<PAGE> 1
VANGUARD
INTERNATIONAL VALUE
PORTFOLIO
Semiannual Report
June 30, 1997
[PHOTO]
[THE VANGUARD GROUP LOGO]
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[PHOTO]
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future. The montage
includes a bronze medallion with a likeness of our namesake, HMS Vanguard (Lord
Nelson's flagship at The Battle of the Nile); a clock built circa 1816 in
Scotland, featuring a portrait of Nelson; and several views of our recently
completed campus, which is steeped in nautical imagery--from our buildings
named after Nelson's warships (Victory, Majestic, and Goliath are three shown),
to our artwork and ornamental compass rose.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
3
Report From
The Adviser
5
Performance
Summary
6
Financial
Statements
7
Trustees And
Officers
INSIDE BACK COVER
All comparative mutual fund data
are from Lipper Analytical Services, Inc.
or Morningstar unless otherwise noted.
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[PHOTO]
FELLOW SHAREHOLDER,
Common stock prices on international markets generally rose smartly during
the first six months of 1997, though they trailed the torrid U.S. stock market.
Vanguard International Value Portfolio returned +12.4%, matching the average
international mutual fund and narrowly outdistancing the broad international
index we use as a benchmark.
The table below compares the Portfolio's total return (capital change plus
reinvested dividends) for the period with those of our competitive benchmarks:
the average international fund and the unmanaged Morgan Stanley Capital
International Europe, Australasia, Far East Index.
The Portfolio's return is based on an increase in net asset value from
$27.54 per share on December 31, 1996, to $30.16 per share on June 30, 1997,
with the latter figure adjusted for a distribution of $0.70 per share from net
realized capital gains. Distributions from income, formerly made quarterly,
will now be made once a year as part of our year-end distributions.
<TABLE>
<CAPTION>
- ------------------------------------------------------
TOTAL RETURN
SIX MONTHS ENDED
JUNE 30, 1997
- ------------------------------------------------------
<S> <C>
Vanguard International Value
Portfolio* +12.4%
- ------------------------------------------------------
Average International Fund +12.4%
- ------------------------------------------------------
MSCI EAFE Index +11.4%
- ------------------------------------------------------
</TABLE>
*Known as Vanguard/Trustees' Equity Fund-International Portfolio prior to April
30, 1997.
THE PERIOD IN REVIEW
A reviving Japanese economy and higher-than-expected earnings by European
exporters propelled a strong six-month performance in most international stock
markets. The MSCI EAFE Index, which measures securities in 20 countries in
Europe and the Pacific Rim, gained +16.8% in local currency terms. But the
continued strength of the dollar eroded returns to +11.4% for U.S. investors.
European bourses were the strongest performers, rising +24.8% in local
currencies, or +14.4% in dollar terms. French markets slowed after the election
of a socialist government, but still ended the period up +9.4% in dollar terms.
The Swiss market, largely reflecting positive outlooks for the pharmaceutical
and financial-services sectors, gained a stellar +42.9% for the period, or
+31.6% in dollars.
In the Pacific region, signs of a long-awaited economic recovery in Japan
boosted that country's stock market and strengthened the yen, turning what
began as a losing year into a +9.2% gain in U.S. dollars for the six months.
During the six-month period, our Portfolio provided returns that were
good both in an absolute sense and in comparison to our benchmarks. We
benefited from a lighter weighting in Japanese stocks (about 25% as of June 30
versus 31% for the MSCI EAFE Index), which lagged other major markets despite
the spring rally. Our large position in French stocks (17% of the Portfolio
versus 7% of the Index) detracted from overall returns during the period, but
our adviser continues to see opportunity there.
Though our return matched that of the average international fund, we are
not satisfied with that result. Over time, we expect to do better than our
competitors, especially because our low costs--the Vanguard advantage--give the
Portfolio a head start.
1
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International Value's expenses for administration, investment management, and
operations amount to about 0.50% of average net assets, versus 1.70% for the
average international fund. Our goal is to outperform our competitors before
costs are taken into account. The main reason we didn't beat our peers is that
our stake in Japanese equities was roughly twice that of the average
international equity fund.
<TABLE>
<CAPTION>
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SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------
LOCAL U.S.
CURRENCY CURRENCY DOLLAR
INDEX RETURN IMPACT RETURN
- -----------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 +20.6% -- +20.6%
- -----------------------------------------------------------------
MSCI Europe +24.8% -10.4% +14.4%
MSCI Pacific + 6.6 + 0.4 + 7.0
MSCI EAFE +16.8 - 5.4 +11.4
MSCI Select
Emerging Markets +21.6% - 9.5% +12.1%
- -----------------------------------------------------------------
</TABLE>
IN SUMMARY
Events during the first half of 1997 amply demonstrated the risks and rewards
of international investing. Currency fluctuations and political change can
enhance otherwise lackluster returns or tarnish those that are sparkling.
Compared with the remarkable recent returns in the U.S. stock market, the
rewards of international stocks may seem unimpressive. But it is worth
remembering that international stocks, from time to time, have provided higher
returns than U.S. stocks.
It is precisely because international stocks don't always move in step
with U.S. stocks that they can add an important element of diversification to a
balanced portfolio of domestic stock funds, bond funds, and money market funds.
By making it easier to ride out episodes of market volatility, a balanced
portfolio helps investors to adhere to our oft-stated message: Always "stay the
course" toward your long-term investment goals.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
July 23, 1997
2
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[PHOTO]
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 1997
U.S. EQUITY MARKETS
As the economy continued to grow while the rate of inflation did not, a robust
market provided solid gains to investors in U.S. common stocks during the
first half of 1997. The best performers were primarily larger-capitalization
issues, although the small-company indexes exhibited some strength in the final
two months of the period. Over the half-year, the Standard & Poor's 500
Composite Stock Price Index gained 20.6%, fueled by a 10.8% boost since the end
of April. Reflecting the gains among smaller companies, the Russell 2000 Index
posted a 10.2% increase for the six-month period, driven by an 11.1% jump in
May and a 4.3% rise in June. It was particularly noteworthy that the recent
small-cap gains were led by small growth stocks, the worst segment of the U.S.
market during the past 12 months. This group has surged 17.6% since the end of
March, although at the half-year's end it still lagged the S&P 500 Index by a
sizable margin (5.2% versus 20.6%).
Stocks benefited from the continued strength of corporate earnings, which
rose some 15% during the past year, and from a widespread confidence reflected
in increased price/earnings ratios. The strength in earnings, the expectation
that income will continue to increase at an attractive pace, and the further
conviction that inflation is not a problem helped stocks to continue to produce
solid gains in the fiscal period. What's more, earnings have shown not only
good strength but remarkable consistency in beating the consensus forecasts of
Wall Street analysts.
<TABLE>
<CAPTION>
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TOTAL RETURNS
PERIODS ENDED JUNE 30, 1997
------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- -------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 20.6% 34.7% 19.8%
Russell 2000 Index 10.2 16.3 17.9
MSCI EAFE Index 11.4 13.2 13.2
- -------------------------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 3.1% 8.2% 7.1%
Lehman 10-Year Municipal
Bond Index 3.3 8.3 7.4
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.6 5.3 4.5
- -------------------------------------------------------------------------
OTHER
Consumer Price Index 1.1% 2.3% 2.7%
- -------------------------------------------------------------------------
</TABLE>
*Average annual.
The strongest gains in the S&P 500 Index during the past six months came
from the health-care sector (up 31.4%) and the consumer-staples sector (up
23.9%). By contrast, numerous uncertainties for utilities caused the issues in
that sector to lag the broad market, although, on an absolute basis, their 8.2%
return over six months is quite good.
U.S. FIXED-INCOME MARKETS
The modest rise in interest rates during the past six months reflects the
economy's underlying momentum. The 10-year U.S. Treasury's yield increased from
6.42% at the end of December to 6.97% by the middle of April. In the following
weeks, economic reports indicated a slowing in economic growth and further
reduced fears of an increase in inflation. This news helped interest rates fall
to 6.50% by the end of June.
3
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Fueled by robust consumer spending, the U.S. economy expanded at a
remarkable 5.8% rate in the first three months of 1997. Reflecting the vibrant
economy, the nation's unemployment rate stood at 5.0% in June. Strong economic
growth and tight labor markets have often led to rising inflation because of
increased demand for goods and services. With this in mind, the Federal Reserve
raised its federal funds interest rate target by 0.25% on March 25 in a
"preemptive" strike against mounting inflationary pressures. Observed price
increases have been subdued in recent months, however. Wholesale prices have
fallen in each of the first six months of 1997, and so far this year consumer
prices have risen at a slower pace than last year.
With interest rates very close to year-end levels, bond investors have
fared reasonably well during the past six months, as illustrated by the 3.1%
return of the Lehman Brothers Aggregate Bond Index. Investors who favored
shorter-maturity and lower-quality issues achieved somewhat better returns.
Mortgage-backed securities continued to perform well because refinancing
activity has been reduced to historically low levels as interest rates have
risen. Municipal issues also tended to perform better than their taxable
counterparts.
INTERNATIONAL EQUITY MARKETS
International investors received fairly good returns over the past six months.
As measured by the broad Morgan Stanley Capital International Europe,
Australasia, Far East Index, foreign markets gained 11.4%.
The period saw two major developments. First, the Japanese stock market
moved sharply higher in the spring, returning 11.1% in May and 7.5% in June to
U.S. investors. Better tone in the economy, plus strong earnings reported by
export-oriented companies benefiting from the weak yen, gave Japan a
long-awaited boost. For the six months, the Japanese market is up 9.2%. The
competitive benefits of a weak currency relative to the dollar extended to
Germany, where the export-driven capital goods and chemical manufacturers
gained; overall, the German market rose 17.0% during the six-month period.
Arguably the biggest news came from the French elections at the end of
May. The new government is considered to be less friendly toward the austerity
measures needed to meet the eligibility requirements for the European Monetary
Union (EMU) in 1999. The French elections also had a broad impact across the
continent. Although most investors appear to agree that the elections won't
jeopardize the continent's move toward the EMU, the timing and intensity of the
fiscal measures are now less certain. For the six months, Europe gained 24.8%
in local currencies, which a strong dollar trimmed to 14.4% for U.S. investors.
4
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[PHOTO]
REPORT FROM THE ADVISER
Vanguard International Value Portfolio provided a total return of 12.4%
during the first half of 1997. This exceeded the return of 11.4% for the Morgan
Stanley Capital International Europe, Australasia, Far East (EAFE) Index and
matched the 12.4% return on the average international equity fund.
The major activity for the Portfolio during the period was in Japanese
equities. While our weighting in Japan has remained at 25%, this masks a
significant addition during the first few months of 1997, when the Japanese
market and currency were still falling, and a similar amount of disinvestment
toward the end of the period, after the market and currency had rallied.
We have reduced exposure to Japanese exporters that, while being good
companies, have seen their share prices rise more than warranted by events.
Meanwhile, we have added to stocks of companies that serve primarily the
domestic market, since these have lagged the broader market. We have maintained
an underexposure to the Japanese banking sector, which is not yet free of its
bad-debt problems and where valuations remain high.
The Portfolio's exposure to emerging markets not included in the EAFE
Index rose to 5% of assets with additions of stocks from Korea and Thailand.
Share prices in these markets have declined recently because of short-term
economic and political problems, which presented an opportunity to buy good
growth at low valuations. These new holdings have been concentrated in the
banking and telecommunication sectors.
In continental Europe, we have maintained a larger-than-Index position
because valuations in this region are relatively low compared with the rest of
the world and because more managements are moving to improve shareholder
returns. Strong evidence of this continued during the period, with further
consolidation in the Scandinavian and French financial sectors and Krupp's
uninvited attempt to acquire fellow German steelmaker Thyssen. However, it is
becoming increasingly important to distinguish between clever management
rhetoric and managers who are committed to delivering results. We think that
the fundamental shift toward focusing on shareholder value is in its very early
stages, and we expect to see further progress on this front in many of the
Portfolio's holdings.
We have maintained the overweighted position in French stocks (17% of the
Portfolio versus 7% for the Index) despite the recent change in government.
Our position was always based on the outlook for individual companies rather
than the market as a whole, and we have reinforced this by focusing on stocks
where, we believe, restructuring is in place and will be effective.
Wilson Phillips, Portfolio Manager
Robin Apps, Portfolio Manager
UBS International Investment London Ltd.
July 11, 1997
INVESTMENT PHILOSOPHY
The Portfolio reflects a belief that superior long-term investment results can
be achieved by investing in a diversified portfolio of international stocks
that are generally out of favor or undervalued by fundamental measures such as
price/earnings ratio or dividend yield.
5
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PERFORMANCE SUMMARY
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolio could lose money.
<TABLE>
<CAPTION>
INTERNATIONAL VALUE PORTFOLIO
TOTAL INVESTMENT RETURNS: MAY 16, 1983-JUNE 30, 1997
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INTERNATIONAL VALUE PORTFOLIO MSCI EAFE
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
1983 4.0% 1.8% 5.8% 11.0%
1984 -4.9 4.1 -0.8 7.9
1985 36.1 4.2 40.3 56.7
1986 46.8 3.9 50.7 69.9
1987 22.1 1.8 23.9 24.9
1988 14.8 4.0 18.8 28.6
1989 22.8 3.2 26.0 10.8
1990 -15.1 2.8 -12.3 -23.2
1991 6.9 3.1 10.0 12.5
1992 -11.0 2.3 -8.7 -11.8
1993 27.0 3.5 30.5 32.9
1994 3.5 1.8 5.3 8.1
1995 7.0 2.6 9.6 11.6
1996 7.5 2.7 10.2 6.4
1997* 12.4 0.0 12.4 11.4
- -----------------------------------------------------------
</TABLE>
*Six months ended June 30, 1997.
See Financial Highlights table on page 12 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997
- -------------------------------------------------------------------------------------
10 YEARS
INCEPTION ----------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International Value Portfolio 5/16/83 17.19% 11.42% 6.27% 2.65% 8.92%
- -------------------------------------------------------------------------------------
</TABLE>
6
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[PHOTO]
FINANCIAL STATEMENTS
JUNE 30, 1997 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Portfolio's holdings, including
each security's market value on the last day of the reporting period.
Securities are grouped and subtotaled by asset type (common stocks, bonds,
etc.) and by country. Other assets are added to, and liabilities are subtracted
from, the value of Total Investments to calculate the Portfolio's Net Assets.
Finally, Net Assets are divided by the outstanding shares of the Portfolio to
arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the Portfolio's net assets on both a dollar and per-share
basis. Because all income and any realized gains must be distributed to
shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the Portfolio had available to distribute to shareholders as income
dividends or capital gains as of the statement date, but may differ because
certain investments or transactions may be treated differently for financial
statement and tax purposes. Any Accumulated Net Realized Losses, and any
cumulative excess of distributions over net income or net realized gains, will
appear as negative balances. Unrealized Appreciation (Depreciation) is the
difference between the market value of the Portfolio's investments and their
cost, and reflects the gains (losses) that would be realized if the Portfolio
were to sell all of its investments at their statement-date values.
<TABLE>
<CAPTION>
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MARKET
VALUE*
INTERNATIONAL VALUE PORTFOLIO SHARES (000)
- -----------------------------------------------------------------------
COMMON STOCKS (97.8%)
- -----------------------------------------------------------------------
<S> <C> <C>
AUSTRALIA (6.6%)
Australia & New Zealand
Bank Group Ltd. 1,200,000 $ 8,900
Burns Philp & Co., Ltd. 2,304,020 4,246
Coles Myer Ltd. 1,000,000 5,162
Foster's Brewing Group Ltd. 2,844,000 5,241
Goodman Fielder Ltd. 5,000,000 7,304
Mount Isa Mines Holdings Ltd. 12,042,862 17,683
Pacific Dunlop Ltd. 2,300,000 6,754
Pasminco Ltd. 2,400,000 4,837
Stockland Trust Group Ltd. 2,023,400 5,275
--------
65,402
--------
DENMARK (1.8%)
BG Bank A/S 49,200 2,723
Tele Danmark A/S B Shares 287,100 14,938
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17,661
--------
FRANCE (16.6%)
AXA-UAP SA 210,000 13,074
- - AXA-UAP SA Certificates 262,800 1,021
Alcatel Alsthom SA 30,535 3,828
Banque Nationale de Paris SA 170,000 7,013
Compagnie de Saint-Gobain SA 66,100 9,649
Elf Aquitaine SA 291,700 31,501
Esso SA 9,935 880
Etablissements Economiques
du Casino Guichard-
Perrachon SA 192,000 9,513
Groupe Danone SA 179,582 29,701
Lafarge SA 50,000 3,113
PSA Peugeot Citroen SA 26,000 2,515
Pechiney SA A Shares 200,000 7,886
Pernod Ricard SA 22,737 1,174
Societe Generale SA 125,000 13,967
Societe National d'Exploitation
Industrielle de Tabacs et
Allumettes SA 127,689 4,045
Thomson-CSF SA 333,877 8,610
Total SA B Shares 160,000 16,188
--------
163,678
--------
GERMANY (5.5%)
BHF-Bank AG 93,400 2,461
Bayer AG 632,330 24,320
Man AG 1,500 462
Schering AG 46,150 4,935
- - Varta AG 15,480 2,528
Volkswagen AG 25,000 19,182
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53,888
--------
INDONESIA (0.6%)
PT Bank Dagang Nasional
Indonesia (Foreign) 2,713,374 1,925
- - PT Bank Dagang Nasional
Indonesia Warrants Exp. 2/4/00 193,812 123
PT Indah Kiat Pulp & Paper Corp.
(Foreign) 362,180 212
- - PT Indah Kiat Pulp & Paper
Corp. Rights Exp. 8/8/97 325,962 57
- - PT Indah Kiat Pulp & Paper Corp.
Warrants Exp. 4/13/01 240,970 67
PT Indosat (Foreign) 262,000 784
PT Inti Indorayon Utama (Foreign) 545,000 381
</TABLE>
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<TABLE>
<CAPTION>
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MARKET
VALUE*
INTERNATIONAL VALUE PORTFOLIO SHARES (000)
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<S> <C> <C>
PT Kalbe Farma (Foreign) 706,000 944
PT Pabrik Kertas Tjiwi Kimia
(Foreign) 1,549,154 1,800
PT Unilever Indonesia (Foreign) 9,900 175
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6,468
--------
ITALY (1.7%)
Ente Nazionale Idrocarburi SPA 1,960,800 11,092
La Rinascente SPA 589,000 3,270
- - La Rinascente SPA Rights
for Bonds Exp. 7/23/97 589,000 26
- - La Rinascente SPA Rights
for Stock Exp. 7/15/97 589,000 96
- - Seat SPA 6,460,000 2,081
- - Seat SPA Risp. 500,000 104
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16,669
--------
JAPAN (25.4%)
Aoki Corp. 1,628,000 1,921
Chudenko Corp. 400 11
Chugoku Electric
Power Co., Ltd. 184,100 3,250
Fuji Photo Film Co., Ltd. 230,000 9,266
Hitachi Ltd. 1,246,000 13,938
Hokkaido Electric
Power Co., Ltd. 68,400 1,225
Ishikawajima-Harima
Heavy Industries Co. 1,179,000 4,636
Itoham Foods, Inc. 333,000 1,839
JGC Corp. 500,000 3,452
Japan Tobacco, Inc. 537 4,247
Japan Wool Textile Co., Ltd. 257,000 1,815
Kajima Corp. 400,000 2,345
Kansai Paint Co., Ltd. 700,000 2,900
Koito Manufacturing Co., Ltd. 427,000 3,269
Kyudenko Corp. 172,000 1,452
Kyushu Electric Power Co., Inc. 215,200 3,705
Marudai Food Co., Ltd. 796,000 3,506
Matsushita Electric
Industrial Co., Ltd. 563,000 11,365
Mitsubishi Chemical Corp. 2,500,000 8,171
Mitsubishi Estate Co., Ltd. 964,000 13,984
Mitsubishi Heavy Industries Ltd. 650,000 4,993
Mitsubishi Materials Corp. 1,840,000 7,364
Nihon Cement Co., Ltd. 906,000 4,339
Nikko Securities Co., Ltd. 867,000 5,342
Nippon Yusen Kabushiki
Kaisha Co. 2,377,000 9,244
Nishimatsu Construction Co. 671,000 4,691
Nissan Fire & Marine
Insurance Co., Ltd. 1,155,000 6,359
Nisshin Oil Mills Ltd. 297,000 1,687
Nisshinbo Industries, Inc. 1,145,000 10,406
Okumura Corp. 300,000 1,591
Sakura Finance Ltd.
.75% Cvt. Pfd. 192 10,168
Sanwa Bank Ltd. 395,000 5,868
Sekisui House Ltd. 335,000 3,396
Sony Corp. 50,000 4,365
Sumitomo Forestry Co. 143,000 1,575
Sumitomo Marine & Fire
Insurance Co. 1,350,000 11,090
Tokyo Gas Co., Ltd. 1,898,000 5,274
Tokyu Construction Co., Ltd. 595,000 1,097
Toppan Printing Co., Ltd. 750,000 11,798
Toray Industries, Inc. 684,000 4,884
Tostem Corp. 215,000 5,956
West Japan Railway Co. 2,908 11,410
Yamaha Motor Co., Ltd. 1,158,000 11,536
Yamanouchi Pharmaceuticals
Co., Ltd. 358,000 9,636
--------
250,366
--------
KOREA (2.2%)
Housing & Commercial Bank 14,560 277
Hyundai Motor Co., Ltd. 36,410 1,216
- - Hyundai Motor Co., Ltd. GDR 244,000 2,507
Korea Mobile
Telecommunications Corp. 4,593 3,451
- - Korean Air Co. 139,560 2,861
LG Chemical Ltd. 200,000 2,770
Pohang Iron & Steel Co., Ltd. 840 87
Samsung Electronics 1,026 114
- - Samsung Heavy Industries Co. 101,580 1,071
Shinhan Bank Co. 269,574 4,057
Yukong Ltd. 127,000 3,075
--------
21,486
--------
MALAYSIA (0.3%)
Hong Leong Industries Bhd. 417,200 1,322
Malaysia International
Shipping Corp., Bhd. (Foreign) 530,666 1,377
--------
2,699
--------
NETHERLANDS (4.0%)
Akzo Nobel NV 95,400 13,098
ING Groep NV 217,338 10,039
Koninklijke KNP BT NV 250,000 5,704
Koninklijke PTT Nederland NV 125,000 4,912
Philips Electronics NV 80,000 5,741
--------
39,494
--------
NEW ZEALAND (1.0%)
Brierley Investments Ltd. 4,866,300 4,749
Fletcher Challenge Ltd. Forest 18,168 26
Fletcher Challenge Ltd. Paper 454,200 1,099
Lion Nathan Ltd. 1,516,100 3,833
--------
9,707
--------
NORWAY (1.3%)
Den Norske Bank ASA 586,900 2,301
Norsk Hydro ASA 200,000 10,900
--------
13,201
--------
PHILIPPINES (0.4%)
Engineering & Equipment Corp. 8,870,000 370
JG Summit Holdings Inc.
Class B 3,226,000 661
Metropolitan Bank & Trust Co. 1,055 22
- - Philex Mining Corp. Class B 5,710,500 476
Philippine Long Distance
Telephone Co. 86,000 2,788
--------
4,317
--------
PORTUGAL (0.8%)
Electricidade de Portugal SA 420,200 7,721
--------
</TABLE>
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<TABLE>
<CAPTION>
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MARKET
VALUE*
SHARES (000)
- -----------------------------------------------------------------------
<S> <C> <C>
SINGAPORE (1.2%)
Dairy Farm International
Holdings Ltd. 1,585,740 1,189
Jardine Strategic Holdings Ltd. 651,000 2,461
Keppel Corp., Ltd. 1,025,000 4,552
- - Keppel Corp., Ltd. Class A 140,250 608
Rothmans Industries Ltd. 267,000 1,391
United Overseas Land Ltd. 1,000,000 1,357
--------
11,558
--------
SPAIN (0.9%)
Argentaria SA 158,600 8,897
--------
SWEDEN (5.2%)
Astra AB A Shares 608,000 11,323
Electrolux AB B Shares 325,695 23,504
- - Granges AB 109,000 1,466
SKF AB A Shares 48,920 1,208
Sparbanken Sverige AB A Shares 130,000 2,892
Stora Kopparbergs Berglags
AB A Shares 660,000 10,669
--------
51,062
--------
SWITZERLAND (6.0%)
Georg Fischer AG (Bearer) 1,768 2,462
Nestle SA (Registered) 23,500 31,046
Novartis AG (Registered) 11,733 18,784
Schindler Holding AG (Ptg. Ctf.) 5,530 6,923
--------
59,215
--------
THAILAND (1.1%)
Bangkok Bank PLC (Foreign) 299,000 2,055
Italian-Thai Development PLC
(Foreign) 50,000 113
Italian-Thai Development PLC
(Local) 171,100 386
Shinawatra Computer &
Communications PLC (Foreign) 459,200 3,173
Shinawatra Computer &
Communications PLC (Local) 77,400 535
Siam Pulp & Paper PLC (Foreign) 251,100 451
TPI Polene PLC (Foreign) 91,875 49
- - TPI Polene PLC Rights Exp. 7/18/97 91,875 13
Thai Farmers Bank PLC (Foreign) 507,000 2,153
Thai Military Bank PLC (Foreign) 1,106,400 1,239
Thai Plastic & Chemical PLC
(Foreign) 187,850 576
- - Thai Telephone &
Telecommunication PLC
(Foreign) 140,625 58
--------
10,801
--------
UNITED KINGDOM (15.2%)
Allied Domecq PLC 2,209,400 15,867
Anglian Water PLC 422,000 4,600
B.A.T. (British American
Tobacco) Industries PLC 1,500,000 13,419
BG PLC 6,850,000 25,081
BTR PLC 6,566,314 22,458
- - Centrica PLC 6,850,000 8,322
Coats Viyella PLC 1,074,500 2,253
Iceland Group PLC 312,750 432
MEPC PLC 2,391,000 19,569
Marley PLC 3,500,000 7,223
National Grid Group PLC 98,673 356
Severn Trent PLC 328,300 4,257
T & N PLC 2,058,500 4,899
Tarmac PLC 2,600,000 5,366
United Biscuits Holdings PLC 2,903,000 9,880
United Utilities PLC 265,000 2,902
Williams PLC 531,100 2,873
--------
149,757
--------
- -----------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $876,751) 964,047
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
FACE
AMOUNT
(000)
- -----------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.7%)
- -----------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.93%, 7/1/97
(COST $16,337) $16,337 16,337
- -----------------------------------------------------------------------
TOTAL INVESTMENTS (99.5%)
(COST $893,088) 980,384
- -----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.5%)
- -----------------------------------------------------------------------
Other Assets--Notes C and F 159,827
Liabilities--Note F (154,437)
--------
5,390
- -----------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------
Applicable to 32,686,915 outstanding
shares of beneficial interest
(unlimited authorization) $985,774
=======================================================================
NET ASSET VALUE PER SHARE $30.16
=======================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
GDR-Global Depository Receipt.
(Ptg Ctf.)-Participating Certificate.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
AT JUNE 30, 1997, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $835,407 $25.56
Undistributed Net
Investment Income--Note D 12,783 .39
Accumulated Net
Realized Gains--Note D 50,459 1.54
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 87,296 2.67
Foreign Currencies (171) --
- -----------------------------------------------------------------------
NET ASSETS $985,774 $30.16
=======================================================================
</TABLE>
9
<PAGE> 12
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Portfolio
during the reporting period, and details the operating expenses charged to the
Portfolio. These expenses directly reduce the amount of investment income
available to pay to shareholders as dividends. This Statement also shows any
Net Gain (Loss) realized on the sale of investments, and the increase or
decrease in the Unrealized Appreciation (Depreciation) on investments during
the period--these amounts include the effect of foreign currency movements on
the value of the Portfolio's securities. Currency gains (losses) on the
translation of other assets and liabilities, combined with the results of any
investments in forward currency contracts during the period, are shown
separately.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
INTERNATIONAL VALUE PORTFOLIO
SIX MONTHS ENDED JUNE 30, 1997
(000)
- --------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 14,883
Interest 501
---------
Total Income 15,384
----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 688
Performance Adjustment 92
The Vanguard Group--Note C
Management and Administrative 1,311
Marketing and Distribution 100
Custodian Fees 229
Auditing Fees 4
Shareholders' Reports 11
Annual Meeting and Proxy Costs 1
Trustees' Fees and Expenses 1
----------
Total Expenses 2,437
- --------------------------------------------------------------------------------------
NET INVESTMENT INCOME 12,947
- --------------------------------------------------------------------------------------
REALIZED NET GAIN (loss)
Investment Securities Sold 50,635
Foreign Currencies (29)
- --------------------------------------------------------------------------------------
REALIZED NET GAIN 50,606
- --------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 45,228
Foreign Currencies (238)
- --------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 44,990
- --------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $108,543
======================================================================================
</TABLE>
*Dividends are net of foreign withholding taxes of $1,805,000.
10
<PAGE> 13
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes
information that is detailed in the Statement of Operations. The amounts shown
as Distributions to shareholders from the Portfolio's net income and capital
gains may not match the amounts shown in the Operations section, because
distributions are determined on a tax basis and may be made in a period
different from the one in which the income was earned or the gains were
realized on the financial statements. The Capital Share Transactions section
shows the amount shareholders invested in the Portfolio, either by purchasing
shares or by reinvesting distributions, as well as the amounts redeemed. The
corresponding numbers of Shares Issued and Redeemed are shown at the end of the
Statement.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
INTERNATIONAL VALUE PORTFOLIO
-----------------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 1997 DEC. 31, 1996
(000) (000)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 12,947 $ 23,802
Realized Net Gain 50,606 184,635
Change in Unrealized Appreciation (Depreciation) 44,990 (115,067)
-----------------------------------------
Net Increase in Net Assets Resulting from Operations 108,543 93,370
-----------------------------------------
DISTRIBUTIONS
Net Investment Income -- (23,772)
Realized Capital Gain (22,239) (162,857)
-----------------------------------------
Total Distributions (22,239) (186,629)
-----------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 106,973 166,785
Issued in Lieu of Cash Distributions 21,247 176,984
Redeemed (145,304) (322,082)
-----------------------------------------
Net Increase (Decrease) from Capital Share Transactions (17,084) 21,687
- ------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 69,220 (71,572)
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 916,554 988,126
-----------------------------------------
End of Period $985,774 $916,554
==================================================================================================================
(1)Shares Issued (Redeemed)
Issued 3,899 5,237
Issued in Lieu of Cash Distributions 797 6,434
Redeemed (5,289) (10,158)
-----------------------------------------
Net Increase (Decrease) in Shares Outstanding (593) 1,513
==================================================================================================================
</TABLE>
11
<PAGE> 14
FINANCIAL HIGHLIGHTS
This table summarizes the Portfolio's investment results and distributions
to shareholders on a per-share basis. It also presents the Portfolio's Total
Return and shows net investment income and expenses as percentages of average
net assets. These data will help you assess: the variability of the Portfolio's
net income and total returns from year to year; the relative contributions of
net income and capital gains to the Portfolio's total return; how much it costs
to operate the Portfolio; and the extent to which the Portfolio tends to
distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Portfolio for one year. Finally, the table lists the Portfolio's Average
Commission Rate Paid, a disclosure required by the SEC beginning in 1996. This
rate is calculated by dividing total commissions paid on portfolio securities
by the total number of shares purchased and sold on which commissions were
charged.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL VALUE PORTFOLIO
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED --------------------------------------------------
THROUGHOUT EACH PERIOD JUNE 30, 1997 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $27.54 $31.11 $31.48 $31.04 $24.44 $27.78
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .390 .82 .750 .55 .50 .66
Net Realized and Unrealized Gain (Loss)
on Investments 2.925 2.20 2.185 1.08 6.91 (3.05)
--------------------------------------------------------------------
Total from Investment Operations 3.315 3.02 2.935 1.63 7.41 (2.39)
--------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.82) (.790) (.56) (.81) (.67)
--------------------------------------------------------------------
Distributions from Realized Capital Gains (.695) (5.77) (2.515) (.63) -- (.28)
--------------------------------------------------------------------
Total Distributions (.695) (6.59) (3.305) (1.19) (.81) (.95)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $30.16 $27.54 $31.11 $31.48 $31.04 $24.44
================================================================================================================================
TOTAL RETURN 12.37% 10.22% 9.65% 5.25% 30.49% -8.72%
================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $986 $917 $988 $1,053 $982 $678
Ratio of Total Expenses to
Average Net Assets 0.54%* 0.50% 0.47% 0.34% 0.40% 0.42%
Ratio of Net Investment Income to
Average Net Assets 2.85%* 2.50% 2.29% 1.71% 1.76% 2.48%
Portfolio Turnover Rate 40%* 82% 47% 40% 39% 51%
Average Commission Rate Paid $.0161 $.0582 N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
12
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
Vanguard International Value Portfolio (formerly Vanguard/Trustees' Equity
Fund-International Portfolio) is registered under the Investment Company Act of
1940 as a diversified open-end investment company, or mutual fund. The
Portfolio invests in securities of foreign issuers, which may subject it to
investment risks not normally associated with investing in securities of United
States corporations.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The Portfolio consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Foreign securities listed on an exchange are valued
at the latest quoted sales prices on the appropriate exchange as of the close
of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
the valuation date. Securities not listed on an exchange 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 p.m. Geneva time on the valuation date.
Realized gains (losses) and unrealized appreciation (depreciation) on
investment securities include the effects of changes in exchange rates since
the securities were purchased, combined with the effects of changes in security
prices. Fluctuations in the value of other assets and liabilities resulting
from changes in exchange rates are recorded as unrealized foreign currency
gains (losses) until the asset or liability is settled in cash, when they are
recorded as realized foreign currency gains (losses).
3. FEDERAL INCOME TAXES: The Portfolio 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.
4. REPURCHASE AGREEMENTS: The Portfolio, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. UBS International Investment London Ltd. provides investment advisory
services to the Portfolio for a fee calculated at an annual percentage rate of
average net assets. The basic advisory fee is subject to quarterly adjustments
based on performance relative to the Morgan Stanley Capital International
Europe, Australasia, Far East Index. For the six months ended June 30, 1997,
the advisory fee represented an effective annual basic rate of 0.15% of the
Portfolio's average net assets before an increase of $92,000 (an annual rate of
0.02%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Portfolio under methods approved by the board of trustees. At June 30,
1997, the Portfolio had contributed capital of $71,000 to Vanguard (included in
Other Assets), representing 0.4% of Vanguard's capitalization. The Portfolio's
trustees and officers are also directors and officers of Vanguard.
13
<PAGE> 16
D. During the six months ended June 30, 1997, the Portfolio purchased
$179,040,000 of investment securities and sold $221,658,000 of investment
securities, other than temporary cash investments.
During the six months ended June 30, 1997, the Portfolio realized net
foreign currency losses of $29,000, which decreased distributable net income
for tax purposes; accordingly, such losses have been reclassified from
accumulated net realized gains to undistributed net investment income.
E. At June 30, 1997, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $87,296,000, consisting
of unrealized gains of $143,099,000 on securities that had risen in value since
their purchase and $55,803,000 in unrealized losses on securities that had
fallen in value since their purchase.
The Portfolio had net unrealized foreign currency losses of $171,000
resulting from the translation of other assets and liabilities at June 30,
1997.
F. The market value of securities on loan to broker/dealers at June 30, 1997,
was $127,653,000, for which the Portfolio held cash collateral of $136,535,000.
14
<PAGE> 17
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer,
Inc.; Managing Director of Global Health Care Partners/DLJ Merchant
Banking Partners; Director of Sun Company, Inc. and Westinghouse
Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Ikon Business Solutions, Inc., Raytheon Co., Knight-Ridder, Inc.,
and Massachusetts Mutual Life Insurance Co.; Trustee Emerita of
Wellesley College.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
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., Procter & Gamble 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; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President,
Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President,
Institutional Investor Group.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGUARD GROUP LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
http://www.vanguard.com [email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C) 1997 Vanguard Marketing Corporation, Distributor
<PAGE> 18
[PHOTO]
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Growth and Income Portfolio
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-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 Portfolios
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
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard International Value Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q462-6/97
