<PAGE> 1
[VANGUARD TRUSTEES' EQUITY FUND LOGO]
ANNUAL REPORT 1995
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard/Trustees' Equity Fund and the other Funds in The
Vanguard Group. Mr. Brennan will continue to serve as President of the Funds,
and I will continue to serve as Chairman of the Board.
As a shareholder of the Fund since its inception and as Chairman of
all the Vanguard Funds, I want to tell you that I am enthusiastic and confident
that Jack Brennan is exactly the right person to succeed me as Chief Executive
Officer. To use yet another Vanguard nautical metaphor, he will be the new
captain. He has the qualities of leadership, integrity, intelligence, and
vision that must continue to be Vanguard's hallmark as we move toward, and then
into, the 21st century.
[FIGURE 1]
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising like a rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became Chief Executive Officer of Vanguard's predecessor organization in 1967,
at the age of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our costs
of operation to a minimum, and in retaining our position as the lowest-cost
provider of financial services in the world. He is a true competitor, who
shares Vanguard's dedication to providing highly competitive returns to our
investors relative to the returns provided by other mutual funds with
comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you to
Vanguard in the first place will remain intact.
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in
me in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/S/ JOHN C. BOGLE
VANGUARD/TRUSTEES' EQUITY FUND CONSISTS OF TWO BROADLY DIVERSIFIED PORTFOLIOS,
EACH OF WHICH SEEKS TO REALIZE MAXIMUM LONG-TERM RETURN FOR ITS SHAREHOLDERS,
CONSISTENT WITH REASONABLE RISK. THE UNITED STATES PORTFOLIO EMPLOYS A
QUANTITATIVE APPROACH TO IDENTIFY BOTH GROWTH AND VALUE STOCKS THAT APPEAR TO
BE UNDERVALUED. THE INTERNATIONAL PORTFOLIO USES A PROPRIETARY SCORING SYSTEM
FOR IDENTIFYING UNDERVALUED STOCKS IN MORE THAN 20 INTERNATIONAL MARKETS.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
During the year ended December 31, 1995, all of the world's major stock markets
provided positive returns, with considerable variation from country to country.
The U.S. stock market, on the other hand, enjoyed its most powerful bull market
in nearly four decades, as the Standard & Poor's 500 Index soared +37.6%.
In this environment, both Portfolios of Vanguard/Trustees' Equity Fund
achieved solid absolute returns. Each Portfolio also outpaced its respective
peer group of comparable mutual funds, but fell short of its unmanaged index
standard. Our U.S. Portfolio rode the bull market wave, providing a total
return of +33.2%, the highest in its history. The return of the International
Portfolio, at +9.6%, was considerably more modest, but nonetheless exceeded
competitive norms.
The following table shows the total returns (capital change plus
reinvested dividends) provided by our two Portfolios during 1995, compared with
those of their respective benchmarks: for the International Portfolio, the
unmanaged Morgan Stanley Capital International (MSCI) Europe, Australia, and
Far East (EAFE) Index, and the average diversified international mutual fund;
for the U.S. Portfolio, the unmanaged Standard & Poor's 500 Composite Stock
Price Index and the average general equity fund.
<TABLE>
<CAPTION>
- ------------------------------------------------------
TOTAL RETURN
----------------
YEAR ENDED
DECEMBER 31, 1995
- ------------------------------------------------------
<S> <C>
TRUSTEES' INTERNATIONAL PORTFOLIO + 9.6%
- ------------------------------------------------------
AVERAGE INTERNATIONAL FUND + 9.3%
MSCI EAFE INDEX +11.6
======================================================
TRUSTEES' U.S. PORTFOLIO +33.2%
- ------------------------------------------------------
AVERAGE GENERAL EQUITY FUND +31.1%
STANDARD & POOR'S 500 INDEX +37.6
- ------------------------------------------------------
</TABLE>
The total return of the International Portfolio is based on net asset values of
$31.48 per share on December 31, 1994, and $31.11 on December 31, 1995, with
the latter figure adjusted to take into account the reinvestment of four
dividends totaling $.79 per share from net investment income and two
distributions totaling $2.52 per share from net capital gains, nearly all of
which were realized during the calendar year. For the U.S. Portfolio, the
respective net asset values were $29.09 and $37.01 per share. There were four
quarterly dividends totaling $.61 per share from net investment income, and a
distribution of $1.05 per share from net realized capital gains.
TRUSTEES' INTERNATIONAL PORTFOLIO
MARKET OVERVIEW
To some degree, 1995 was "the world turned upside down" in foreign markets.
European equities, having lagged in 1994, were the clear (and big) winners last
year. On the other hand, Pacific equities (dominated by the huge Japanese
market), having led the international markets in 1994, lagged substantially
last year. And the emerging markets, which set the world afire during 1993 with
a single year return of +90%, only to collapse during 1994, essentially held
their own during the past year. If you see a pattern in these points and
counterpoints, you have completed phase #1 in the lesson on international
investing: different regions of the world often march to the beat of a
different drummer.
<TABLE>
<CAPTION>
- -------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995
------------------------------
LOCAL CURRENCY U.S. DOLLAR
RETURN IMPACT RETURN
- -------------------------------------------------------
<S> <C> <C> <C>
EUROPEAN INDEX +15.7% + 6.4% +22.1%
UNITED KINGDOM +22.2 - 0.9 +21.3
GERMANY + 8.0 + 9.0 +17.0
FRANCE + 5.2 + 9.6 +14.8
- -------------------------------------------------------
PACIFIC INDEX + 5.9% - 3.0% + 2.9%
JAPAN + 4.3 - 3.4 + 0.9
HONG KONG +22.5 + 0.1 +22.6
- -------------------------------------------------------
EMERGING MARKETS INDEX + 0.8% - 6.0% - 5.2%
BRAZIL - 7.7 -11.5 -19.2
MEXICO +22.5 -42.9 -20.4
MALAYSIA + 4.1 + 0.6 + 4.7
- -------------------------------------------------------
INTERNATIONAL INDEX* +10.1% + 1.5% +11.6%
- -------------------------------------------------------
</TABLE>
*Excludes emerging markets.
1
<PAGE> 4
[FIGURE 2]
Phase #2 in the lesson is: understand that the dollar matters. The strength (or
weakness) of the U.S. dollar plays a major role in shaping the returns earned
by U.S. investors in foreign markets. A weak dollar enhances the returns earned
on foreign stocks when measured in U.S. dollar terms; a strong dollar does the
opposite. The table on the prior page shows the contrast between foreign stock
returns measured in local currency terms versus returns measured in U.S. dollar
terms.
Overall, you can see that a weak U.S. dollar added marginally to
international returns during 1995, but its impact was uneven. The dollar's
weakness relative to the franc and deutschmark more than doubled local currency
returns in France and Germany. In the United Kingdom the dollar was about
neutral. In Japan, the dollar was very weak against the yen through July 1995,
then rebounded sufficiently to provide only a small net change for the full
year. Even this modest negative impact nearly offset the small rise in the
Tokyo market, such that U.S. investors received a return of just +0.9% for the
year.
Phase #3 of our lesson is: foreign markets are exposed not only to
independent economic and fundamental variables and independent movements
against the dollar, but also to independent national risks. Foreign nations
differ greatly in their national cultures, forms of government, tax policies,
tolerance of inflation, and susceptibility to unexpected shocks. These factors
are magnified in the emerging markets, but less crucial in the markets of the
industrialized nations. For whatever reason, the U.S. appears far less exposed
to these kinds of extraneous shocks.
The performance chart to the left illustrates some of these differences
among the European, Pacific basin, and emerging markets--as well as the U.S.
stock market--so far during the 1990s. Note particularly that: (1) the returns
on European equities most closely track those in the U.S.; (2) the boom in
emerging markets took place over a relatively short span of years; and (3) the
Pacific market has yet to recover sufficiently to offset its sharp decline
during the first half of the six-year period.
Once again, I should note that the returns shown are
dollar-denominated--taking into account the impact of currency changes--and
therefore reflect the returns achieved by U.S. investors. On balance, the
average annual rates of return so far during the decade were: Europe +9.7%,
Pacific -1.0%, emerging markets +17.6%, and the U.S. +13.1%.
THE INTERNATIONAL PORTFOLIO IN 1995
As noted at the outset, the International Portfolio achieved a total return of
+9.6% for the year, just a hair ahead of the +9.3% return of the average
international mutual fund, but well behind the +11.6% return of the MSCI EAFE
Index.
Compared to our peer group of mutual funds, there was little to
differentiate our country weightings in the various foreign markets, with two
notable exceptions. One, we held a larger position in Japan (34% of net assets
versus 21%) than our typical competitor, a distinct negative in a market where
returns on stocks barely eked into positive territory. Two, the negative impact
of our overweighting in the weak Japanese market was more than offset by our
large underweighting in the disappointing emerging markets (9% versus 24%),
which were "flat" on a local currency basis but negative in U.S. dollar terms.
2
<PAGE> 5
Our shortfall versus the MSCI EAFE Index is much easier to explain. We
gained a bit of an edge over the Index by virtue of our country selections,
especially our underweighting in Japan (34% of net assets versus 42%).
Unfortunately, this modest advantage was erased by our 9% weighting in the
lagging emerging markets securities. (The Index holds no stocks in the emerging
markets.)
RESULTS FOR THE PAST DECADE
Looking out over a longer time span, the chart below and the table that follows
compare the record of the International Portfolio to the records of the average
international fund and the MSCI EAFE Index during the decade ended December 31,
1995, based on an initial investment of $10,000.
It should go without saying that the chart and the table reflect both
ups and downs in the financial markets. There is no assurance that the
ever-unpredictable markets of the future will provide better returns or worse
returns than those presented.
Given the proximity of the annual rates of return illustrated in the
chart and the table, it is probably fair to call the results of the ten-year
period "a draw" among the International Portfolio, its peer
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
TOTAL RETURN*
------------------------------
DECEMBER 31, 1985, TO
DECEMBER 31, 1995
------------------------------
AVERAGE FINAL VALUE OF
ANNUAL INITIAL INVESTMENT
RATE OF $10,000
- ---------------------------------------------------------------
<S> <C> <C>
TRUSTEES'
INTERNATIONAL PORTFOLIO +14.0% $37,050
- ---------------------------------------------------------------
AVERAGE
INTERNATIONAL FUND +13.5% $35,330
MSCI EAFE INDEX +14.0 36,920
- ---------------------------------------------------------------
</TABLE>
* Assuming the reinvestment of all income dividends and capital gains
distributions.
group of mutual funds, and the unmanaged MSCI EAFE Index. That said, I would
note that our slight margin of superiority over the average international
mutual fund during the past decade was more than accounted for by our expense
ratio advantage of about 1.1% (our annual costs amounted to only 0.5% last
year, compared to 1.6% for our competitors). This differential indicates that,
during the past decade, our investment adviser in fact failed to match the
returns achieved by its peers.
[FIGURE 3]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1995
- ---------------------------------------------------------------------------
1 Year 5 Years 10 Years
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
TRUSTEES' INTERNATIONAL PORTFOLIO + 9.65% + 8.61% +13.99%
AVERAGE INTERNATIONAL FUND + 9.25 +10.03 +13.45
MSCI EAFE INDEX +11.55 + 9.71 +13.95
</TABLE>
3
<PAGE> 6
NEW INVESTMENT ADVISER APPOINTED
As I have noted in the past, we expect our Portfolio's investment adviser,
Batterymarch Financial Management, to surpass, over time, the results of the
average international fund on a gross basis (i.e., before deducting expenses),
thereby enhancing our natural expense advantage. This was not the case during
1995, as our reported return advantage of +0.4% was in fact a disadvantage of
- -0.7% before expenses. While our 1994 return was more than satisfactory on a
relative basis, it followed four consecutive years of below-average returns.
Following a careful evaluation of the investment results achieved by
Batterymarch, the investment objectives of the Portfolio, and the three changes
in the adviser's designated manager that have occurred since 1991, your Board
of Directors determined in February 1996 to terminate the International
Portfolio's advisory agreement with Batterymarch Financial Management. At the
same time, the Fund has entered into a new investment advisory agreement with
UBS International Investment (UBSII), an international investment management
firm located in London. (UBSII is expected to begin managing the International
Portfolio at the end of March 1996.) UBSII oversees nearly $6 billion in net
assets for clients in the United States, Europe, and Australia. UBSII traces
its roots to the investment division of Phillips & Drew, a leading British
brokerage firm. Phillips & Drew was acquired by the Union Bank of Switzerland
in 1985, creating UBS Asset Management London, an $80 billion investment
advisory firm that employs some 85 investment managers and analysts. UBSII was
founded two years later to provide investment management services to clients
outside of the United Kingdom.
Your Officers and Directors are well aware that instituting this kind of
a change is a fallible endeavor. Nonetheless, we fully expect that the
Portfolio's new adviser, UBSII, will provide shareholders with above-average,
long-term returns relative to competitive norms. Above all, we believe that the
investment philosophy of UBSII more clearly reflects the value objective that
we originally envisioned for the International Portfolio. Specifically, the
firm utilizes a team approach to building a geographically diversified
portfolio, focusing on stocks of primarily large and medium market
capitalizations with traditional value characteristics--below-average
price-to-book ratios, below-average price-earnings ratios, and above-average
dividend yields. The UBSII investment process seeks to identify companies that
are "out of favor," statistically cheap relative to historical and competitive
norms, and have managements that are motivated to grow the business. UBSII's
fundamental research approach is evidenced by the nearly 1,400 company visits
it conducts each year.
TRUSTEES' U.S. PORTFOLIO
MARKET OVERVIEW
The great bull market in U.S. stocks we enjoyed during the year was virtually
uninterrupted, as stock prices rose in eleven of the past twelve months. The
dimension of the increase was close to record breaking, delighting the bulls
even as it astonished the bears. By year's end, the Standard & Poor's 500 Index
had generated a total return of +37.6%--its best year since 1958.
There were, as always, many opinions as to the source of the surprising
strength in the stock market. In my view, it resulted from a combination of:
(1) record-breaking corporate profits; (2) a growing speculative fever in the
marketplace, especially during the final weeks of the year; and (3) a sharp
decline in long-term interest rates. The rise in corporate profits was
particularly striking. It's estimated that operating earnings for the companies
in the Standard & Poor's 500 Index increased about +15% in 1995, after already
rising +16% in 1994. (Since 1926, earnings growth has averaged less than +7%
per year.) If there is a cautionary signal in this boom in profits, it is that
the two-year cumulative earnings growth of +33% has been accompanied by
dividend growth of only +11%.
This subdued dividend growth in the face of sharply higher stock prices
resulted in a decline in the yield on the Index to 2.2%, the lowest level on
record. Nonetheless, the Wall Street chorus sings "this time it's different."
Dividend yield and earnings growth--the two fundamentals of stock returns--are
clearly taking a back seat to the market's high valuation of the
4
<PAGE> 7
[FIGURE 4]
long-term fundamentals. This is called "speculation," and it is hardly an
inconsequential component of 1995's high returns on stocks. So, as 1996 begins,
we face an environment that is surely sobering.
The huge decline in interest rates during the year not only provided a
major stimulus to the stock market, but also set bond prices afire. The yield
of the Lehman Long-Term Corporate Bond Index declined from 8.9% to 6.9% during
1995, driving long-term bond prices upward by fully +19%. The result was a
total return (including the interest coupon) of +28%--remarkably competitive
with the return on stocks. Short-term rates also declined, as the Federal
Reserve reduced the Federal funds rate (the rate at which banks borrow from one
another) in July and again in December. On balance during the year, the yield
on the U.S. Treasury bill eased from 5.6% to 5.0%.
This improvement in the actual (and expected) interest rate environment
was caused largely by a softening in the growth of the U.S. economy, perhaps
with further weakness to come. A sluggish economy, in turn, engendered
continued optimism about the benign outlook for inflation. (Indeed, the
Consumer Price Index was quite well-behaved in 1995, rising by but +2.6%, its
smallest increase since 1986.) Investors should carefully ponder the extent to
which today's high growth rate of corporate earnings is likely to be sustained
in a slowing economy.
THE U.S. PORTFOLIO IN 1995
The most important fact about 1995 is doubtless that investors in sound,
broadly diversified U.S. equity funds earned very large returns, mostly ranging
from +25% to +40%. These returns reflect a sort of "breakout" from the much
more modest annual gains of about +9% per year that were achieved during the
first five years of the decade.
While the +33.2% return on the U.S. Portfolio was the highest return
since our inception in 1980, we nonetheless lagged the results of the Standard
& Poor's 500 Index for the year. This shortfall can be attributed primarily to
the Portfolio's exposure to medium- and small-capitalization companies. Indeed,
during the past year, there was a clear progression of returns in terms of
market capitalization. Large-cap stocks led the way (+37.6%), followed by
mid-cap stocks (+33.5%), followed in turn by small-cap stocks (+28.4%). (Thus
far during the decade of the 1990s, as shown in the chart to the left, large
and small stocks have virtually identical returns--albeit with wide interim
variations.) In this environment, our 22% asset weighting in smaller companies
impeded our relative performance.
Relative to what is probably our more relevant performance benchmark,
the average general equity fund, the news is much better, as we outpaced our
peers by 2.1 percentage points for the year (+33.2% versus +31.1%). Our
above-average weighting in utility stocks (16.2% of assets for the Portfolio
versus 8.2% for the average competitor) enhanced our relative performance, but
some of this advantage was erased by our below-average weighting in the
market-leading financial sector. Our overall performance also suffered somewhat
because of some sub-par individual stock selections, particularly in the
health-care sector.
5
<PAGE> 8
[FIGURE 5]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1995
- ---------------------------------------------------------------------------
1 Year 5 Years 10 Years
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
TRUSTEES' U.S. PORTFOLIO +33.21% +15.12% +12.24%
AVERAGE GENERAL EQUITY FUND +31.07 +16.45 +12.49
STANDARD & POOR'S 500 INDEX +37.58 +16.59 +14.86
</TABLE>
That said, the Portfolio's traditionally heavy weighting in the
technology sector during the year (16.2% of assets for the Portfolio versus
9.5% for our competitors) paid off handsomely. It should be noted that
technology stocks, which led the market through mid-September, pulled back in
the final months of the year, providing a net total return for the full year
roughly equal to that of the overall market.
The chart above and the table that follows present the U.S. Portfolio's
record over the past ten years compared to our two benchmark standards.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
TOTAL RETURN*
----------------------------
DECEMBER 31, 1985, TO
DECEMBER 31, 1995
----------------------------
AVERAGE FINAL VALUE OF
ANNUAL INITIAL INVESTMENT
RATE OF $10,000
- -----------------------------------------------------------------
<S> <C> <C>
TRUSTEES' U.S. PORTFOLIO +12.2% $31,740
- -----------------------------------------------------------------
AVERAGE GENERAL
EQUITY FUND +12.5% $32,450
STANDARD & POOR'S
500 INDEX +14.9 39,950
- -----------------------------------------------------------------
</TABLE>
*Assuming the reinvestment of all dividends and capital gains distributions.
It should go without saying that the returns reflected in the table are
merely history. Future returns of the Portfolio--both on an absolute basis and
relative to the average general equity fund and to the Index--are
unpredictable, and may be better or worse than those shown in the table.
I should note that the ten-year chart may well conceal the fine
performance record of our investment adviser, Geewax, Terker & Company, since
they began managing the Portfolio in April 1992. During this period, our
relative performance has substantially improved. We have moved from laggard by
a narrow margin over the ten years, to leader by a wide margin over the past
three years as our average annual return handily exceeded the return of our
average competitor (+14.5% versus +13.2%). Our expense ratio advantage of 0.7%
accounts for roughly one-half of this incremental positive return of +1.3%.
While we have, on the other hand, trailed the Standard & Poor's 500
Index over the past three years (essentially by the amount of our expense
ratio), we continue to seek to outpace it. Of course, this Index is a tough
competitor for all actively managed mutual funds. It always has been! The Index
is calculated "on paper," without the real world expenses of fund
6
<PAGE> 9
operations, advisory fees, portfolio transaction costs, and the impact of cash
reserves. Mutual funds, however, must incur such costs, and it has proved
difficult for most professional money managers to provide more than
compensatory returns.
IN SUMMARY
Perhaps surprisingly, many portfolio managers are recommending reduced exposure
to U.S. equities following their extraordinarily high 1995 returns and
increased exposure to international markets, despite their generally lackluster
returns during the past year. While these "experts" too often provide advice
that simply extends the trends of the recent past, their conclusions today seem
to be based more on the premises that: (a) returns among markets tend to even
out over time; and (b) international equities are undervalued relative to U.S.
equities based on investment fundamentals such as earnings and dividends. This
time, they may be right.
To state the obvious, 1995 was a bountiful year for the shareholders in
Vanguard/Trustees' Equity Fund. We should all take (only) a moment to bask in
the light of the generous rewards we earned. We should also recognize that the
financial markets are never a "one-way street," and the risks that exist today
in the stock market may well come home to roost in 1996 and erode our 1995
bounty. Put even more bluntly, our shareholders in the U.S. Portfolio, for
example, enjoyed an enhancement of over +33% in value during the year. With
this gain now behind us, even a significant market decline seems unlikely to
take shareholders back to where we were--presumably with satisfaction--just one
year ago.
Under these circumstances, what course of action should shareholders of
Vanguard/Trustees' Equity Fund follow? In our Annual Report one year ago, under
very different circumstances, I urged you to "stay the course," despite the
lackluster return provided by equities during the year. You should recognize
that, despite today's short-term risks of investing, the biggest long-term
risks are: (1) failing to invest in stocks at all; and (2) following an erratic
and ever-changing course. For our part, we intend to maintain the Fund's goal
of long-term capital growth that has been in place since we began operations
over ten years ago. "Stay the course" proved wise counsel a year ago; I
reiterate it today.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------
John C. Bogle,
Chairman of the Board
February 16, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE
PORTFOLIOS (PERIODS ENDED DECEMBER 31, 1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
10 YEARS
----------------------------------
INCEPTION TOTAL CAPITAL INCOME
PORTFOLIO DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
- ----------------------- ------------ -------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. PORTFOLIO 1/31/80 +33.21% +15.12% +12.24% + 9.35% +2.89%
INTERNATIONAL PORTFOLIO 5/16/83 + 9.65 + 8.61 +13.99 +11.12 +2.87
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
7
<PAGE> 10
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
TRUSTEES' EQUITY FUND-INTERNATIONAL PORTFOLIO since inception through December
31, 1995. During the period illustrated, stock prices fluctuated widely; these
results should not be considered a representation of the dividend income or
capital gain or loss that may be realized from an investment made in the
Portfolio today.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN*
- -----------------------------------------------------------------------------------------------------------------------
International Portfolio EAFE Index
Value with Income ------------------------------- -----------
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (5/83) $25.00 -- -- $ 25.00 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
1983 25.98 $ .02 $ .44 26.46 + 4.0% +1.8% + 5.8% + 11.0%
- -----------------------------------------------------------------------------------------------------------------------
1984 24.59 .11 1.09 26.26 - 4.9 +4.1 - 0.8 + 7.9
- -----------------------------------------------------------------------------------------------------------------------
1985 30.91 2.54 .93 36.85 +36.1 +4.2 + 40.3 + 56.7
- -----------------------------------------------------------------------------------------------------------------------
1986 38.68 6.55 1.03 55.53 +46.8 +3.9 + 50.7 + 69.9
- -----------------------------------------------------------------------------------------------------------------------
1987 28.66 18.32 .75 68.79 +22.1 +1.8 + 23.9 + 24.9
- -----------------------------------------------------------------------------------------------------------------------
1988 28.27 4.58 .99 81.71 +14.8 +4.0 + 18.8 + 28.6
- -----------------------------------------------------------------------------------------------------------------------
1989 32.44 2.08 .79 102.93 +22.8 +3.2 + 26.0 + 10.8
- -----------------------------------------------------------------------------------------------------------------------
1990 26.58 1.01 .95 90.31 -15.1 +2.8 - 12.3 - 23.2
- -----------------------------------------------------------------------------------------------------------------------
1991 27.78 .61 .77 99.30 + 6.9 +3.1 + 10.0 + 12.5
- -----------------------------------------------------------------------------------------------------------------------
1992 24.44 .28 .67 90.64 -11.0 +2.3 - 8.7 - 11.8
- -----------------------------------------------------------------------------------------------------------------------
1993 31.04 -- .81 118.28 +27.0 +3.5 + 30.5 + 32.9
- -----------------------------------------------------------------------------------------------------------------------
1994 31.48 .63 .56 124.50 + 3.5 +1.8 + 5.3 + 8.1
- -----------------------------------------------------------------------------------------------------------------------
1995 31.11 2.52 .79 136.51 + 7.0 +2.6 + 9.6 + 11.6
- -----------------------------------------------------------------------------------------------------------------------
LIFETIME +446.0% +592.6%
- -----------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN + 14.4% + 16.6%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
*Includes reinvestment of income dividends and any capital gains distributions
for both the Portfolio and the Index.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
8
<PAGE> 11
The following table illustrates the results of a single-share investment in
TRUSTEES' EQUITY FUND-U.S. PORTFOLIO since inception through December 31, 1995.
During the period illustrated, stock prices fluctuated widely; these results
should not be considered a representation of the dividend income or capital
gain or loss that may be realized from an investment made in the Portfolio
today.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN*
- -----------------------------------------------------------------------------------------------------------------------
U.S. Portfolio S&P 500
Value with Income ----------------------------- ---------
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (1/80) $25.00 -- -- $ 25.00 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
1980 26.95 $ .84 $1.49 29.35 +11.2% +6.2% + 17.4% + 24.6%
- -----------------------------------------------------------------------------------------------------------------------
1981 27.05 .87 1.80 32.38 + 3.6 +6.7 + 10.3 - 4.9
- -----------------------------------------------------------------------------------------------------------------------
1982 30.56 1.19 1.75 40.42 +17.4 +7.4 + 24.8 + 21.5
- -----------------------------------------------------------------------------------------------------------------------
1983 35.72 2.15 1.52 52.19 +23.9 +5.2 + 29.1 + 22.5
- -----------------------------------------------------------------------------------------------------------------------
1984 30.56 2.51 1.57 50.69 - 7.4 +4.5 - 2.9 + 6.3
- -----------------------------------------------------------------------------------------------------------------------
1985 31.15 4.10 1.45 61.09 +15.4 +5.1 + 20.5 + 31.8
- -----------------------------------------------------------------------------------------------------------------------
1986 28.69 6.15 1.16 70.41 +11.3 +4.0 + 15.3 + 18.6
- -----------------------------------------------------------------------------------------------------------------------
1987 22.77 5.88 .72 71.60 - 0.3 +2.0 + 1.7 + 5.1
- -----------------------------------------------------------------------------------------------------------------------
1988 26.35 1.00 .97 89.24 +20.1 +4.5 + 24.6 + 16.6
- -----------------------------------------------------------------------------------------------------------------------
1989 26.15 3.81 .88 104.61 +13.8 +3.4 + 17.2 + 31.7
- -----------------------------------------------------------------------------------------------------------------------
1990 22.90 -- 1.08 95.90 -12.4 +4.1 - 8.3 - 3.1
- -----------------------------------------------------------------------------------------------------------------------
1991 28.20 -- .71 121.38 +23.1 +3.5 + 26.6 + 30.5
- -----------------------------------------------------------------------------------------------------------------------
1992 28.43 .86 .67 129.21 + 3.9 +2.6 + 6.5 + 7.6
- -----------------------------------------------------------------------------------------------------------------------
1993 30.65 2.16 .43 151.49 +15.6 +1.6 + 17.2 + 10.1
- -----------------------------------------------------------------------------------------------------------------------
1994 29.09 .03 .34 145.56 - 5.0 +1.1 - 3.9 + 1.3
- -----------------------------------------------------------------------------------------------------------------------
1995 37.01 1.05 .61 193.90 +30.9 +2.3 + 33.2 + 37.6
- -----------------------------------------------------------------------------------------------------------------------
LIFETIME +675.6% +889.0%
- -----------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN + 13.7% + 15.5%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
*Includes reinvestment of income dividends and any capital gains distributions
for both the Portfolio and the Index.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
9
<PAGE> 12
REPORT FROM GEEWAX, TERKER & COMPANY
Trustees' U.S. Portfolio provided a total return of +33.2% during 1995's
roaring bull market. For most of the year, technology stocks and
medium-capitalization stocks did well while bad earnings continued to be
punished. Your Portfolio did well during this time period. Technology stocks
then fell out of favor, and riskier technology companies pulled higher-quality
companies down with them. The large-capitalization equities did extremely
well--whereas our emphasis on medium-capitalization companies penalized us to
some degree.
Because of the increased volatility of the technology sector, we started
to decrease our exposure to this group near the end of the year, moving the
cash raised to the financial, consumer non-durable, and telephone sectors.
However, we felt (and still feel) that the stronger technology companies will
continue to prosper and that we will be rewarded for holding them. Accordingly,
you will not see a "firesale" withdrawal from this sector, but rather an
increasing concentration into those companies that have the financial strength,
valuation, and earnings momentum to maintain their leadership.
Otherwise, your Portfolio will be diversified across all segments of the
domestic stock market and will continue to have a smaller capitalization than
that of the Standard & Poor's 500 Index. Our emphasis on earnings and
reasonable valuation should pay off in this environment. The Portfolio is made
up of companies with solid fundamentals, in lieu of exciting "stories." And, if
January's early returns are a guide, the market seems to be favoring the
Portfolio's current composition. As long as good earnings are not punished, and
there is not a perverse capitalization effect during the coming year, your
Portfolio should perform admirably. We thank you for your continued
confidence.
Respectfully,
Geewax, Terker & Company
January 23, 1996
10
<PAGE> 13
REPORT FROM BATTERYMARCH FINANCIAL MANAGEMENT, INC.
PERFORMANCE
The total return for the International Portfolio for 1995 was +9.6%
versus +11.6% for the MSCI Europe, Australia, and Far East (EAFE) Index and
+9.3% for the average international fund.
Despite reasonable returns in international markets in 1995, this good
performance was over-shadowed by the staggering strength of the U.S. market.
Yet, the case for overseas investment has become even more compelling--for
different reasons in different regions.
In Europe, valuations are below those of the U.S. enhancing this
region's opportunities for success as a result of economic restructuring.
Japan, the country with the largest allocation in the portfolio, is the only
major market where analysts are actually revising their earnings forecasts
upward for 1996. In other parts of Asia, sheer population and mass consumption
will continue to provide high growth.
While the Portfolio outperformed the average international fund, our
objective is to also outperform the EAFE Index. In 1995, the shortfall relative
to the Index can largely be attributed to the Portfolio's holdings in emerging
markets.
The Portfolio's 9% weight in emerging markets pulled down the return,
relative to the EAFE Index which has no weight in emerging markets. Our Early
Database strategic theme, which focuses on the more advanced emerging markets,
was the weakest of our four themes. Emerging markets had a volatile year with
many ending the year with negative returns.
On the other hand, the Portfolio's holdings in the emerging markets
countries performed better than both the MSCI Emerging Markets (Free) Index and
the average emerging markets fund. As an asset class, emerging markets are very
attractive, offering higher growth rates and lower valuations (such as lower
price-to-book ratios) than the EAFE Index. We remain committed to our long-term
investment in emerging markets and plan to add to our holdings as conditions
warrant.
INVESTMENT ENVIRONMENT
Global growth was surprisingly weak in 1995. Forecasts for growth and earnings
were continually cut during the year. Reductions in inventories, in the face of
dashed expectations, contributed to sluggishness as did the U.S. dollar's big
decline in the first half of the year. The weakening of exports at an early
stage of recovery was particularly damaging to Europe which needed exports to
propel domestic consumption. By year end, the yen had given up all its gain
versus the dollar, leading to a boost in earnings expectations in Japan, but
continued strength in the deutschmark block dampened prospects in Europe.
Structural change to reduce budget deficits was targeted by European
governments striving to meet the criteria for European Monetary Unit. In the
fourth quarter, France faced strikes by public sector workers opposed to the
government's attempts to reform the welfare state. The Bundesbank lowered
rates three times during the year in an effort to spur the European economies.
Accommodative monetary policy is likely to continue into 1996.
Japan faced a series of disasters during the year--earthquake, subway
terrorism, bank failures. The government response has been stimulus on the
fiscal and monetary fronts such that conditions for growth improved by the
fourth quarter.
INVESTMENT STRATEGY
We identify companies which are attractive based on one of four strategic
themes:
Corporate Value--Investors tend to focus on earnings per share, which are
distorted by differences in accounting practices across countries and
companies. Cash flow provided a better measure of value.
Early Database--Long-term returns are likely to be greater in high-growth
developing countries than in mature markets. The uniqueness of this strategy
lies in our ability to select high-growth stocks using both quantitative and
qualitative techniques.
Low-Priced Growth--Investors focus too much on high-risk growth which leads to
disappointment when earning and sales growth slow. We buy stocks with the best
ratios on a variety of earnings-growth measures compared to stock price and
valuation.
11
<PAGE> 14
Traditional Value--Investors drive prices to extremes relative to objective
value benchmarks. We use several value measures tailored to each country.
We introduced Low-Priced Growth to incorporate a better way to capture
growth in the Portfolio while maintaining the integrity of our value-oriented
approach. This strategy identifies companies with attractive earnings growth
projections but at reasonable price-to-earnings ratios.
Our willingness to search for value beyond the large-capitalization,
well-known companies has been at the core of our strategy for the Portfolio
since its inception. While we will buy large-capitalization stocks when they
meet our strategies' criteria, we tend to find better opportunities among the
mid-capitalization (less well-followed) companies. We remain committed to this
long-term value orientation.
We increased the Portfolio's weight in Japan to 34% from 26% during the
second half of the year in light of a rapidly improving trend in earnings
estimates, signaling renewed confidence in business. Although there are
obstacles ahead, Japan has both monetary and fiscal policies in place to
encourage growth, the yen is back to year-ago levels, and structural reform to
the financial sector has begun.
We believe the values in the Portfolio in Japanese stocks and in
emerging markets, along with our continuing emphasis on medium-capitalization
issues, should be recognized by the market in 1996.
Respectfully,
Batterymarch Financial Management, Inc.
January 23, 1996
12
<PAGE> 15
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
December 31, 1995
<TABLE>
<CAPTION>
Market
Value
U.S. PORTFOLIO Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (95.4%)
- ----------------------------------------------------------------
BASIC MATERIALS (7.1%)
Aluminum Co. of America 3,000 $ 159
ASARCO, Inc. 14,100 451
Boise Cascade Corp. 13,000 450
Bowater, Inc. 13,000 462
Cabot Corp. 4,500 242
Cyprus Amax Minerals Co. 2,500 65
Dow Chemical Co. 9,400 662
E.I. du Pont de Nemours & Co. 3,600 252
Eastman Chemical 6,000 376
Geon Co. 14,300 349
Georgia-Pacific Corp. 14,700 1,009
P.H. Glatfelter Co. 1,000 17
M.A. Hanna Co. 8,300 232
Kimberly-Clark Corp. 9,360 775
Olin Corp. 4,800 356
Phelps Dodge Corp. 9,700 604
Potash Corp. of Saskatchewan, Inc. 5,000 354
Praxair, Inc. 19,000 639
Rayonier Inc. 6,600 220
Reynolds Metals Co. 6,200 351
Sigma Aldrich Corp. 6,000 297
Terra Industries, Inc. 9,500 134
Union Carbide Corp. 20,500 769
Westvaco Corp. 6,000 166
Willamette Industries, Inc. 6,800 381
----------
GROUP TOTAL 9,772
----------
- ----------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (6.8%)
Caterpillar, Inc. 23,500 1,381
Clayton Homes Inc. 6,875 147
Crane Co. 11,000 406
Cummins Engine Co., Inc. 4,100 152
Deere & Co. 6,300 222
Dover Corp. 17,200 634
General Electric Co. 5,000 360
* General Instrument 9,200 215
Honeywell, Inc. 4,000 194
* International Rectifier Corp. 6,400 160
Lockheed Martin Corp. 14,079 1,112
Millipore Corp. 2,600 107
Parker Hannifin Corp. 3,500 120
Rockwell International Corp. 8,400 444
TRW, Inc. 11,400 884
Tecumseh Products Co. Class A 2,000 103
Tyco International Ltd. 53,606 1,910
United Technologies Corp. 9,000 854
----------
GROUP TOTAL 9,405
----------
- ----------------------------------------------------------------
CONSUMER CYCLICALS (8.3%)
Black & Decker Corp. 19,500 687
Breed Technological Inc. 2,700 50
Brunswick Corp. 6,000 144
* CUC International, Inc. 1,000 34
Callaway Golf Co. 7,300 165
Chrysler Corp. 18,100 1,002
Dana Corp. 24,000 702
Dayton-Hudson Corp. 1,700 128
The Walt Disney Co. 32,000 1,888
Eastman Kodak Co. 4,800 322
* Emmis Broadcasting Corp. Class A 4,500 138
* Federated Department Stores 2,300 63
General Motors Corp. 20,000 1,058
The Goodyear Tire & Rubber Co. 31,000 1,407
* HFS Inc. 6,000 491
* Hollywood Entertainment Corp. 2,000 17
La Quinta Inns Inc. 7,300 200
Lowes Cos., Inc. 8,000 268
* Officemax Inc. 3,500 78
Paccar, Inc. 6,700 281
Rite Aid Corp. 31,500 1,079
Sears, Roebuck & Co. 15,700 612
Tandy Corp. 15,700 651
----------
GROUP TOTAL 11,465
----------
- ----------------------------------------------------------------
CONSUMER STAPLES (8.7%)
American Brands, Inc. 2,600 116
American Stores Co. 23,400 626
Coca-Cola Enterprises, Inc. 7,700 206
ConAgra, Inc. 10,000 412
Dean Foods Corp. 19,200 528
Hannaford Brothers Co. 7,500 185
H.J. Heinz Co. 2,200 73
IBP, Inc. 18,400 929
* Jefferson Smurfit Corp. 4,000 38
* The Kroger Co. 16,900 634
PepsiCo, Inc. 7,000 391
Philip Morris Cos., Inc. 37,900 3,430
Procter & Gamble Co. 8,000 664
Ralston-Purina Group 4,000 249
* Safeway, Inc. 26,300 1,354
Sonoco Products 1,500 39
* Stop & Shop Cos. Inc. 2,000 46
Sysco Corp. 18,400 598
* Vons Cos., Inc. 40,200 1,136
Winn Dixie Stores, Inc. 6,200 229
----------
GROUP TOTAL 11,883
----------
- ----------------------------------------------------------------
ENERGY (11.1%)
Amoco Corp. 5,400 388
Ashland Inc. 6,700 235
Atlantic Richfield Co. 21,500 2,381
Baker Hughes, Inc. 17,000 414
Chevron Corp. 55,600 2,919
Enron Corp. 2,000 76
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
U.S. PORTFOLIO (continued) Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
Exxon Corp. 22,000 $ 1,763
* Global Marine, Inc. 31,000 271
Halliburton Co. 4,000 203
Mobil Corp. 16,000 1,792
Occidental Petroleum Corp. 6,000 128
Panhandle Eastern Corp. 6,700 187
Pennzoil Co. 2,800 118
Royal Dutch Petroleum Co. ADR 2,000 282
Sonat Offshore Drilling Co. 3,700 165
Sun Co., Inc. 13,874 380
Texaco Inc. 36,700 2,881
Tidewater, Inc. 2,000 63
USX-Marathon Group 32,500 635
----------
GROUP TOTAL 15,281
----------
- ----------------------------------------------------------------
FINANCIAL (10.2%)
AFLAC, Inc. 3,000 130
H.F. Ahmanson & Co. 4,000 106
Allstate Corp. 21,554 886
American Express Co. 13,100 542
American General Corp. 13,900 485
Aon Corp. 1,300 65
Banc One Corp. 3,000 113
The Bank of New York Co., Inc. 9,000 439
BankAmerica Corp. 13,000 842
Bear Stearns Co., Inc. 6,500 129
* CNA Financial Corp. 3,000 341
Capital One Financial Corp. 2,700 64
Chemical Banking Corp. 8,600 505
Citicorp 11,900 800
Conseco Co., Inc. 4,000 251
CoreStates Financial Corp. 5,600 212
Countrywide Credit Industries, Inc. 15,800 344
Equitable of Iowa Co. 4,900 157
Federal National Mortgage Assn. 11,150 1,384
Finova Group, Inc. 2,500 121
First Chicago NBD Corp. 9,620 380
First Interstate Bancorp. 2,500 341
First USA Inc. 18,400 817
Green Tree Financial Corp. 13,200 348
Household International, Inc. 3,000 177
Lehman Brothers Holdings, Inc. 1,500 32
Mercury General Corp. 7,500 354
NationsBank, Inc. 2,000 139
Old Republic International Corp. 2,300 82
The PMI Group Inc. 4,800 217
Republic New York Corp. 3,700 230
Charles Schwab Corp. 44,900 904
Standard Federal Bank 4,200 165
Student Loan Marketing Assn. 6,500 428
SunAmerica Inc. 16,500 784
TIG Holdings, Inc. 6,500 185
Transatlantic Holdings 600 44
Travelers Group Inc. 2,500 157
Union Planters Corp. 3,800 121
Washington Mutual Inc. 2,200 63
Zions Bancorp. 1,900 153
----------
GROUP TOTAL 14,037
----------
- ----------------------------------------------------------------
HEALTH CARE (10.9%)
Abbott Laboratories, Inc. 20,000 835
American Home Products Corp. 32,100 3,114
* Amgen, Inc. 3,700 219
Bergen Brunswig Corp. Class A 23,550 586
* Boston Scientific Corp. 4,000 196
Bristol-Myers Squibb Co. 39,600 3,401
Cardinal Health, Inc. 6,500 356
Columbia/HCA Healthcare Corp. 9,500 482
* Foundation Health Co. 2,000 86
Guidant Corp. 12,319 520
* Humana, Inc. 12,000 329
Johnson & Johnson 24,400 2,089
Mylan Laboratories, Inc. 47,250 1,110
* Oxford Health Plan 12,000 882
Pharmacia & Upjohn, Inc. 14,100 546
U.S. Healthcare, Inc. 4,900 228
----------
GROUP TOTAL 14,979
----------
- ----------------------------------------------------------------
TECHNOLOGY (10.9%)
* ADC Telecommunications, Inc. 10,000 363
* Alliance Semiconductor Corp. 3,200 36
* America Online, Inc. 2,000 75
* Amphenol Corp. 9,000 218
* Analog Devices, Inc. 4,000 142
Apple Computer, Inc. 7,000 222
* Applied Materials, Inc. 13,200 518
* Arrow Electronics, Inc. 2,900 125
* Atmel Corp. 48,000 1,062
Avnet, Inc. 15,100 676
* Cabletron Systems, Inc. 3,750 304
* Cadence Design Systems, Inc. 4,500 189
Computer Associates
International, Inc. 31,850 1,811
* Cypress Semiconductor Corp. 10,400 133
Harris Corp. 5,000 273
Hewlett-Packard Co. 8,000 670
International Business
Machines Corp. 3,500 321
* KLA Instruments Corp. 23,400 608
* LSI Logic Corp. 12,000 393
* MEMC Electronic Materials, Inc. 4,000 130
Micron Technology Inc. 10,000 396
* Microsoft Corp. 10,000 877
* National Semiconductor Corp. 18,000 401
* Oracle Corp. 13,500 570
* Seagate Technology 17,000 808
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
* Silicon Graphics, Inc. 6,000 $ 165
* Sun Microsystems, Inc. 15,000 684
* Teradyne, Inc. 10,900 273
Texas Instruments, Inc. 25,400 1,314
U.S. Robotics Corp. 2,500 219
Xerox Corp. 7,300 1,000
----------
GROUP TOTAL 14,976
----------
- ----------------------------------------------------------------
TRANSPORT & SERVICES (3.0%)
* AMR Corp. 6,300 468
Burlington Northern Santa Fe Corp. 24,100 1,880
CSX Corp. 10,800 493
Delta Air Lines, Inc. 8,300 613
* Federal Express Corp. 6,300 465
* UAL Corp. 1,400 250
---------
GROUP TOTAL 4,169
---------
- ----------------------------------------------------------------
UTILITIES (16.2%)
AT&T Corp. 7,500 486
Ameritech Corp. 42,800 2,525
Bell Atlantic Corp. 46,400 3,103
BellSouth Corp. 72,000 3,132
Brooklyn Union Gas Co. 3,200 94
Consolidated Edison Co.
of New York, Inc. 26,200 838
DQE Inc. 19,700 606
FPL Group, Inc. 17,700 821
GTE Corp. 70,400 3,098
MCN Corp. 26,200 609
Northeast Utilities 6,300 154
NYNEX Corp. 63,700 3,440
Pacific Gas & Electric Co. 32,300 917
Pacific Telesis Group 2,500 84
Pinnacle West Capital Corp. 18,300 526
SBC Communications Inc. 2,200 127
Southern New England
Telecommunications Corp. 11,600 461
Sprint Corp. 21,300 849
Union Electric Co. 2,200 91
Williams Cos., Inc. 5,400 236
----------
GROUP TOTAL 22,197
----------
- ----------------------------------------------------------------
MISCELLANEOUS (2.2%)
American Financial Group, Inc. 2,800 86
* Litton Industries, Inc. 23,800 1,059
Loews Corp. 5,900 462
McKesson Corp. 10,000 506
Olsten Corp. 7,000 277
Tenneco, Inc. 5,000 248
Textron, Inc. 5,900 398
----------
GROUP TOTAL 3,036
----------
- ----------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $102,367) 131,200
- ----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (4.7%)
- ----------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.89%, 1/2/96
(Cost $6,432) $ 6,432 $ 6,432
- ----------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(Cost $108,799) 137,632
- ----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.1%)
Other Assets--Notes C and F 2,592
Liabilities--Note F (2,769)
----------
(177)
- ----------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------
Applicable to 3,714,196 outstanding
shares of beneficial interest
(unlimited authorization) $137,455
- ----------------------------------------------------------------
NET ASSET VALUE PER SHARE $37.01
================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
AT DECEMBER 31, 1995,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
Amount Per
(000) Share
-------- ------
<S> <C> <C>
Paid in Capital $102,674 $27.65
Undistributed Net
Investment Income 24 .01
Accumulated Net Realized Gains 5,924 1.59
Unrealized Appreciation of
Investments--Note D 28,833 7.76
- ----------------------------------------------------------------
NET ASSETS $137,455 $37.01
- ----------------------------------------------------------------
</TABLE>
15
<PAGE> 18
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
INTERNATIONAL PORTFOLIO Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (94.8%)
- ----------------------------------------------------------------
AUSTRALIA (1.7%)
Australia & New Zealand Bank
Group Ltd. 1,031,100 $ 4,840
Santos Ltd. 2,463,300 7,201
Stockland Trust Group 2,268,000 5,230
----------
GROUP TOTAL 17,271
----------
- ----------------------------------------------------------------
AUSTRIA (.2%)
* Austrian Airlines 10,060 1,673
* Constantia Iso Holding AG 6,000 334
----------
GROUP TOTAL 2,007
----------
- ----------------------------------------------------------------
CANADA (1.5%)
Avencor Inc. 129,500 2,220
Canadian Imperial Bank
of Commerce 100,300 2,988
Fletcher Challenge Canada Ltd. 150,800 2,405
Imasco Ltd. 171,800 3,338
Macmillan Bloedel Ltd. 58,100 719
Power Corp. Canada 48,400 732
Shell Canada Ltd. Class A 57,600 1,811
Transcanada Pipelines Ltd. 34,800 482
----------
GROUP TOTAL 14,695
----------
- ----------------------------------------------------------------
DENMARK (.2%)
Jyske Bank 33,400 2,290
----------
- ----------------------------------------------------------------
FINLAND
Rautaruuki Oy "K" 33,000 201
----------
- ----------------------------------------------------------------
FRANCE (8.0%)
BIC 81,200 8,269
Bon Marche 4,800 940
Eridania Beghin-Say 36,900 6,338
Fromageries Bel 12,300 11,690
Christian Dior 4,620 499
CGI Group, Inc. 3,100 600
Comptoirs Modernes 21,100 6,860
Esso Francais 16,900 1,693
Finextel Societe Fin 44,200 643
Navigation Mixte 28,800 3,910
Pernod-Ricard 18,400 1,047
Poliet Ex Lambert Freres 17,600 1,432
Roussel-Uclaf 9,450 1,604
Sagem 27,200 15,295
Saint-Louis 10,122 2,691
Societe National Elf Aquitaine 143,700 10,602
Sodexho 17,670 5,203
----------
GROUP TOTAL 79,316
----------
- ----------------------------------------------------------------
GERMANY (4.9%)
Altana AG 15,050 8,780
Bayer AG 27,790 7,349
Bayerische Hypotheken und
Wechsel Bank 101,100 2,553
BHF-BANK AG 211,400 5,834
Commerzbank AG 12,700 3,008
Douglas Holding AG 56,100 1,983
Hoechst AG 18,740 5,093
IWKA AG 18,400 3,355
RWE-DEA AG fuer Mineraloel
und Chemie 1,326 370
* Varta AG 15,480 2,974
Viag AG 18,400 7,392
WMF Wuerttembergishe
Metallwarenfabrik AG 400 87
----------
GROUP TOTAL 48,778
----------
- ----------------------------------------------------------------
GREECE (1.4%)
* Aegek Pfd. 64,320 419
Aegek SA 353,760 3,050
Alpha Credit Bank 40,300 2,334
Ergo Bank 44,210 1,765
Hellenic Bottling Co. (Bearer) 111,150 3,641
Papastratos Cigarettes 65,800 2,086
----------
GROUP TOTAL 13,295
----------
- ----------------------------------------------------------------
HONG KONG (3.4%)
China Travel International 2,306,000 370
Citic Pacific Ltd. 608,000 2,080
Guoco Group 258,000 1,245
Henderson Land
Development Co. Ltd. 463,000 2,790
Hong Kong
Telecommunication Ltd. 3,641,600 6,499
HSBC Holdings PLC 665,800 10,075
New World Development
Co., Ltd. 1,675,000 7,300
* New World Infrastructure 520 1
Orient Overseas International Ltd. 197,641 133
Sun Hung Kai Properties Ltd. 93,700 766
Tai Cheung Properties 601,502 463
Television Broadcast Ltd. 250,000 891
Varitronix International 498,000 924
Wharf Holdings Ltd. 800 3
----------
GROUP TOTAL 33,540
----------
- ----------------------------------------------------------------
INDONESIA (1.6%)
Astra International (Foreign) 695,000 1,444
Bank Dagang Nasional
Indonesia (Foreign) 775,250 636
Bank Internasional
Indonesia (Foreign) 542,500 1,797
Hanjaya Mandala
Sampoerna (Foreign) 393,750 4,099
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
Indah Kiat Pulp &
Paper Corp. (Foreign) 1,314,637 $ 963
Indofood Sukes Makmur (Foreign) 246,000 1,183
Indosat (Foreign) 262,000 951
Inti Indorayon Utama (Foreign) 545,000 572
Kalbe Farma (Foreign) 353,000 1,196
Matahari Putra Prima (Foreign) 609,750 1,073
Tjiwi Kimia (Foreign) 1,280,294 1,176
Unilever Indonesia (Foreign) 27,400 330
----------
GROUP TOTAL 15,420
----------
- ----------------------------------------------------------------
IRELAND (1.0%)
Allied Irish Banks 460,464 2,494
Bank of Ireland Stock (Dublin) 428,400 3,124
Greencore PLC 164,600 1,438
Irish Life PLC 453,100 1,721
Jefferson Smurfit Group 461,700 1,103
----------
GROUP TOTAL 9,880
----------
- ----------------------------------------------------------------
ITALY (2.6%)
* Banca Toscana 1,067,000 2,018
* Breda Ernesto Finanziaria 3,759,600 0
Franco Tosi SPA 44,200 262
Istituto Bancario
San Paolo de Torino 477,100 2,827
Magnetti Marelli SPA 1,802,200 2,210
Sirti SPA 816,500 4,591
Telecom Italia SPA 4,857,840 7,563
Telecom Italia Mobile SPA 3,443,640 6,067
----------
GROUP TOTAL 25,538
----------
- ----------------------------------------------------------------
JAPAN (33.8%)
AIDA Engineering Ltd. 431,000 3,309
Aoki Corp. 1,628,000 6,834
Best Denki 50,000 742
Brother Industries Ltd. 1,114,000 6,058
Calsonic Corp. 81,000 595
Chubu Electric Power 87,200 2,063
Chudenko Corp. 24,000 824
Chugoku Electric Power Co. 184,110 4,266
Citizen Watch Co. 167,000 1,279
Daido Steel Co. 955,000 4,814
Daiichi Pharmaceutical Co., Ltd. 188,000 2,679
Danto Corp. 48,000 596
Fuji Photo Film Co., Ltd. 207,000 5,980
Fujisawa Pharmaceutical 242,000 2,323
Fujita Corp. 221,000 998
Gunze Ltd. 26,000 158
Hazama Corp. 722,000 3,080
Hitachi Cable Ltd. 395,000 2,799
Hitachi Koki Co. 29,000 263
Hitachi Maxwell 147,000 2,551
Hokkaido Electric Power 84,542 1,967
Hokuriku Electric Power 129,336 3,009
House Foods Industrial Co., Ltd. 546,000 9,845
Itoham Food Co., Ltd. 367,000 2,775
Japan Synthetic Rubber 140,000 852
Kandenko Co. 48,000 600
Kikkoman Shoyu Co. 117,600 866
Kishu Paper Co. 123,000 733
Komori Corp. 22,000 555
Kyowa Hakko Kogyo 681,000 6,430
Kyudenko Corp. 172,000 2,268
Kyushu Electric Power 215,290 5,092
Lion Corp. 91,000 537
Makita Corp. 46,000 736
Marudai Food Co. 576,000 4,132
Marui Co. 141,000 2,939
Maruichi Steel Tube 98,000 1,796
Mitsubishi Material 1,840,000 9,543
New Japan Securities Co., Ltd. 1,453,000 9,381
NHK Spring Co. 224,000 1,129
Nichicon Corp. 510,000 7,515
Nichimen Corp. 58,000 239
Nippon Credit Bank 279,000 1,277
Nippon Flour Mills 100,000 514
Nippon Meat Packers, Inc. 241,000 3,504
Nippon Shinpan Co. 127,000 960
* Nippon Soda Co. 77,000 470
Nishimatsu Construction 671,000 7,871
Nisshin Oil Mills 297,000 2,237
Nisshin Steel Co. 1,650,000 6,670
Nisshinbo Industries 216,000 2,094
Nissho Iwai Corp. 983,000 5,051
NTN Corp. 1,209,000 8,087
Okumura Corp. 257,000 2,342
Olympus Optical Ltd. 148,000 1,435
Ono Pharmaceutical Co., Ltd. 25,000 962
Onward Kashiyama Co. 1,112,000 18,110
Pioneer Electronic Corp. 191,000 3,499
Ricoh Co. 1,009,000 11,053
Rohm Co., Ltd. 183,000 10,343
Royal Co. Ltd. 128,000 2,085
Santen Pharmaceutical Co. Ltd. 78,000 1,769
Sega Enterprises 192,100 10,615
Sekisui Chemical Co. 652,000 9,607
Sekisui House Ltd. 335,000 4,287
Showa Electric Wire & Cable 197,000 936
Sumitomo Forestry 143,000 2,190
* Sumitomo Metal Industries 2,023,000 6,138
Sumitomo Rubber 65,000 543
Sumitomo Warehouse 228,000 1,470
SXL Corp. 205,000 2,126
Taisei Construction Corp. 413,000 2,759
Takasago Thermal Engineering 119,000 2,134
</TABLE>
17
<PAGE> 20
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
INTERNATIONAL Value
PORTFOLIO (contnued) Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
Takeda Chemical Industries 788,000 $ 12,986
TDK Corp. 181,000 9,247
Teikoku Oil Co., Ltd. 388,000 2,618
Toagosei Chemical 174,000 924
Toho Co., Ltd. 8,200 1,312
Tohoku Electric Power 123,766 2,988
Tokico Ltd. 126,000 629
Tokyo Sowa Bank 284,000 1,211
Tokyo Style Co. 169,000 2,900
Tokyu Construction 595,000 2,867
Toppan Printing Co. 750,000 9,888
Toyo Ink Manufacturing 63,000 311
Toyoda Automatic Loom Works 105,000 1,883
Wacoal Corp. 995,000 13,504
Yamanouchi Pharmaceuticals Ltd. 292,000 6,284
Yamatake-Honeywell 397,000 6,158
----------
GROUP TOTAL 333,998
----------
- ----------------------------------------------------------------
MALAYSIA (1.7%)
Arab Malaysia Corp. 575,000 2,084
* Berjuntai Tin 197,000 628
DCB Holdings Bhd. 352,000 1,026
Genting Bhd. 229,500 1,916
Hong Leong Industries Bhd. 193,000 1,026
IOI Corp. Bhd. 825,000 809
Land and General Bhd. 265,000 574
Lion Land Bhd. 1,063,000 1,055
Malayan Banking Bhd. 63,000 531
Malaysia Mining Corp. 1,196,000 1,724
Malaysian Airlines System Bhd. 157,000 510
Malaysian International
Shipping Corp. Bhd. (Foreign) 530,666 1,369
Sungei Way Holdings 407,000 1,467
Tractors Malaysia Holdings 1,120,000 1,606
----------
GROUP TOTAL 16,325
----------
- ----------------------------------------------------------------
MEXICO (1.3%)
Cemex SA de C.V. 289,237 1,057
* Grupo Carso Series A-1 216,600 1,179
* Grupo Sidek B 583,400 254
Kimberly Clark Class A 104,200 1,583
Telefonos de Mexico L 5,578,400 9,001
----------
GROUP TOTAL 13,074
----------
- ----------------------------------------------------------------
NETHERLANDS (4.8%)
ABN AMRO Holding NV 224,000 10,215
Ahrend Groep NV 5,000 165
Fortis Amev NV 161,600 10,837
Grolsch NV 51,700 1,800
Hollandsche Beton Groep NV 4,300 657
Internatio-Muller NV 6,900 477
Internationale Nederlanden Groep 203,800 13,629
Koninklijke Van Ommeren NV 14,000 437
Telegraaf Holdings 59,600 8,402
Volker Stevin CVA 13,500 817
----------
GROUP TOTAL 47,436
----------
- ----------------------------------------------------------------
NEW ZEALAND (.8%)
Brierley Investment 2,097,000 1,659
Lion Nathan 1,447,300 3,454
Telecom Corp. of New Zealand 626,700 2,704
----------
GROUP TOTAL 7,817
----------
- ----------------------------------------------------------------
NORWAY (.8%)
Den Norske Bank 187,900 488
Norsk Hydro 170,400 7,174
----------
GROUP TOTAL 7,662
----------
- ----------------------------------------------------------------
PHILIPPINES (.9%)
Ayala Corp. B 1,427,440 1,741
Engineering Equipment 8,870,000 514
JG Summit Holdings Inc. B 4,151,600 1,140
Manila Electric B 156,150 1,274
Metro Pacific Corp. A 89,000 16
Metropolitan Bank & Trust Co. 26,077 507
* Philex Mining Corp. B 3,807,000 435
Philippine Long Distance
Telephone Co. 32,480 1,765
San Miguel Corp. B 129,200 441
* SM Prime Holdings 2,793,500 799
----------
GROUP TOTAL 8,632
----------
- ----------------------------------------------------------------
PORTUGAL (.9%)
Banco Totta & Acores 83,800 1,388
Cimentos de Portugal 95,640 1,587
* Portugal Telecom SA 145,182 2,736
Soares da Costa Rfd. 109,800 1,249
* Sonae Industries SGPS SA 58,200 403
Sonae Investimentos SGPS SA 58,820 1,260
----------
GROUP TOTAL 8,623
----------
- ----------------------------------------------------------------
SINGAPORE (1.6%)
City Development Ltd. 235,307 1,713
Cycle & Carriage Ltd. 174,000 1,734
Dairy Farm International 558,000 513
Fraser & Neave Ltd. 91,000 1,158
Inchcape Bhd. 112,000 359
Jardine Strategic 651,000 1,992
Keppel Corp. 116,000 1,033
Overseas Union Bank (Foreign) 299,000 2,061
Rothmans Industries Ltd. 284,000 1,074
Singapore Press
Holdings Ltd. (Foreign) 73,200 1,294
Singapore Technologies
Industries Corp. 1,003,000 2,269
Straits Steamship Land Ltd. 191,000 645
----------
GROUP TOTAL 15,845
----------
- ----------------------------------------------------------------
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------
<S> <C> <C>
SPAIN (7.4%)
Acerinox SA 18,300 $ 1,851
Argentaria SA 69,300 2,856
Aumar-Autopistas
del Mare Nostrum 471,800 6,144
Banco Bilbao Vizcaya 211,508 7,619
Banco Central Hispanoamericano 311,713 6,321
Banco Santander 151,300 7,595
Banco Popular Espanol 12,300 2,268
Dragados y Construcciones SA 89,900 1,182
Fuerzas Electrica 1,069,700 7,627
Gas y Electricdad 10,100 565
Iberdrola SA 878,100 8,034
Sevillana de Electricidad Cia 1,329,600 10,324
Tabacalera SA 30,700 1,164
Union Electrica Fenosa 1,613,500 9,709
----------
GROUP TOTAL 73,259
----------
- ----------------------------------------------------------------
SWEDEN (.5%)
Incentive AB Series B 28,100 1,230
Svenska Cellulosa AB 126,600 1,968
Svenska Handelsbanken,
Inc. Series A 72,700 1,514
----------
GROUP TOTAL 4,712
----------
- ----------------------------------------------------------------
SWITZERLAND (2.1%)
Holderbank Financiere
Glarus AG (Bearer) 340 262
SGS Societe Generale de
Surveillance Holdings SA (Bearer) 3,820 7,602
Swiss Bank Corp. (Bearer) 25,810 10,565
Winterthur (Bearer) 3,025 2,161
----------
GROUP TOTAL 20,590
----------
- ----------------------------------------------------------------
THAILAND (1.9%)
Advanced Information
Services (Foreign) 31,000 544
Ban-Pu Coal Co., Ltd. (Foreign) 16,000 344
Bangkok Bank Public
Co. Ltd. (Foreign) 493,500 5,995
Dhana Siam Finance
& Securities Co. Ltd. (Foreign) 226,000 1,292
Land and House Co., Ltd. (Foreign) 26,000 427
Shinawatra Computer &
Communications Co.,
Ltd. (Foreign) 61,100 1,504
Siam Commercial
Bank Ltd. (Foreign) 158,600 2,090
Siam Pulp & Paper (Foreign) 251,100 723
TPI Polene Co., Ltd. (Foreign) 91,875 547
Thai Farmers Bank Ltd. (Foreign) 400,400 4,037
Thai Plastic Chemical
Co., Ltd. (Foreign) 187,850 910
* Thai Telephone and
Telecom (Foreign) 62,500 340
United Communication
Industry (Foreign) 34,600 442
----------
GROUP TOTAL 19,195
----------
- ----------------------------------------------------------------
TURKEY (1.2%)
Akbank Turkery 6,992,792 1,320
Alarko Holdings 3,203,906 1,289
Altinyildiz Mensucat 5,844,750 1,272
Arcelik 10,065,497 810
Brisa Bridgestone 6,138,500 1,487
Cimsa Cemento 3,015,500 1,312
EGE Biracilik 3,506,488 1,209
Migros 2,164,549 1,653
Netas 6,139,850 1,739
----------
GROUP TOTAL 12,091
----------
- ----------------------------------------------------------------
UNITED KINGDOM (8.6%)
Anglian Water 378,600 3,552
Charter Consolidated (Registered) 378,900 5,088
Coats Viyella PLC 1,965,600 5,325
Cobham PLC 270,000 1,974
Commercial Union 713,800 6,959
General Accident PLC 697,400 7,043
Harrison and Crosfield 257,100 639
Hazlewood Foods 684,625 1,068
Kwik Save Group 223,900 1,738
Lex Services 110,600 524
Lloyds Abbey Life 522,500 3,650
* National Grid Group PLC 98,673 306
North West Water Group 265,000 2,530
* Northern Electric 8.061% Pfd. 248,920 416
Northumbrian Water 59,100 1,078
Severn Trent Water PLC 328,300 3,504
Slough Estates PLC 260,400 885
Smithkline Beecham PLC Class A 435,500 4,800
South Wales Electricity 108,100 1,566
South West Water 244,400 1,979
Southern Water 260,500 2,780
Sun Alliance Group 1,138,300 6,601
Thames Water PLC 572,300 4,989
T & N PLC 1,728,500 4,347
Whitbread & Co. A 805,800 8,513
Williams Holdings PLC 531,100 2,700
Yorkshire Water 75,700 696
----------
GROUP TOTAL 85,250
----------
- ----------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $780,388) 936,740
- ----------------------------------------------------------------
</TABLE>
19
<PAGE> 22
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
INTERNATIONAL Amount Value
PORTFOLIO (contnued) (000) (000)+
- ----------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (4.4%)
- ----------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.89%, 1/2/96
(Cost $43,512) $ 43,512 $ 43,512
- ----------------------------------------------------------------
TOTAL INVESTMENTS (99.2%)
(Cost $823,900) 980,252
- ----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.8%)
- ----------------------------------------------------------------
Other Assets--Notes C and F 113,609
Liabilities--Note F (105,735)
----------
7,874
- ----------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------
Applicable to 31,766,437 outstanding
shares of beneficial interest
(unlimited authorization) $988,126
- ----------------------------------------------------------------
NET ASSET VALUE PER SHARE $31.11
================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
AT DECEMBER 31, 1995,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
Amount Per
(000) Share
-------- -------
<S> <C> <C>
Paid in Capital $828,944 $26.09
Overdistributed Net
Investment Income--Note E (752) (.02)
Accumulated Net Realized Gains 2,732 .09
Unrealized Appreciation--Note D:
Investment Securities 156,352 4.92
Foreign Currencies and
Forward Currency Contracts 850 .03
- ----------------------------------------------------------------
NET ASSETS $988,126 $31.11
- ----------------------------------------------------------------
</TABLE>
20
<PAGE> 23
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
U.S. INTERNATIONAL
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, December 31,
1995 1995
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends(1) . . . . . . . . . . . . . . . . . . . . . $ 2,731 $25,003
Interest . . . . . . . . . . . . . . . . . . . . . . . 202 2,941
- -------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . 2,933 27,944
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fees . . . . . . . . . . . . . . . . . . . . $383 $1,516
Performance Adjustments . . . . . . . . . . . . . . -- 383 (282) 1,234
---- ------
The Vanguard Group--Note C . . . . . . . . . . . . . .
Management and Administrative . . . . . . . . . . . 246 2,374
Marketing and Distribution . . . . . . . . . . . . . 23 269 203 2,577
---- ------
Taxes (other than income taxes) . . . . . . . . . . . . 10 90
Custodian Fees . . . . . . . . . . . . . . . . . . . . 20 783
Auditing Fees . . . . . . . . . . . . . . . . . . . . 8 9
Shareholders' Reports . . . . . . . . . . . . . . . . . 10 74
Annual Meeting and Proxy Costs . . . . . . . . . . . . 2 20
Trustees' Fees and Expenses . . . . . . . . . . . . . . 1 4
- -------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . 703 4,791
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . 2,230 23,153
- -------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . 11,499 70,981
Foreign Currencies and Forward Currency Contracts . . . -- 1,195
- -------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . 11,499 72,176
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . 21,505 (4,113)
Foreign Currencies and Forward Currency Contracts . . . -- 850
- -------------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) . . . . . . . 21,505 (3,263)
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . $35,234 $92,066
===================================================================================================================
</TABLE>
(1) Dividends for the International Portfolio are net of foreign witholding
taxes of $3,518,000.
21
<PAGE> 24
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
U.S. PORTFOLIO INTERNATIONAL PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
DECEMBER 31, 1995 December 31, 1994 DECEMBER 31, 1995 December 31, 1994
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . $ 2,230 $ 1,409 $ 23,153 $ 18,821
Realized Net Gain (Loss) . . . . . . . . . . 11,499 (1,747) 72,176 48,027
Change in Unrealized
Appreciation (Depreciation) . . . . . 21,505 (5,504) (3,263) (17,417)
- -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in
Net Assets Resulting
from Operations . . . . . . . . . 35,234 (5,842) 92,066 49,431
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . (2,220) (1,401) (24,492) (19,131)
Realized Net Gain . . . . . . . . . . . . . (3,834) (129) (74,633) (21,716)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . (6,054) (1,530) (99,125) (40,847)
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . 9,231 13,497 104,845 155,908
--In Lieu of
Cash Distributions . . . . . . 5,704 1,340 93,901 38,823
--Exchange . . . . . . . . . . . 12,951 33,652 76,453 192,662
Redeemed --Regular . . . . . . . . . . . . (12,042) (15,728) (132,469) (198,824)
--Exchange . . . . . . . . . . . (20,347) (31,355) (200,670) (126,363)
- -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions . . . (4,503) 1,406 (57,940) 62,206
- -------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . 24,677 (5,966) (64,999) 70,790
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . 112,778 118,744 1,053,125 982,335
- -------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . $ 137,455 $ 112,778 $ 988,126 $ 1,053,125
===================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . $ .61 $ .34 $ .79 $ .56
Realized Net Gain . . . . . . . . . . $ 1.05 $ .03 $ 2.52 $ .63
- -------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . 646 1,527 5,672 10,643
Issued in Lieu of Cash Distributions . 160 45 3,046 1,222
Redeemed . . . . . . . . . . . . . . . (968) (1,570) (10,409) (10,051)
- -------------------------------------------------------------------------------------------------------------------
(162) 2 (1,691) 1,814
- -------------------------------------------------------------------------------------------------------------------
(3) Undistributed (Overdistributed)
Net Investment Income . . . . . . $ 24 $ 14 $ (752) $ 377
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 25
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
U.S. PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . $29.09 $30.65 $28.43 $28.20 $22.90
------ ------ ------- ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .62 .34 .43 .68 .71
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . 8.96 (1.53) 4.38 1.08 5.30
------ ------ ------- ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . 9.58 (1.19) 4.81 1.76 6.01
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.61) (.34) (.43) (.67) (.71)
Distributions from Realized Capital Gains . . (1.05) (.03) (2.16) (.86) --
------ ------ ------- ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . (1.66) (.37) (2.59) (1.53) (.71)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . $37.01 $29.09 $30.65 $28.43 $28.20
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . +33.21% -3.91% +17.24% +6.45% +26.57%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . $137 $113 $119 $68 $115
Ratio of Expenses to Average Net Assets . . . . . .56% .73% .90% .65% .44%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 1.79% 1.14% 1.43% 2.33% 2.67%
Portfolio Turnover Rate . . . . . . . . . . . . . 77% 151% 139% 209% 84%
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
INTERNATIONAL PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . $31.48 $31.04 $24.44 $27.78 $26.58
------ ------ ------- ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .750 .55 .50 .66 .78
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . 2.185 1.08 6.91 (3.05) 1.80
------ ------ ------- ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . 2.935 1.63 7.41 (2.39) 2.58
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.790) (.56) (.81) (.67) (.77)
Distributions from Realized Capital Gains . . (2.515) (.63) -- (.28) (.61)
------ ------ ------- ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . (3.305) (1.19) (.81) (.95) (1.38)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . $31.11 $31.48 $31.04 $24.44 $27.78
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . +9.65% +5.25% +30.49% -8.72% +9.96%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . $988 $1,053 $982 $678 $878
Ratio of Expenses to Average Net Assets . . . . . .47% .34% .40% .42% .38%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 2.29% 1.71% 1.76% 2.48% 2.87%
Portfolio Turnover Rate . . . . . . . . . . . . . 47% 40% 39% 51% 46%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
Vanguard/Trustees' Equity Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company and consists of the U.S.
and International Portfolios. The International Portfolio invests in securities
of foreign issuers which may subject the Portfolio to investment risks not
normally associated with investing in securities of United States corporations.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Market values for securities listed on U.S. exchanges
are based upon the latest quoted sales prices for such securities on the
appropriate exchange as of the close of the New York Stock Exchange
(generally 4:00 PM) on the valuation date; such securities not traded are
valued at the mean of the latest quoted bid and asked prices. Securities
listed on foreign exchanges are valued at the latest quoted sales prices.
Securities not listed are valued at the latest quoted bid prices. Temporary
cash investments are valued at cost which approximates market value.
2. FOREIGN CURRENCY: Securities and other assets and liabilities denominated in
foreign currencies are translated into U.S. dollars at the bid prices of
those currencies against U.S. dollars last quoted by major banks as of 5:00
PM Geneva Time on the valuation date.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on securities from the
portion arising from changes in market prices of securities. Such
fluctuations are included in realized net gains (losses) and unrealized
appreciation (depreciation) on investment securities. Changes in the value
of other assets and liabilities resulting from changes in foreign exchange
rates are recorded as unrealized foreign currency gains (losses) until
settled in cash, at which time realized foreign currency gains (losses) are
recognized.
3. FORWARD CURRENCY CONTRACTS: The International Portfolio enters into forward
currency contracts to protect the value of securities and related
receivables and payables against changes in future foreign exchange rates.
Risks associated with such contracts include movement in the value of the
foreign currency relative to the U.S. dollar and the ability of the
counterparties to fulfill their obligations under the contracts.
Fluctuations in the value of such contracts are recorded as unrealized
appreciation (depreciation) until terminated, at which time realized gains
(losses) are recognized.
4. FEDERAL INCOME TAXES: Each Portfolio of the Fund intends to continue to
qualify as a regulated investment company and distribute all of its taxable
income. Accordingly, no provision for Federal income taxes is required in
the financial statements.
5. REPURCHASE AGREEMENTS: Each Portfolio of the Fund, along with other members
of The Vanguard Group of Investment Companies, transfers uninvested cash
balances into a Pooled Cash Account, the daily aggregate of which is
invested in repurchase agreements secured by U.S. Government obligations.
Securities pledged as collateral for repurchase agreements are held by a
custodian bank until maturity of each repurchase agreement. Provisions of
each agreement require that the market value of this collateral is
sufficient in the event of default; however, in the event of default or
bankruptcy by the other party to the agreement, realization and/or retention
of the collateral may be subject to legal proceedings.
6. OTHER: Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized gains
and losses are those of specific securities sold.
24
<PAGE> 27
B. U.S. PORTFOLIO: Under the terms of a contract which expires March 31, 1996,
the Portfolio pays Geewax, Terker & Company an investment advisory fee which
represents a percentage rate of average net assets of the Portfolio adjusted
for the investment performance of the Portfolio relative to that of the
Standard & Poor's 500 Composite Stock Price Index. For the year ended December
31, 1995, the investment advisory fee of the Portfolio represented an effective
annual rate of .31 of 1% of average net assets.
INTERNATIONAL PORTFOLIO: Under the terms of a contract which expires March 31,
1996, the Portfolio pays Batterymarch Financial Management, Inc. an investment
advisory fee calculated at an annual percentage rate of average net assets of
the Portfolio. The base fee thus computed is subject to quarterly adjustments
based on performance relative to the Morgan Stanley Capital International
Europe, Australia, and Far East Index. For the year ended December 31, 1995,
the investment advisory fee of the Portfolio represented an effective annual
base rate of .15 of 1% of the Portfolio's average net assets, before a decrease
of $282,000 (.03 of 1%) based on performance. The base fee reflects a fee
waiver of $190,000, which represented .02% of 1% of average net assets.
On February 16, 1996, the Board of Trustees approved the appointment of UBS
International Investment as investment adviser to the International Portfolio
effective March 31, 1996.
C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing and distribution services. The costs of such services
are allocated to the Fund under methods approved by the Board of Trustees. At
December 31, 1995, the Fund had contributed capital of $129,000 to Vanguard
(included in Other Assets), representing .6% of Vanguard's capitalization. The
Fund's trustees and officers are also directors and officers of Vanguard.
D. During the year ended December 31, 1995, purchases and sales of investment
securities other than U.S. Government securities and temporary cash investments
were:
<TABLE>
<CAPTION>
- -------------------------------------------------------
(000)
-----------------------
Portfolio Purchases Sales
- -------------------------------------------------------
<S> <C> <C>
U.S. $ 93,878 $105,869
INTERNATIONAL 454,533 631,471
- -------------------------------------------------------
</TABLE>
At December 31, 1995, net unrealized appreciation for Federal income tax
purposes was:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
(000)
------------------------------------------
Appreciated Depreciated Net Unrealized
Portfolio Securities Securities Appreciation
- -----------------------------------------------------------------
<S> <C> <C> <C>
U.S. $ 30,009 $ (1,176) $ 28,833
INTERNATIONAL 196,246 (40,599) 155,647
- -----------------------------------------------------------------
</TABLE>
At December 31, 1995, the International Portfolio had net unrealized foreign
currency gains of $13,000 resulting from the translation of other assets and
liabilities.
Under the terms of open forward currency exchange contracts at December 31,
1995, the International Portfolio was obligated to deliver foreign currency in
exchange for U.S. dollars as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------
(000)
------------------------
Foreign U.S.
Contract Settlement Date Currency Dollars
- --------------------------------------------------------
<S> <C> <C>
2/29/96 JAPANESE YEN 4,851,985 $48,245
- --------------------------------------------------------
</TABLE>
Net unrealized appreciation of $837,000 related to these contracts is required
to be treated as realized gain for tax purposes.
25
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS (continued)
E. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
In the International Portfolio, such differences primarily relate to
investments in securities considered to be "passive foreign investment
companies," for which any unrealized appreciation and/or realized gains are
required to be included in distributable net income for tax purposes.
The International Portfolio's distributions to shareholders from passive
foreign investment company income during the year ended December 31, 1995,
totalled $705,000, and are reflected in the overdistributed net income balance
at December 31, 1995.
During the year ended December 31, 1995, the International Portfolio realized
gains on the sale of passive foreign investment companies of $154,000, which
had been included in 1995 and prior years' distributable net income for tax
purposes; accordingly such gains have been reclassified from accumulated net
realized gains to undistributed net income.
During the year ended December 31, 1995, the International Portfolio realized
net foreign currency gains of $56,000, which increased distributable net income
for tax purposes; accordingly such gains have been reclassified from
accumulated net realized gains to undistributed net income.
F. The market values of securities on loan to broker/dealers at December 31,
1995, and the cash collateral received with respect to such loans were:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
(000)
-------------------------
Market Value Cash
of Loaned Collateral
Portfolio Securities Received
- ---------------------------------------------------------
<S> <C> <C>
U.S. $ 973 $ 984
INTERNATIONAL 90,636 95,612
- ---------------------------------------------------------
</TABLE>
Security loans are required to be secured at all times by collateral at least
equal to the market value of securities loaned; however, in the event of
default or bankruptcy by the other party to the agreement, realization and/or
retention of the collateral may be subject to legal proceedings.
26
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
Vanguard/Trustees' Equity Fund
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
U.S. Portfolio and International Portfolio of Vanguard/Trustees' Equity Fund
(the "Fund") at December 31, 1995, and the results of each of their operations,
the changes in each of their net assets and the financial highlights for each
of the respective periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities by correspondence with the custodian and brokers and
the application of alternative auditing procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1996, except as to the
third paragraph of Note B for which
the date is February 16, 1996.
SPECIAL 1995 TAX INFORMATION (UNAUDITED)
FOR U.S. PORTFOLIO OF VANGUARD/TRUSTEES' EQUITY FUND
Corporate shareholders should note that for the fiscal year ended December 31,
1995, 100% of the Porfolio's investment income (i.e., dividend income plus
short-term capital gains, if any) qualifies for the intercorporate dividends
received deduction.
27
<PAGE> 30
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd. and The St. Paul Companies, Inc.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and
The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co. and
NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
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.
OTHER VANGUARD GROUP OFFICERS
ROBERT A. DISTEFANO IAN A. MACKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
28
<PAGE> 31
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LIFEStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
[THE VANGUARD GROUP LOGO]
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q250-12/95
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet annihilated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 32
VANGUARD TRUSTEES' EQUITY FUND
EDGAR APPENDIX
This appendix describes the components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile".
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appears at the top of pages one through seven.
A line chart of the Indexed Value between MSCI Select Emerging Markets (Free)
Index, Standard & Poor's 500 Index, MSCI Europe Index, and MSCI Pacific (Free)
Index, for the fiscal years 1990 through 1995 appears at the top of page two.
A line chart illustrating performance between the Trustees' International
Portfolio, Average International Fund, and MSCI EAFE Index for the period
December 31, 1985, to December 31, 1995 appears at the bottom of page three.
A bar chart illustrating Large Stocks versus Small Stocks (Standard & Poor's
500 Index and Russell 2000 Stock Index) Annual Returns for the years 1990
through 1995 appears at the top of page five.
A line chart illustrating performance between Trustees' U.S. Portfolio, Average
General Equity Fund, and Standard & Poor's 500 Index, average Annual Total
Returns for the period December 31, 1985, to December 31, 1995 appears at the
top of page six.
A running head featuring a cannon and battleships in the background appears at
the top of pages eight and nine.
A running head featuring ships wheel, rope and battleships in the background
appears at the top of pages ten through twelve.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages thirteen through twenty seven.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page twenty eight.
A running head featuring birds flying and ships in the background appears at
the top of the inside back cover.
