income tax returns.
- - Twice each year, you will receive comprehensive fund reports about
Vanguard/Trustees' Equity Fund-International Portfolio. These reports include
an assessment of the Portfolio's performance (and a comparison to its
benchmark index) as well as a complete listing of its holdings.
- - Vanguard Tele-Account(R) offers toll-free Fund and account information 24
hours a day from any TouchTone(TM) telephone.
- - You can use your personal computer to obtain share price, yield, and total
return--as well as general investment information--through Vanguard
Online(sm) and the World Wide Web.
13
<PAGE> 42
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to purchase, sell, or
exchange shares.
TELEPHONE REDEMPTIONS
(SALES AND EXCHANGES)
Automatically set up for this Portfolio unless you notify us otherwise.
VANGUARD DIRECT DEPOSIT SERVICE
[BOOK GRAPHIC]
Automatic method for depositing your paycheck or U.S. Government payment
(including Social Security and Government pension checks) into your account.
VANGUARD AUTOMATIC EXCHANGE SERVICE
[BOOK GRAPHIC]
Automatic method for moving a fixed amount of money from one Vanguard Fund
account to another.*
VANGUARD FUND EXPRESS
[BOOK GRAPHIC]
Electronic method for purchasing or selling shares: transferring money between
your Vanguard Fund account and an account at your bank, savings and loan, or
credit union--on a systematic schedule or whenever you wish.*
VANGUARD DIVIDEND EXPRESS
[BOOK GRAPHIC]
Electronic method for transferring dividends and/or capital gains distributions
directly from your Vanguard Fund account to your bank, savings and loan, or
credit union account or to another Vanguard Fund account.
Vanguard Brokerage Services (VBS)
[BOOK GRAPHIC]
A way to trade stocks, bonds, and options on major exchanges, Nasdaq, and other
domestic over-the-counter markets at reduced rates, and to buy and sell shares
of non-Vanguard mutual funds. Call VBS (1-800-992-8327) for additional
information and the appropriate forms.
*Can be used to "dollar-cost average" [BOOK GRAPHIC] or to contribute to an IRA
or other retirement plan.
TYPES OF ACCOUNTS
INDIVIDUAL OR OTHER ENTITY
Vanguard's account registration form can be used to establish a variety of
account types.
FOR ONE OR MORE PEOPLE
To open an account in the name of one (individual) or more (joint tenants)
people. $3,000 minimum initial investment.
FOR A MINOR CHILD
[BOOK GRAPHIC]
To open an account as an UGMA/UTMA (Uniform Gifts/Transfers to Minors Act). Age
of majority and other transfer requirements are set by state law. $1,000 minimum
initial investment.
FOR HOLDING TRUST ASSETS
[BOOK GRAPHIC]
To register assets held in an existing trust. $3,000 minimum initial investment.
Investor Information 1-800-662-7447 -- Client Services 1-800-662-2739 --
Tele-Account 1-800-662-6273
14
<PAGE> 43
TYPES OF ACCOUNTS (continued)
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
(Vanguard is not the custodian or trustee)
To open an account as a retirement trust or plan based on an existing corporate
or institutional plan. These accounts are established by the custodian or
trustee of the existing plan.
FOR AN ORGANIZATION
To open an account as a corporation, partnership, or other entity. These
accounts may require a corporate resolution or other documents to name the
individuals authorized to act. $3,000 minimum initial investment.
RETIREMENT
These accounts must be established with a Vanguard adoption agreement--not a
Vanguard account registration form--and may require additional documentation. To
request the appropriate adoption agreement and forms or to receive answers to
your questions about investing for retirement, call Investor Information.
FOR AN INDIVIDUAL RETIREMENT ACCOUNT (IRA)
(Vanguard Fiduciary Trust Company is the custodian)
To open a retirement account in the name of an individual. IRAs can be
established through a regular contribution, a direct rollover from an
employer's plan such as a 401(k), or through an asset transfer or rollover from
another financial institution such as a bank or mutual fund company. $1,000
minimum initial investment.
FOR A SIMPLIFIED EMPLOYEE PENSION PLAN ACCOUNT (SEP-IRA)
(Vanguard Fiduciary Trust Company is the custodian)
To open a retirement account in the name of an employee.SEPs allow employers to
make deductible contributions directly to IRAs established by their employees. A
SEP can be established by self-employed individuals, small businesses,
partnerships, or corporations.
FOR A QUALIFIED RETIREMENT PROGRAM ACCOUNT
(Vanguard Fiduciary Trust Company can be the custodian)
To open a retirement account that allows small business owners or self-employed
individuals to make tax-deductible retirement contributions for themselves and
their employees into Profit-Sharing and Money Purchase Pension (Keogh) plans.
FOR A 403(b)(7) CUSTODIAL ACCOUNT
(Vanguard Fiduciary Trust Company is the custodian)
To open a retirement account that allows employees of tax- exempt institutions
(for example, schools or hospitals) to make pre-tax retirement contributions.
DISTRIBUTION OPTIONS
You can receive distributions of dividends and/or capital gains in a number of
ways:
REINVESTMENT
Dividends and capital gains are reinvested in additional shares of the
Portfolio.
DIVIDENDS IN CASH
Dividends are paid by check and mailed to your account's address of record, and
capital gains are reinvested in additional shares of the Portfolio.
Investor Information 1-800-662-7447 -- Client Services 1-800-662-2739 --
Tele-Account 1-800-662-6273
15
<PAGE> 44
DISTRIBUTION OPTIONS (continued)
DIVIDENDS AND CAPITAL GAINS IN CASH
Both dividends and capital gains are paid by check and mailed to your account's
address of record.
- --------------------------------------------------------------------------------
To electronically transfer cash dividends and/or capital gains to your bank,
savings and loan, or credit union account, or to another Vanguard Fund
account, see Vanguard Dividend Express under "Services and Account Features."
- --------------------------------------------------------------------------------
BUYING SHARES
The price you pay for your shares is the Portfolio's next-determined net asset
value after Vanguard receives your request, provided we receive your request
before 4:00 p.m. Eastern time (the close of trading on the New York Stock
Exchange). The Portfolio is offered on a no-load basis, meaning that you do not
pay sales commissions or 12b-1 marketing fees.
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
--------------------------------- -----------------------------------
<S> <C> <C> <C>
MINIMUM INVESTMENT $3,000 (regular account); $1,000 $100 by mail or exchange; $1,000
(IRAs and accounts for minors). by wire.
BY MAIL Complete and sign the application Mail your check with an Invest-By-
[ENVELOPE GRAPHIC] form. Mail form detached from your
confirmation statement to the
FIRST-CLASS mail to: address listed on the form.
The Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482 Make your check payable to: Make your check payable to:
The Vanguard Group-46. The Vanguard Group-46.
EXPRESS or REGISTERED mail to:
The Vanguard Group All purchases must be made in All purchases must be made in
455 Devon Park Drive U.S. dollars, and checks must U.S. dollars, and checks must
Wayne, PA 19087 be drawn on U.S. banks. be drawn on U.S. banks.
</TABLE>
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
BY TELEPHONE Call Vanguard Tele-Account* 24 Call Vanguard Tele-Account* 24
[TELEPHONE GRAPHIC] hours a day--or Client Services hours a day--or Client Services
1-800-662-6273 during business hours--to exchange during business hours--to exchange
Vanguard Tele-Account from another Vanguard Fund account from another Vanguard Fund account
with the same registration (name, with the same registration (name,
1-800-662-2739 address, and taxpayer I.D. number). address, and taxpayer I.D. number).
Client Services
Use Vanguard Fund Express (see
"Services and Account Features") to
transfer assets from your bank
account. Call Client Services
before your first use to verify
that this option is in place.
*You must obtain a Personal Identification Number through Tele-Account
at least seven days before you request your first exchange.
</TABLE>
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once a telephone transaction has been approved by you and
a confirmation number assigned, it cannot be revoked. We reserve the right
to refuse any purchase.
- --------------------------------------------------------------------------------
Investor Information 1-800-662-7447 -- Client Services 1-800-662-2739 --
Tele-Account 1-800-662-6273
16
<PAGE> 45
BUYING SHARES (continued)
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
------------------------------------ ------------------------------------
<S> <C> <C>
BY WIRE Call Client Services to arrange your Call Client Services to arrange your
[WIRE GRAPHIC] wire transaction. wire transaction.
Wire to:
CoreStates Bank, N.A. Wire transactions are not available Wire transactions are not available
ABA 031000011 for retirement accounts. for retirement accounts.
CoreStates No 01019897
[Temporary Account Number]
Vanguard/Trustees' Equity Fund-
International Portfolio
[Account Registration]
Attn Vanguard
AUTOMATICALLY -- Vanguard offers a variety of ways that
you can add to your account
automatically. See "Services and
Account Features."
</TABLE>
- --------------------------------------------------------------------------------
Shares purchased by check or Vanguard Fund Express can be redeemed at any
time. However, while your redemption request will be processed as soon as it
is received, your redemption proceeds will not be available until payment for
your purchase is collected, which may take up to ten days.
- --------------------------------------------------------------------------------
It is important that you call Vanguard before you invest a large dollar
amount by wire or check. Vanguard must consider the interests of all Portfolio
shareholders and so reserves the right to delay or refuse any purchase that may
disrupt the Portfolio's operation or performance.
REDEEMING SHARES
- --------------------------------------------------------------------------------
IMPORTANT TAX NOTE: Any sale or exchange of shares in a non-retirement account
could result in a taxable gain or a loss.
- --------------------------------------------------------------------------------
The ability to redeem (that is, sell or exchange) Portfolio shares by telephone
is automatically established for your account unless you tell us in writing that
you do not want this option.
To protect your account from unauthorized or fraudulent telephone
instructions, Vanguard follows specific security procedures. When we receive a
call requesting an account transaction, we require the caller to provide:
x Portfolio name.
x 10-digit account number.
x Name and address exactly as registered on that account.
x Social Security or Employer Identification number as registered on that
account.
If you call to sell shares, the sale proceeds will be made payable to you, as
the registered shareholder, and mailed to your account's address of record.
If we follow reasonable security procedures, neither the Portfolio nor
Vanguard will be responsible for the authenticity of transaction instructions
received by telephone. We believe that these procedures are reasonable and that,
if we follow them, you bear the risk of any losses resulting from unauthorized
or fraudulent telephone transactions on your account. However, if we do not
follow these or other reasonable procedures, Vanguard may be liable for any
losses resulting from unauthorized or fraudulent transactions.
Investor Information 1-800-662-7447 -- Client Services 1-800-662-2739 --
Tele-Account 1-800-662-6273
17
<PAGE> 46
REDEEMING SHARES (continued)
HOW TO SELL SHARES
You may withdraw any part of your account, at any time, by selling shares;
however, the Portfolio reserves the right to close any non-retirement or
UGMA/UTMA account whose balance falls below the minimum initial investment. The
Portfolio will deduct a $10 annual fee if your non-retirement account balance
falls below $2,500 or if your UGMA/UTMA account balance falls below $500. The
fee is waived if your total Vanguard Fund account assets are $50,000 or more.
Sale proceeds are normally mailed within two business days after Vanguard
receives your request. The sale price of your shares will be the Portfolio's
next-determined net asset value after Vanguard receives all required documents
in good order.
Good order means that the request includes:
x Portfolio name and account number.
x Amount of the transaction (in dollars or shares).
x Signatures of all owners exactly as registered on the account.
x Signature guarantees (if required).
x Any supporting legal documentation that may be required.
x Any certificates you are holding for the account.
Sales or exchange requests received after the close of trading on the New
York Stock Exchange (generally 4:00 p.m. Eastern time) are processed at the next
business day's net asset value.
- --------------------------------------------------------------------------------
Some written requests require a signature guarantee from a bank, broker, or
other acceptable institution. A notary public cannot provide a signature
guarantee.
- --------------------------------------------------------------------------------
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one Vanguard Fund to purchase shares of
another.
Although every effort will be made to maintain the exchange privilege,
Vanguard reserves the right to revise or terminate the exchange privilege, limit
the amount of an exchange, or reject any exchange, at any time, without notice.
Because excessive exchanges can potentially disrupt the management of the
Portfolio and increase transaction costs, Vanguard has established a policy of
limiting exchange activity to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (at least 30
days apart) from the Portfolio during any 12-month period. "Substantive" means
either a dollar amount large enough to have a negative impact on the Portfolio
or a series of movements between Vanguard Funds.
Before you exchange into a new Vanguard Fund, please read its prospectus. For
a copy and for answers to questions you might have, please call Investor
Information.
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
- ---------------------------- -------------------------------------------------
BY TELEPHONE ALL TYPES EXCEPT RETIREMENT:
[TELEPHONE GRAPHIC]
1-800-662-6273 Call Vanguard Tele-Account* 24 hours a day--or
Vanguard Tele-Account Client Services during business hours--to
request a sale or exchange of shares. You can
1-800-662-2739 exchange shares from this Portfolio to open an
Client Services account in another Vanguard Fund or to add to
an existing Vanguard Fund account with
an identical registration.
RETIREMENT:
You can exchange--but not sell--shares by
calling Tele- Account or Client Services.
*You must obtain a Personal Identification
Number through Tele-Account at least seven days
before you request your first redemption.
Investor Information 1-800-662-7447 -- Client Services 1-800-662-2739 --
Tele-Account 1-800-662-6273
18
<PAGE> 47
REDEEMING SHARES (CONTINUED)
<TABLE>
<CAPTION>
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
- ------------------------------ -----------------------------------------------
<S> <C>
BY MAIL ALL TYPES EXCEPT RETIREMENT:
[ENVELOPE GRAPHIC]
FIRST-CLASS mail to: Send a letter of instruction signed by all
The Vanguard Group registered account holders. Include the
Vanguard/Trustees' Equity Fund- Portfolio name and account number and (if you
International Portfolio are selling) a dollar amount or number of
P.O. Box 1120 shares OR (if you are exchanging) the name of
Valley Forge, PA 19482 the Fund you want to exchange into and a dollar
amount or number of shares.
RETIREMENT:
EXPRESS or REGISTERED mail to: Call Client Services (for IRAs) or Individual
The Vanguard Group Retirement Services (for SEP-IRAs, 403(b)(7)
Vanguard/Trustees' Equity Fund- custodial accounts, and Profit-Sharing and
International Portfolio Money Purchase Pension [Keogh] plans:
455 Devon Park Drive 1-800-662-2003) for information on how to
Wayne, PA 19087 request a distribution. Depending on your
account registration type, additional
documentation may be required.
AUTOMATICALLY ALL TYPES EXCEPT RETIREMENT:
Vanguard offers several ways to sell or
exchange shares automatically (see "Services
and Account Features"). Call Investor
Information for the appropriate booklet and
application if you did not elect a feature when
you opened your account.
</TABLE>
It is important that you call Vanguard before you redeem a large dollar
amount. In protecting the interests of all Portfolio shareholders, Vanguard may
not be able to deliver your redemption proceeds immediately if the amount is
considered to be disruptive to the Portfolio's operation or performance.
Vanguard reserves the right to take up to seven days to deliver your redemption
proceeds.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares 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 you experience difficulty making a
telephone redemption during periods of drastic economic or market change, you
can send us your request by regular or express mail. Follow the instructions
on selling or exchanging shares by mail in the "Redeeming Shares" section.
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you a variety of statements to help you monitor your account
activity and to help you complete your tax returns. You will also receive annual
and semi-annual financial reports on the Portfolio's operation and performance.
CONFIRMATION STATEMENT
Sent each time you purchase, exchange, or redeem shares; confirms the date and
the amount of the transaction.
Investor Information 1-800-662-7447 -- Client Services 1-800-662-2739 --
Tele-Account 1-800-662-6273
19
<PAGE> 48
FUND AND ACCOUNT UPDATES (continued)
PORTFOLIO SUMMARY
Mailed quarterly; shows the market value of your account as of the close of the
statement period, as well as distributions, purchases, exchanges, and
redemptions for the current calendar year.
FUND FINANCIAL REPORTS
Mailed in February and August for this Portfolio.
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
AVERAGE COST STATEMENT [BOOK GRAPHIC]
Issued quarterly for taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the previous quarter,
using the average cost single category method.
AUTOMATED TELEPHONE ACCESS
VANGUARD TELE-ACCOUNT
1-800-662-6273
Any time, seven days a week, from anywhere in the continental United States and
Canada. [BOOK GRAPHIC]
Toll-free access to total return, share price, price change, and yield
quotations through any TouchTone telephone. Also provides your account balance
(in dollars and shares), last transaction, redemptions by check during the last
three months, and the latest dividend or capital gains distribution. Permits
exchanges and sales of Portfolio shares.
COMPUTER ACCESS
VANGUARD ONLINE
KEYWORD: vanguard
Information via your personal computer on Fund share price, yield, and total
return; offered through America Online (AOL). To establish an AOL account, call
1-800-238-6336.
VANGUARD ON THE WORLD WIDE WEB
http://www.vanguard.com
An education-oriented website offering news and information about Vanguard Funds
and services, as well as interactive, easy-to-use investment planning tools.
SHARES OF THE PORTFOLIO MAY ONLY BE SOLD IN THOSE STATES IN WHICH THEY ARE
REGISTERED. THE PORTFOLIO'S SHARES ARE CURRENTLY REGISTERED FOR SALE IN ALL 50
STATES, AND THE PORTFOLIO INTENDS TO MAINTAIN SUCH REGISTRATION.
Investor Information 1-800-662-7447 -- Client Services 1-800-662-2739 --
Tele-Account 1-800-662-6273
20
<PAGE> 49
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash reserves as well as short-term bank deposits, money market instruments, and
U.S. Treasury bills.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
COUNTRY RISK
The possibility that events such as political or financial troubles or natural
disasters will weaken a country's economy.
CURRENCY RISK
The possibility that an American's foreign investment will lose money because of
unfavorable exchange rates.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
marketing fees.
FIXED-INCOME SECURITIES
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies whose strong earnings and
revenue potential indicate above-average prospects for capital growth with less
emphasis on dividend income.
INTERNATIONAL STOCK FUND
A mutual fund that invests in the stocks of companies located outside the United
States.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a portfolio's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security, industry, or country.
PRINCIPAL
The amount of your own money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that focuses on the stocks of companies that, considering their
earnings and dividends, are attractively priced; these companies often pay
regular dividend income to shareholders.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 50
[THE VANGUARD GROUP LOGO]
HMS Vanguard was the flagship of
Lord Nelson at the Battle of the
Nile in 1798. Vanguard was chosen
as the name of The Vanguard Group
because of the significance of its
traditional meaning: "the advance
guard" or "leadership of a new
trend."
THE VANGUARD GROUP
Post Office Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
For information on our Funds, Fund services, and retirement accounts; requests
for literature
CLIENT SERVICES DEPARTMENT
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-662-2738
For information on your account, account transactions, account statements
VANGUARD BROKERAGE SERVICES
1-800-992-8327
For information on trading stocks, bonds, and options at reduced commissions
VANGUARD TELE-ACCOUNT(R)
1-800-662-6273 (ON-BOARD)
For 24-hour automated access to price and yield, information on your account,
certain transactions
ELECTRONIC ACCESS TO THE VANGUARD MUTUAL FUND EDUCATION AND INFORMATION CENTER
On America Online(R)
Keyword: vanguard
To Send E-Mail to Vanguard
[email protected]
On the World Wide Web
http://www.vanguard.com
(C) 1996 Vanguard Marketing Corporation, Distributor
P046N
<PAGE> 51
PART B
VANGUARD/TRUSTEES' EQUITY FUND
STATEMENT OF ADDITIONAL INFORMATION
APRIL 29, 1996
This Statement is not a prospectus but should be read in conjunction with
the Fund's Prospectus dated April 30, 1996. 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-5
Redemption of Shares...................................................................... B-5
Yield and Total Return.................................................................... B-6
Investment Limitations.................................................................... B-6
Management of the Fund.................................................................... B-8
Investment Advisory Services.............................................................. B-11
Portfolio Transactions.................................................................... B-14
Performance Measures...................................................................... B-14
General Information....................................................................... B-16
Financial Statements...................................................................... B-17
</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 certain special considerations which are not typically
associated with investing in U.S. companies. Since the stocks of foreign
companies are frequently denominated in foreign currencies, and since the
International Portfolio may temporarily 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 policies 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 contracts involve an obligation to purchase or sell a
specific currency at a future date at a price set at the time of the contract.
As foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable 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 securities 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 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 foreign stock exchanges are generally higher than negotiated commissions on
U.S. exchanges. In addition, it is expected that the expenses for custodian
arrangements
B-1
<PAGE> 52
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
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from the companies comprising the Fund's International
Portfolio. However, these foreign withholding taxes are not expected to have a
significant impact on the International Portfolio, since the Portfolio's
investment 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 maintain 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 Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"),
a U.S. Government Agency. Assets committed to futures contracts will be
segregated at the Fund's custodian bank to the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," "selling" a contract previously
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
completion 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.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin
deposits 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
contract 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.
The Portfolios will not use futures and options for speculative purposes. A
Portfolio will use futures and options to simulate full investment in underlying
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
fluctuations, 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
B-2
<PAGE> 53
closing out futures positions, these costs are lower than transaction 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 assurance that a liquid secondary market will
exist for any particular futures contract 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
substantial, 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
substantial 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
Advisers do not believe that the Portfolios are subject to the risks of loss
frequently associated with futures transactions. A Portfolio would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying security 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 market
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 unfavorable
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 income for each taxable year its net
unrealized gains and losses on futures contracts 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
B-3
<PAGE> 54
capital gain or loss, without regard to the holding period of the contract.
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 unrecognized
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
securities 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 contracts
will be considered gain from the sale of securities and therefore be qualifying
income for purposes of the 90% requirement. In order to avoid realizing
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 recognized 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 transactions. 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.
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 (generally 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 (normally, the next business day). A repurchase agreement
may be considered a loan collateralized by securities. The resale price reflects
an agreed upon interest 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 interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by a custodian bank until
repurchased. 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 investment, will be invested in repurchase agreements having
maturities longer than seven days and in securities subject to legal or
contractual restrictions on resale for which there are no readily available
market quotations. From time to time, the Fund's Board of Trustees may determine
that certain restricted securities known as Rule 144A securities are liquid and
not subject to the 15% limitation described above.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying 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 reorganization
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 security and may
be deemed an unsecured creditor of the other party to the agreement. While the
Fund's management acknowledges these risks, it is expected that they can be
controlled through careful monitoring procedures.
B-4
<PAGE> 55
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 consisting of cash, an irrevocable letter of credit issued by a
domestic U.S. bank, or securities issued or guaranteed by the United States
Government having 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 securities loaned rises (i.e., the borrower "marks to the market" on a daily
basis), (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
increase in their market value. Loan arrangements made by a Portfolio will
comply 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 the normal settlement time of three
business days. All relevant facts and circumstances, including the
creditworthiness of the broker, dealer or institution, 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
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Directors (Trustees). In addition, voting
rights 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
calculated 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 materially
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 investment for or any other restrictions on 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
Exchange 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.
B-5
<PAGE> 56
The Fund has made an election with the Commission to pay in cash all
redemptions 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
securities 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
securities 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 identity of the person who has
authorized a redemption from your account. Signature guarantees are required in
connection with: (1) all redemptions, regardless of the amount involved, when
the proceeds are to be paid to someone other than the registered owner(s) and/or
to an address other than the address of record; and (2) share transfer requests.
These requirements may be waived by the Fund in certain instances.
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
December 31, 1995 was 1.83%.
The average annual total return of each Portfolio of the Fund for the
following periods ending December 31, 1995 is set forth below:
<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
12/31/95 12/31/95 12/31/95
------------ ------------- --------------
<S> <C> <C> <C>
U.S. Portfolio................................. +33.21% +15.12% +12.24%
International Portfolio........................ + 9.65% + 8.61% +13.99%
</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 investment.
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 (including the amount borrowed and the value of
any outstanding reverse repurchase 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
government 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-6
<PAGE> 57
(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 Portfolio will invest only in investment companies which have
investment objectives 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 disposing 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
securities 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
records of less than three years' continuous operation, including the
operation of any predecessor, but this limitation does not apply to
securities issued or guaranteed as to interest and principal by the
United States Government 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,
director, or investment adviser of the Fund, or a partner or officer
or director 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 repurchase 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 15% of a Portfolio's total assets, and (iii) lending its
securities as provided under "Investment Objective 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
development programs;
(14) Purchase or sell commodities or commodity contracts except as
specified 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
business activities in the same industry.
*These limitations are not fundamental and therefore may be changed by the
Fund's Trustees without a shareholder vote.
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
financial 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 business
of
B-7
<PAGE> 58
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
investment securities are purchased.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
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. 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
Officers is Post Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman and Trustee
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group. Director of The Mead
Corporation and General Accident Insurance.
JOHN J. BRENNAN, President, Chief Executive Officer & Trustee*
President, Chief Executive Officer and Director of The Vanguard Group,
Inc., and of each of the other investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Trustee
Chairman of Rhone-Poulenc Rorer, Inc.; Director of Sun Company, Inc.
BARBARA BARNES HAUPTFUHRER, Trustee
Director of The Great Atlantic and Pacific Tea Company, Alco Standard
Corp., Raytheon Company, Knight-Ridder, Inc., and Massachusetts Mutual Life
Insurance Co. and Trustee Emerita of Wellesley College.
BRUCE K. MACLAURY, Trustee
President, The Brookings Institution; Director of American Express Bank
Ltd., The St. Paul Companies, Inc. and Scott Paper Company.
BURTON G. MALKIEL, Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co., and Southern New England Communications
Company.
ALFRED M. RANKIN, JR., Trustee
Chairman, President and Chief Executive Officer of NACCO Industries Inc.;
Director of The BFGoodrich Company and The Standard Products Company.
JOHN C. SAWHILL, Trustee
President and Chief Executive Officer, The Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co.; President, New York
University; Director of Pacific Gas and Electric Company and NACCO
Industries.
JAMES O. WELCH, JR., Trustee
Retired Chairman of Nabisco Brands Inc., retired Vice Chairman and Director
of RJR Nabisco; Director of TECO Energy, Inc.; and Director of Kmart
Corporation.
J. LAWRENCE WILSON, Trustee
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company and Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary
of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, Controller*
Vice President of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
- ---------------
* Officers of the Fund are "interested persons" as defined in the Investment
Company Act of 1940.
B-8
<PAGE> 59
THE VANGUARD GROUP
Vanguard/Trustees' Equity Fund is a member of The Vanguard Group of
Investment 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
personnel 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 prevent
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
permitted to engage in personal securities transactions. However, such
transactions 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 has invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. At December 31, 1995, the
Fund had contributed capital of $129,000 to Vanguard, representing .6% 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 Vanguard 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
relationships; (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, 1995, the Fund's share of Vanguard's actual net
costs of operation relating to management and administrative services (including
transfer agency) totaled approximately $2,620,000.
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
connection with any sales made directly to investors in the states of Florida,
Missouri, New York, Ohio, Texas and such other states as it may be required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies 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 remaining
one half of these expenses is allocated among the Funds based upon each Fund's
sales for the preceding 24 months relative 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,
1995, the Fund paid approximately $226,000 of the Group's distribution and
marketing expenses.
B-9
<PAGE> 60
INVESTMENT ADVISORY SERVICES. Vanguard provides investment advisory
services to Vanguard Money Market Reserves, 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 Equity Index Fund, Vanguard Balanced Index Fund,
Vanguard Bond Index Fund, Vanguard Institutional Index Fund, Vanguard
Tax-Managed Fund, the Aggressive Growth Portfolio of Vanguard Horizon 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 management 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 Vanguard
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, 1995, the Fund paid approximately
$5,000 in fees and expenses to its "non-interested" Trustees. The Fund's
proportionate 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
approximately $43,307.
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 eligible
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 1995 fiscal year was approximately $900.
The following table provides detailed information with respect to the
amounts paid or accrued for the Trustees for the fiscal year ended December 31,
1995.
VANGUARD/TRUSTEES' EQUITY FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF TRUSTEES FROM TRUST PART OF TRUST EXPENSES UPON RETIREMENT PAID TO TRUSTEES(3)
- --------------------------- ------------ ---------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1),(2) -- -- -- --
John J. Brennan(2) -- -- -- --
Barbara Barnes Hauptfuhrer $484 $ 83 $15,000 $59,000
Robert E. Cawthorn $484 $ 69 $13,000 $59,000
Bruce K. MacLaury $534 $ 82 $12,000 $55,000
Burton G. Malkiel $492 $ 55 $15,000 $60,000
Alfred M. Rankin, Jr. $492 $ 44 $15,000 $60,000
John C. Sawhill $492 $ 52 $15,000 $60,000
James O. Welch, Jr. $484 $ 64 $15,000 $59,000
J. Lawrence Wilson $492 $ 46 $15,000 $60,000
</TABLE>
(1) For the period reported in this table, Mr. Bogle was the Fund's Chief
Executive Officer, and therefore an "Interested Trustee."
(2) As "Interested Trustees," Messrs. Bogle and Brennan receive no compensation
for their service as Trustees.
(3) The amounts reported in this column reflect the total compensation paid to
each Trustee for their service as Director or Trustee of 34 Vanguard Funds
(27 in the case of Mr. MacLaury).
B-10
<PAGE> 61
INVESTMENT ADVISORY SERVICES
INTERNATIONAL PORTFOLIO INVESTMENT ADVISER
The investment adviser to the Fund's International Portfolio is a
wholly-owned subsidiary of UBS Asset Management London Ltd. doing business under
the name "UBS International Investment London Ltd." (UBSII), Triton Court, 14
Finsbury Square, London, England EC2A 1PD. UBSII provides investment management
services to numerous institutional accounts, such as corporate pension plans,
endowment funds and individual investors. Under an Investment Advisory Agreement
with the Fund, dated April 1, 1996, UBSII, 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 Portfolio, manages the
investment and reinvestment of the assets of the International Portfolio. In
this regard, it is the responsibility of UBSII 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 UBSII under the Agreement, and
the assumption by UBSII 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 UBSII an advisory fee calculated
by applying a quarterly rate, based on the following annual percentage rates, to
the average month-end assets of the International Portfolio, for the quarter.
<TABLE>
<CAPTION>
NET ASSETS RATE
---------------------------------------------------------------- ------
<S> <C>
First $50 million............................................... 0.475%
Next $450 million............................................... 0.150%
Next $500 million............................................... 0.120%
Over $1 billion................................................. 0.110%
</TABLE>
Effective with the quarter ending June 30, 1997, the basic fee paid to
UBSII ("Basic Fee"), shall be increased or decreased by applying an
incentive/penalty adjustment to the Basic Fee reflecting the investment
performance of the Portfolio relative to the return of the Morgan Stanley
Capital International Europe, Australia and Far East ("EAFE") Index. The
following table sets forth the fee payable by the Fund to BFM, Inc. based upon
the incentive/penalty adjustment:
<TABLE>
<CAPTION>
THREE-YEAR CUMULATIVE PERFORMANCE PERFORMANCE FEE
DIFFERENTIAL VERSUS EAFE INDEX ADJUSTMENT*
------------------------------------------------------- ------------------
<S> <C>
+13.5% points or more above............................ +0.50 X Basic Fee
Between +4.5% points and
+13.5% points above.................................. +0.25 X Basic Fee
Between +4.5% points and
-0% points........................................... 0 X Basic Fee
Between 0% points and
-9% points below..................................... -0.25 X Basic Fee
-9% points or more below............................... -0.50 X Basic Fee
</TABLE>
* For purposes of this calculation, the Basic Fee is calculated by applying the
quarterly rate based on the Annual Basic Fee Rate using average assets over
the same time period which the performance is measured.
Through the quarter ending June 30, 1997, the incentive/penalty fee for
UBSII will be calculated according to the following transition rules:
(a) Prior to March 31, 1997. The incentive/penalty fee adjustment
will not be operable for the quarters ending prior to March 31, 1997.
(b) April 1, 1997 through June 30, 1999. Beginning with the quarter
ending June 30, 1997 and through the quarter ending June 30, 1999, 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
number of months that have elapsed between July 1, 1996 and the end of the
quarter for which the fee is computed.
B-11
<PAGE> 62
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 June 30, 1997, to 13.5 and -9, respectively, for the
thirty-six months ending June 30, 1999.
(c) On and after June 30, 1999. For the quarter ending June 30, 1999
and thereafter, the period used to calculate the incentive/penalty fee
shall be the 36 months preceding the end of the quarter for which the fee
is being computed and the number of percentage points used shall be 13.5%
and -9%.
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
assets 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
adjusted 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.
PRIOR INVESTMENT ADVISER FOR INTERNATIONAL PORTFOLIO
From its inception until April 1, 1996, the Fund's International Portfolio
employed Batterymarch Financial Management as its investment adviser. During the
years ended December 31, 1993, 1994 and 1995, the International Portfolio paid
Batterymarch Financial Management advisory fees totaling $1,326,000 (.16 of 1%
of average net assets), $1,622,000 (.15 of 1% of average net assets) and
$1,516,000 (.15 of 1% of average net assets), respectively.
U.S. PORTFOLIO INVESTMENT ADVISER
On April 1, 1992, the U.S. Portfolio entered into an Investment Advisory
Agreement with Geewax, Terker & Co. ("Geewax Terker"), 99 Starr Street,
Phoenixville, 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
conformance with the Fund's investment objective and policies, manages the
investment and reinvestment of the assets of the Fund's U.S. Portfolio. In this
regard, 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, 1994 and
1995, the U.S. Portfolio paid Geewax advisory fees totaling $507,000 (.39 of 1%
of average net assets), $563,000 (.45 of 1% of average net assets) and $383,000
(.31 of 1% of average net assets), respectively.
As compensation for the services rendered by Geewax Terker under the
Agreement, 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 at the end of each of the
Portfolio's fiscal quarter, a Basic Fee calculated by applying a quarterly rate,
based on an annual percentage rate of 0.40%, to the Portfolio's average
month-end assets for the quarter.
The Basic Fee, as provided above, shall be increased or decreased by
applying an incentive/penalty fee adjustment based on the investment performance
of the Portfolio relative to the investment performance of
B-12
<PAGE> 63
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 PERFORMANCE FEE
DIFFERENTIAL VS. THE S&P 500 ADJUSTMENT*
------------------------------------------------------- -----------------
<S> <C>
+4.5% points or more................................... 0.50 X Basic Fee
+2.25% points but less than +4.5% points............... 0 X Basic Fee
Less than +2.25% points................................ -0.50 X Basic Fee
</TABLE>
* For purposes of this calculation, the Basic Fee is calculated by applying the
quarterly rate against average assets over the 36-month period.
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
directors 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
insignificant 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 performance difference
exist before the maximum fee adjustment may be made". The Release concludes that
the directors of a fund "should satisfy themselves that the maximum performance
adjustment will be made only for performance differences that can reasonably be
considered significant." The Board of Trustees of the Fund has fully considered
the SEC Release and believes that the performance adjustments as included in the
advisory agreements are entirely appropriate 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 percentage points difference per year.
The Fund's investment advisory agreements provide for no performance adjustment
at a difference of less than +2.25 percentage points from the performance of the
index over a thirty-six month period, 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
Both agreements continue until March 31, 1998. The agreements are renewable
thereafter, for successive one-year periods, if specifically approved 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 approval 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
continuing an agreement may be presented to shareholders. 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 arrangements 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 assignment.
B-13
<PAGE> 64
The Fund's Board of Trustees may, without the approval of shareholders,
provide 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;
(ii) a change in the terms of an advisory agreement; and
(iii) the continued employment of an existing 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 affected Portfolio, which shall include the
information 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.
UBS Asset Management London Ltd., owner of UBS International Investment
London Ltd. is the "controlling person" (as that term is defined in the rules
and regulations of the Securities and Exchange Commission) of UBSII. Union Bank
of Switzerland is the beneficial owner of 100% of the outstanding equity
securities of UBS UK Holdings, Ltd., which in turn is the 100% beneficial owner
of UBS Asset Management London, the 100% shareholder of UBSII.
PORTFOLIO TRANSACTIONS
The investment advisory agreements authorizes the investment advisers to
select the brokers or dealers that will execute the purchases and sales of
investment securities for the Portfolios and directs the investment adviser to
use its best efforts to obtain the best available price and most favorable
execution 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 selecting 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 purchase
or sale of securities consistent with the investment policies of the Portfolio
and one or more of these other clients served by the investment adviser 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 periodic review by
the Fund's Board of Trustees.
During the years ended December 31, 1993, 1994 and 1995 the Fund paid
$753,881, $257,044 and $2,173,469 respectively, in brokerage commissions.
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
B-14
<PAGE> 65
Vanguard/Trustees' Equity Fund may use one or more, of the following
unmanaged 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 INDEX -- consists of more than 6,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
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
common 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
capitalization common stocks.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-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 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible 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 Mortgage
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.
Treasury, Agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible 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.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rated,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
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
Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and
35% of a blended equity composite (75% Standard & Poor's/BARRA Value Index and
25% Standard and Poor's Utilities Index).
B-15
<PAGE> 66
COMPOSITE INDEX -- 65% Standard and Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
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.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 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, agency,
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
defines 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 performance
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
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average 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
preference 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, irrespective 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
B-16
<PAGE> 67
affect any interest of a particular class, then only shareholders of the
affected class or classes shall be entitled to vote thereon.
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 shareholders of such Portfolio; and
2) Subject to the majority of shares of any Portfolio of the Fund
outstanding, 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
remaining 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
circumstances, 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 instrument
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 personal liability to
shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended December 31, 1995,
including the financial highlights for each of the five years in the year ended
December 31, 1995, appearing in the Fund's 1995 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 Additional
Information. The Fund's 1995 Annual Report to Shareholders is enclosed with this
Statement of Additional Information.
B-17
