<PAGE> 1
VANGUARD/TRUSTEES'
EQUITY FUND-
U.S. PORTFOLIO
Annual Report
December 31, 1996
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 (who is also shown, accepting a surrender, in a
detail from a nineteenth-century engraving); 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.
<PAGE> 2
[PHOTO]
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide a candid
assessment of the Fund's performance relative to an appropriate unmanaged market
benchmark and a peer group of mutual funds with similar investment policies. It
also reviews the principal factors contributing to--and detracting from--the
returns earned by the Fund. To help you evaluate your Fund's current-year
performance, the Message includes a discussion of the Fund's long-term
investment results, as well as a look ahead to the prospects for the coming
year. A recap of the financial markets, which had been included as part of the
Chairman's letter, now appears in The Markets In Perspective. This overview
covers the world's financial markets, putting the results of the Fund's strategy
in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS AN ADDITION TO OUR FUND REPORTS. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics. The
Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the adviser
to address--and we do our best to ensure that this Report is written in the same
simple and candid manner that characterizes all Vanguard communications.
Finally, each Adviser's Report will include an inset reminder of the adviser's
basic investment philosophy.
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
3
Report From
The Adviser
5
Performance
Summary
7
Portfolio
Profile
8
Financial
Statements
10
Report Of
Independent
Accountants
18
Trustees And
Officers
INSIDE BACK COVER
<PAGE> 3
[PHOTO]
JOHN C. BOGLE
[PHOTO]
JOHN J. BRENNAN
FELLOW SHAREHOLDER,
Amid the U.S. stock market's continued bull run during 1996,
Vanguard/Trustees' Equity Fund-U.S. Portfolio provided a total return of +21.3%.
Our Portfolio's return outdistanced that of the average general equity mutual
fund but trailed that of its primary benchmark.
The following table compares the Portfolio's twelve-month total return
(capital change plus reinvested dividends) with that of the unmanaged Standard &
Poor's 500 Composite Stock Price Index--dominated by large, blue chip
stocks--and the average general equity mutual fund. Our Portfolio's return is
based on an increase in net asset value from $37.01 per share on December 31,
1995, to $37.08 per share on December 31, 1996, with the latter figure adjusted
for dividends of $0.67 per share paid from net investment income and
distributions totaling $6.78 per share paid from net realized capital gains.
<TABLE>
<CAPTION>
- -------------------------------------------------
TOTAL RETURN
YEAR ENDED
DECEMBER 31, 1996
- -------------------------------------------------
<S> <C>
Vanguard/Trustees' Equity Fund-
U.S. Portfolio +21.3%
- -------------------------------------------------
Average General Equity Fund +19.5%
- -------------------------------------------------
S&P 500 Index +23.0%
- -------------------------------------------------
</TABLE>
1996 PERFORMANCE OVERVIEW
The U.S. stock market flourished in 1996 in a nearly ideal environment of
moderate economic growth, rising corporate profits, and continued low inflation.
Interest rates fluctuated substantially, rising early in the year along with
estimates of the economy's strength, then declining in the autumn as estimates
of economic growth abated--and with them, inflation anxieties. However, interest
rates closed the year with a sharp upward spike in December. The yield on the
benchmark 30-year U.S. Treasury bond finished the year at 6.6%--up about
six-tenths of a percentage point from 6.0% at the end of 1995--driving the price
of the long bond down by about -8%.
In contrast, the price trend for common stocks was virtually one-way: up.
The S&P 500 Index provided positive returns in all but two months (July and
December), as both growth stocks and value stocks turned in strong performances.
While returns on these two groups are quite similar over long periods, they
often diverge over shorter periods. In 1996, the S&P/BARRA Growth Index earned a
return of +24.0%, not far ahead of the S&P/BARRA Value Index, which provided a
return of +22.0%.
While our Portfolio's sector weightings closely paralleled those of the S&P
500 Index, subpar stock selections--particularly in the health-care and
technology sectors--impeded our relative performance. We should note that while
technology provided the market's biggest returns, many mutual funds did not
participate in that gain since the stocks of an elite group of large companies
dominated the performance of the technology sector. In fact, the three largest
tech stocks in the S&P 500 Index (Intel, Microsoft, and IBM) provided an
astounding +94% return versus a return of +5% for the technology sector of the
Russell 2000 Index of small-cap stocks.
This large-cap bias extended to many other market segments, to the
detriment of most equity funds, including ours. Indeed, the median
capitalization of the S&P 500 Index was about $25 billion at year end, while the
Fund's median market cap was $15
1
<PAGE> 4
billion. While this gap slowed our return relative to the Index in 1996, most
mutual funds invested more heavily than we did in stocks of smaller companies,
giving us an edge over our peers.
LONG-TERM PERFORMANCE OVERVIEW
As shown in the table below, our Portfolio's performance during the past decade
lagged that of the average competitor by a slim margin and that of the S&P 500
Index by a considerable margin. That said, the long-term record shown in the
table obscures the performance of our current adviser, Geewax, Terker & Company,
which began managing the Portfolio in April 1992. During the five-year period
ended December 31, 1996--which embraces the entire tenure of Geewax, Terker--our
average annual return of +14.1% bested the +13.5% return of our average
competitor (though it trailed the S&P 500 Index's +15.2% return).
Our goal, of course, is to outpace the S&P 500 Index, as well as our peers.
As you know, the Index is a tough competitor for all actively managed mutual
funds since it is a theoretical construct that bears none of the administrative,
operating, and investment management expenses that all mutual funds incur. In
this regard, our Portfolio's expense ratio provided a "wind at our backs"
relative to competitors. Our expenses amounted to 0.49% of average net assets in
1996, compared with an average of about 1.34% for our competitors.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
TOTAL RETURN
10 YEARS ENDED DECEMBER 31, 1996
--------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- -------------------------------------------------------------
<S> <C> <C>
Vanguard/Trustees' Equity Fund-
U.S. Portfolio +12.8% $33,402
- -------------------------------------------------------------
Average General Equity Fund +13.1% $34,194
- -------------------------------------------------------------
S&P 500 Index +15.3% $41,491
- -------------------------------------------------------------
</TABLE>
We should emphasize that future returns from the stock market may be lower
than those of the past decade, which was an unusually bountiful era for stocks.
Indeed, with stock prices at high levels based on several valuation measures,
there is ample reason to expect returns to be lower in the coming decade.
IN SUMMARY
Volatility risk is a measure of how much an investment may fluctuate in value
over a given period. But many investors have experienced only "upside
volatility." The U.S. stock market has been rising--with only a few brief
setbacks--for nearly 15 years.
Against this backdrop, it seems appropriate to step back and assess the
outlook for the financial markets. While no one can accurately predict what will
happen over the next decade--or even the next year--it seems unlikely that
stocks will enjoy a repeat of the exceptional returns of this remarkable era.
Indeed, there are sure to be some rough seas ahead. Nonetheless, we believe that
investors who maintain a balanced portfolio of stock funds, bond funds, and
money market funds will withstand the volatility of the financial markets and be
rewarded. "Stay the course" has proved wise counsel in the past, and we see no
reason why it should not continue to be in the future.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
Chairman of the Board President
January 13, 1997
2
<PAGE> 5
THE MARKETS IN PERSPECTIVE: YEAR ENDED DECEMBER 31, 1996
[PHOTO]
U.S. EQUITY MARKETS
The stock market in 1996 could not match its astonishing 37.6% return of the
previous year--but it made a good run, with the Standard & Poor's 500 Composite
Stock Price Index up by 23.0%. When the two years are considered cumulatively,
the S&P 500 Index has risen 69.2%. Not surprisingly, many of the factors that
drove the market higher in 1995 were still at work: Once again, steady economic
growth, low inflation, and solid earnings growth were powerful motivators.
The market's gains, however, were far from evenly distributed. Investors
strongly favored larger companies, such as those that dominate the S&P 500
Index. In fact, even within the Index, it was the largest companies that
prevailed: The 50 biggest (which account for roughly half the Index's market
value) gained 26.7% in 1996, compared with an increase of 23.0% for the entire
Index. Looking at the S&P 500 Index's performance by sector, technology stocks
were strongest, closing the year with a 42.5% gain. Financial stocks were a
close second, gaining 35.5%. Utilities, plagued early in the year by higher
interest rates and a rapidly changing competitive landscape, eked out a meager
1.8% return, the lowest within the Index.
With the largest companies performing so well, most smaller issues could
not keep pace. This was evidenced in the considerable difference between the
23.0% return of the S&P 500 Index and the 16.5% return of the Russell 2000 Index
of small stocks. Even for the smaller companies, there was a significant range
of performance among sectors. Energy stocks led the Russell 2000 Index with a
62.0% gain for the year. Here, rising prices, limited exposure to the cyclical
refining business, and a reduced number of competitors created a favorable
environment for the stocks. At the other end of the spectrum were health-care
stocks, which showed a loss of -3.3%.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS
- --------------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 23.0% 19.7% 15.2%
Russell 2000 Index 16.5 13.7 15.6
MSCI-EAFE Index 6.4 8.6 8.5
- --------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 3.6% 6.0% 7.0%
Lehman 10-Year Municipal
Bond Index 4.5 5.3 7.5
Salomon 90-Day U.S. Treasury Bills 5.3 5.1 4.4
- --------------------------------------------------------------------
Other
Consumer Price Index 3.3% 2.8% 2.8%
- --------------------------------------------------------------------
</TABLE>
U.S. FIXED-INCOME MARKETS
At year-end, the yield on the 30-year U.S. Treasury bond was 6.64%, noticeably
higher than its 5.95% level on December 31, 1995. The change in rates during
1996 reflects increased concern about the prospects for rising inflation, due to
indications of greater than expected strength in the economy.
When the year began, the general expectation was that modest economic
growth and benign inflation would continue, giving the Federal Reserve no reason
to boost inter-
3
<PAGE> 6
est rates. That complacency was shattered by an exceptionally strong February
jobs report, the first of what turned out to be a succession of signs that in
fact the economy was growing at a much faster--and potentially
inflation-inducing--pace. The bond market reacted swiftly to meet the perceived
risk: The 30-year Treasury bond's yield jumped from just below 6.0% at the end
of 1995 to 6.7% in late March. The next several months saw a consistent pattern
in which bond yields rose on the Friday of the jobs-report release only to fall
back by the middle of the month. Hindsight shows that most of the worry was
wasted: Inflation, as measured by the Consumer Price Index, remained near an
annualized rate of 3.3%. But increasing signs of growth in late November and
December reignited inflation concerns and caused bonds to finish the year on a
sour note.
Despite the numerous setbacks suffered by the bond market in 1996, indexes
were able to finish the year with positive total returns. Although the specter
of the Federal Reserve Board loomed large during the year, in fact the Board
acted only once, lowering the federal funds rate by a total of 0.25% in January.
Corporate bonds, mortgage-backed issues, and municipals were three
relatively bright spots in 1996. The strength in earnings that benefited stock
prices extended to the corporate bond sector as well. These bonds, especially
those of lower credit quality, performed well relative to Treasuries, supported
by general confidence in companies' ability to meet payments. The
stable-to-rising interest-rate environment throughout most of the year benefited
another large segment of the bond market--mortgage-backed securities--as the
threat of refinancings receded. Finally, municipal bonds outpaced their U.S.
Treasury counterparts. The sector was shielded to a certain extent from the
inflation wars of the Treasury market, as demand outstripped supply for much of
the year.
INTERNATIONAL EQUITY MARKETS
Investors who assess international markets by the often-cited EAFE
benchmark--the Morgan Stanley Capital International-Europe, Australasia, Far
East Index, with its 1996 return of 6.4%--could have overlooked a striking
regional disparity between the Euro-pean and Pacific markets. Europe's markets
gained 21.4% during the year, while their Pacific counterparts posted a decline
of -8.2%. Clearly, the outlook and environments that characterized the European
and Far East markets were quite different.
The poor returns in the Pacific region largely reflected ongoing concern
about the health of the Japanese economy. Growth in Japan has remained modest at
best for several years despite government efforts to stimulate the economy
through public works programs and tax incentives. In Europe, the picture was
dramatically different, with the region benefiting from a variety of factors.
Among the most important were (1) ongoing efforts to lower government deficits
consistent with the Maastricht Treaty guidelines, (2) improving economic growth,
and (3) a greater commitment by corporate executives to increasing "shareholder
value."
4
<PAGE> 7
REPORT FROM THE ADVISER
[PHOTO]
During the second half of 1996, the U.S. Portfolio of Vanguard/Trustees'
Equity Fund outperformed both the Standard & Poor's 500 Composite Stock Price
Index (by 0.1%) and the Wilshire 5000 Equity Index (by 1.9%). That performance
brought the Portfolio's total return for the 12 months ended December 31 to
21.3%, slightly ahead of our peers and the entire U.S. stock market as measured
by the Wilshire 5000 Index, but behind the S&P 500 Index, which is dominated by
large-capitalization stocks.
Since the Portfolio has a disproportionate amount of its assets invested
outside the large-cap segment of the U.S. equity market, 1996 served as a
reminder of the risks inherent in our investment style. We can do an adequate
job of picking good stocks and outperforming our peers, but when the largest 20%
of domestic equities contribute a disproportionate amount of the returns for the
year, as in 1996, an index dominated by large-cap stocks, such as the S&P 500
Index, is going to be hard to beat. Details regarding the Portfolio's
performance are provided in the Message To Shareholders, which begins on page 1.
In accordance with our investment style, we have the Portfolio invested in
both value stocks and growth stocks. Our switch at the beginning of the year to
large-cap technology and consumer companies helped the growth segment of the
Portfolio, as predictable earnings growth and financial quality were rewarded by
the marketplace during the year. We will continue during 1997 to emphasize large
companies with steady earnings growth for this segment of the Portfolio because
we believe that, with equities in general being, at the least, fairly valued,
companies that report earnings below the market's expectations will be severely
punished. However, there are also some very interesting mid- and small-cap
growth companies that we will continue to own. We feel that the faster growth
rates and cheaper valuations of the small-cap growth segment will make up for
the increased volatility risk we are taking on. Let me emphasize, however, that
we will not own small, speculative, growth stocks in this market environment. It
is just too risky.
The value component of our holdings did not fare as well as our growth
component in 1996, something that was true of the market overall. The
Portfolio's financial stocks did well during 1996, and we expect to continue to
own stocks from this sector (currently 12% of the Portfolio). We have added to
our auto and energy holdings as business fundamentals continue to improve in
these sectors. We have underweighted the electric-utility and telephone
industries, as these segments have not shown the same degree of improvement in
business conditions. During 1996, the telephone segment was by far the biggest
factor in our underperformance relative to the S&P 500 Index. As the earnings on
telephone stocks have not shown a marked turnaround, we will avoid most of this
industry for the time being. Even more than our growth component, our value
component has a mid-cap bias
INVESTMENT PHILOSOPHY
The Portfolio reflects a belief that superior long-term investment
results can be achieved by investing in a diversified group of
stocks, of which 50% to 70% are selected for their exceptional
"value" characteristics and the balance for their above-average
prospects for growth. In addition, stocks are analyzed before
selection to eliminate those that are illiquid, of dubious
financial strength, or subject to negative investor sentiment.
5
<PAGE> 8
(except for our holdings of automotive and international oil companies). In
assessing value stocks, we have also placed a greater emphasis on current
earnings and multiples than on asset values and book values because we believe
that the market will reward good earnings going forward.
Although 1996 was only an average year for the Portfolio in relation to its
comparative benchmarks, the second half of the year provided strong indications
that the Portfolio as now situated will be rewarded by the marketplace.
High-quality companies with steady earnings growth are seeing their
price/earnings multiples expand at the expense of more speculative growth
stocks; value companies with lower P/E multiples that have some earnings
visibility are doing better than their lower-multiple brethren with
disappointing earnings. The U.S. Portfolio is situated to take advantage of
these trends and will be so for the foreseeable future. Likewise, we will
continue to emphasize individual stocks, irrespective of the industry they
represent. We will also continue to own attractively valued stocks both within
and outside the S&P 500 Index.
We remain optimistic about the Portfolio's holdings and appreciate your
continued loyalty.
John J. Geewax
Geewax, Terker & Company
January 13, 1997
6
<PAGE> 9
PERFORMANCE SUMMARY: TRUSTEES' EQUITY FUND-U.S. PORTFOLIO
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>
TOTAL INVESTMENT RETURNS: 1/31/80-12/31/96
- -----------------------------------------------------
TRUSTEES' EQUITY FUND-U.S. PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------------------
<S> <C> <C> <C> <C>
1980 11.2% 6.2% 17.4% 24.6%
1981 3.6 6.7 10.3 -4.9
1982 17.4 7.4 24.8 21.5
1983 23.9 5.2 29.1 22.5
1984 -7.4 4.5 -2.9 6.3
1985 15.4 5.1 20.5 31.8
1986 11.3 4.0 15.3 18.7
1987 -0.3 2.0 1.7 5.3
1988 20.1 4.5 24.6 16.6
1989 13.8% 3.4% 17.2% 31.7%
1990 -12.4 4.1 -8.3 -3.1
1991 23.1 3.5 26.6 30.5
1992 3.9 2.6 6.5 7.6
1993 15.6 1.6 17.2 10.1
1994 -5.0 1.1 -3.9 1.3
1995 30.9 2.3 33.2 37.6
1996 19.3 2.0 21.3 23.0
- -----------------------------------------------------
</TABLE>
See Financial Highlights table on page 16 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: 12/31/86-12/31/96
- -------------------------------------------------------------------------------
GEEWAX, TERKER
BECOMES ADVISER
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE 10 YR GRAPH - PORTFOLIO/ BENCHMARK - VANGUARD/TRUSTEES' EQUITY FUND U.S. PORTFOLIO
TRUSTEES'-U.S. PORTFOLIO LIPPER GENERAL EQUITY STANDARD & POOR'S 500 INDEX
<S> <C> <C> <C>
1986 12 10000 10000 10000
1987 03 12292 11922 12136
1987 06 12930 12109 12745
1987 09 13860 12722 13587
1987 12 10168 10050 10526
1988 03 11587 10868 11126
1988 06 12444 11465 11867
1988 09 12495 11417 11907
1988 12 12674 11501 12275
1989 03 14009 12329 13145
1989 06 14508 13236 14305
1989 09 15885 14528 15837
1989 12 14857 14260 16164
1990 03 14310 13972 15678
1990 06 14843 14793 16664
1990 09 12513 12537 14374
1990 12 13620 13366 15662
1991 03 15440 15701 17937
1991 06 15134 15557 17896
1991 09 15863 16864 18853
1991 12 17238 18126 20434
1992 03 16792 18065 19918
1992 06 16738 17581 20296
1992 09 16942 18254 20936
1992 12 18351 19737 21991
1993 03 19670 20372 22951
1993 06 20486 20644 23063
1993 09 21976 21928 23659
1993 12 21515 22206 24207
1994 03 21278 21478 23289
1994 06 20171 20956 23387
1994 09 21174 22321 24530
1994 12 20673 21833 24527
1995 03 22401 23403 26915
1995 06 24356 25541 29484
1995 09 26765 28010 31827
1995 12 27538 28619 33743
1996 03 28914 30133 35554
1996 06 29873 31656 37150
1996 09 30861 32744 38298
1996 12 33402 34194 41491
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
-------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TRUSTEES' EQUITY FUND-
U.S. PORTFOLIO 21.30% 14.14% 12.82% $33,402
AVERAGE GENERAL EQUITY FUND 19.48 13.54 13.08 34,194
S&P 500 INDEX 22.96 15.22 15.29 41,491
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
- -------------------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Trustees' Equity Fund-
U.S. Portfolio 1/31/80 21.30% 14.14% 10.10% 2.72% 12.82%
- -------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 10
PORTFOLIO PROFILE: TRUSTEES' EQUITY FUND-U.S. PORTFOLIO
DECEMBER 31, 1996
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on page 9.
PORTFOLIO CHARACTERISTICS
- --------------------------------------------
U.S. PORTFOLIO S&P 500
- --------------------------------------------
Number of Stocks 288 500
Median Market Cap $15.4B $24.5B
Price/Earnings Ratio 19.1x 19.6x
Price/Book Ratio 3.8x 3.4x
Yield 1.5% 2.0%
Return on Equity 21.3% 19.6%
Earnings Growth Rate 18.5% 13.5%
Foreign Holdings 0.1% 3.7%
Turnover Rate 114% --
Expense Ratio 0.49% --
Cash Reserves 0.9% --
VOLATILITY MEASURES
- --------------------------------------------
U.S. PORTFOLIO S&P 500
- --------------------------------------------
R-Squared 0.87 1.00
Beta 1.03 1.00
INVESTMENT FOCUS
- --------------------------------------------
[FIGURE]
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------
Philip Morris Cos., Inc. 3.2%
Exxon Corp. 2.9
Merck & Co., Inc. 2.5
Intel Corp. 2.1
Microsoft Corp. 2.1
International Business Machines Corp. 2.0
American Home Products Corp. 1.7
PepsiCo, Inc. 1.7
E.I. du Pont de Nemours & Co. 1.6
GTE Corp. 1.3
- --------------------------------------------
Top Ten 21.1%
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- --------------------------------------------------------------------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996
---------------------------------------------
U.S. PORTFOLIO U.S. PORTFOLIO S&P 500
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Materials ............................ 7.5% 6.2% 6.2%
Capital Goods & Construction ............... 7.2 7.1 8.4
Consumer Cyclical ......................... 8.7 12.8 12.1
Consumer Staples ........................... 9.1 10.0 12.4
Energy ..................................... 11.7 11.0 9.7
Financial .................................. 10.7 12.0 15.0
Health Care ................................ 11.4 13.4 10.4
Technology ................................. 11.4 17.7 12.1
Transport & Services ....................... 3.2 1.5 1.5
Utilities .................................. 16.9 6.5 9.9
Miscellaneous .............................. 2.2 1.8 2.3
- --------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
[PHOTO]
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has a beta of 1.00, so a portfolio with a beta of
1.20 would have seen its share price rise or fall by 12% when the overall market
rose or fell by 10%.
EARNINGS GROWTH RATE. The annual average rate of growth in earnings over the
past five years for the stocks now in a portfolio.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors. The average expense ratio for a stock mutual fund was
1.34% in 1995.
FOREIGN HOLDINGS. The percentage of a portfolio's investments represented by
stocks or American Depository Receipts of companies based outside of the United
States.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of the stocks in a portfolio. Half the stocks in the portfolio have
higher market capitalizations and half lower.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a portfolio, the weighted average P/E of the
stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's
future growth.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a portfolio, the weighted average return
on equity for the companies represented in the portfolio.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
SECTOR DIVERSIFICATION. The percentage of a portfolio's common stocks invested
in each of the major industry classifications that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of a portfolio's total net assets in its
ten largest investments (the average for stock mutual funds is about 25%). As
this percentage rises, a portfolio's returns are likely to be more volatile,
since its return is more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year.
Portfolios with high turnover rates incur higher transaction costs and are more
likely to realize and distribute capital gains (which are taxable to investors).
The average turnover rate for stock mutual funds is about 80%.
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based on
income earned over the past 30 days and is annualized, or projected forward for
the coming year.
9
<PAGE> 12
[PHOTO]
FINANCIAL STATEMENTS
DECEMBER 31, 1996
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, preferred stocks,
bonds, etc.) and by industry sector. 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. 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>
- ---------------------------------------------------------
MARKET
TRUSTEES' EQUITY FUND- VALUE*
U.S. PORTFOLIO SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (99.1%)
BASIC MATERIALS (6.2%)
AK Steel Holding Corp. 6,600 $ 261
Air Products & Chemicals, Inc. 12,600 871
AMCOL International Corp. 18,400 285
BetzDearborn Inc. 2,000 117
W.H. Brady Class A 14,400 346
- - Cytec Industries, Inc. 2,000 81
Dow Chemical Co. 1,900 149
E.I. du Pont de Nemours & Co. 26,300 2,482
M.A. Hanna Co. 2,100 46
International Paper Co. 7,200 291
Lubrizol Corp. 11,700 363
Morton International, Inc. 20,100 819
Nucor Corp. 6,300 321
Oregon Steel Mills, Inc. 32,500 544
PPG Industries, Inc. 5,000 281
Praxair, Inc. 8,300 383
RPM Inc. (Ohio) 30,100 508
Rohm & Haas Co. 5,000 408
Sigma Aldrich Corp. 4,500 281
Terra Industries, Inc. 10,600 156
Vulcan Materials Co. 7,700 469
Weyerhaeuser Co. 5,400 256
-------
9,718
-------
CAPITAL GOODS & CONSTRUCTION (7.0%)
Baldor Electric Co. 7,000 173
The Boeing Co. 289 31
Caterpillar, Inc. 13,400 1,008
Cooper Industries, Inc. 13,000 548
Danaher Corp. 9,300 434
Deere & Co. 13,000 528
Dover Corp. 17,200 864
Emerson Electric Co. 3,400 329
Fluor Corp. 11,300 709
W.W. Grainger, Inc. 10,200 818
Harsco Corp. 2,200 151
Illinois Tool Works, Inc. 7,300 583
JLG Industries, Inc. 11,400 183
Lafarge Corp. 12,300 247
Pall Corp. 12,600 321
Robbins & Myers, Inc. 3,000 75
Rockwell International Corp. 6,900 420
Safety-Kleen Corp. 16,100 264
Sherwin-Williams Co. 6,200 347
- - Thermo Instrument Systems, Inc. 7,000 232
Trinity Industries, Inc. 10,600 397
Tyco International Ltd. 17,606 931
- - UCAR International, Inc. 10,900 410
- - U.S. Filter Corp. 8,700 276
United Technologies Corp. 4,000 264
WMX Technologies Inc. 4,500 147
Wheelabrator Technologies, Inc. 24,800 403
-------
11,093
-------
CONSUMER CYCLICAL (12.7%)
- - Bed Bath & Beyond, Inc. 6,900 167
- - Blyth Industries, Inc. 5,800 265
- - CUC International, Inc. 23,500 558
Callaway Golf Co. 12,500 359
Cash America International Inc. 3,539 30
Central Newspapers Inc. 5,500 242
Chrysler Corp. 33,200 1,096
- - Consolidated Stores, Inc. 4,875 157
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
- - Cox Communications Class A 3,000 $ 69
Dana Corp. 7,900 258
The Walt Disney Co. 28,900 2,012
Dollar General Corp. 15,700 502
- - Emmis Broadcasting Corp. Class A 4,500 144
Ford Motor Co. 42,300 1,348
Gannett Co., Inc. 2,800 210
The Gap, Inc. 11,000 331
General Motors Corp. 31,400 1,750
- - GTech Holdings Corp. 2,400 77
Harley-Davidson, Inc. 1,500 70
Home Depot, Inc. 16,700 837
International Game Technology 10,600 193
Kellwood Co. 16,700 334
Knight-Ridder, Inc. 5,000 191
- - Kohls Corp. 3,300 129
Lancaster Colony Corp. 1,200 55
- - Lear Corp. 11,500 393
Leggett & Platt, Inc. 10,300 357
- - Lone Star Steakhouse & Saloon 18,700 500
Lowe's Cos., Inc. 11,200 398
Mattel, Inc. 20,275 563
McDonald's Corp. 17,400 787
The McGraw-Hill Cos. 17,700 817
Newell Co. 7,600 240
- - Office Depot, Inc. 5,300 94
Pep Boys (Manny, Moe & Jack) 7,500 231
- - Price/Costco Inc. 11,800 296
- - Promus Hotel Corp. 7,550 224
- - Staples, Inc. 24,300 437
Talbots Inc. 12,200 349
- - Tommy Hilfiger Corp. 1,400 67
- - Toys R Us, Inc. 13,300 399
Tribune Co. 5,400 426
- - Viking Office Products 6,500 172
Wal-Mart Stores, Inc. 61,100 1,398
Warnaco Group 8,800 261
Wendy's International, Inc. 13,600 279
-------
20,072
-------
CONSUMER STAPLES (9.9%)
American Stores Co. 14,100 577
Avon Products, Inc. 2,100 120
Bemis Co., Inc. 13,000 479
CPC International, Inc. 6,000 465
Clarcor Inc. 10,000 221
Colgate-Palmolive Co. 13,100 1,209
Gillette Co. 4,400 342
H.J. Heinz Co. 18,800 672
PepsiCo, Inc. 89,000 2,603
Philip Morris Cos., Inc. 45,000 5,068
Procter & Gamble Co. 12,500 1,344
The Quaker Oats Co. 6,500 248
RJR Nabisco Holdings Corp. 5,500 187
- - Safeway, Inc. 14,300 611
Sara Lee Corp. 10,800 402
Sysco Corp. 22,400 731
UST Inc. 4,500 146
Wrigley, (Wm.) Jr. Co. 2,800 157
-------
15,582
-------
ENERGY (10.9%)
Amoco Corp. 20,500 1,650
Baker Hughes, Inc. 5,000 172
Chevron Corp. 19,500 1,266
Dresser Industries, Inc. 3,000 93
El Paso Natural Gas 437 22
Enron Corp. 14,300 617
Enron Oil & Gas Co. 6,100 154
Exxon Corp. 47,000 4,606
- - Falcon Drilling Co., Inc. 2,000 78
- - Global Marine, Inc. 15,700 324
Halliburton Co. 2,000 121
Holly Corp. 1,000 27
Lomak Petroleum, Inc. 5,000 86
Mapco Inc. 6,000 204
Mobil Corp. 13,100 1,601
- - Noble Drilling Corp. 2,800 56
Phillips Petroleum Co. 22,300 987
- - Reading & Bates Corp. 14,250 378
Texaco Inc. 19,400 1,904
Tidewater, Inc. 9,300 421
Tosco Corp. 14,800 1,171
TransOcean Offshore Inc. 3,700 232
Union Texas Petroleum
Holdings, Inc. 17,900 401
Vintage Petroleum, Inc. 6,000 207
- - Western Atlas Inc. 5,900 418
-------
17,196
-------
FINANCIAL (11.9%)
AFLAC, Inc. 4,500 192
AMBAC, Inc. 500 33
American Express Co. 13,000 735
Bank of Boston Corp. 3,600 231
BankAmerica Corp. 5,700 569
Barnett Banks, Inc. 16,500 679
Capital One Financial Corp. 6,900 248
Charter One Financial 2,000 84
Chase Manhattan Corp. 4,464 398
The Chubb Corp. 9,000 484
Citicorp 19,200 1,978
Countrywide Credit Industries, Inc. 4,500 129
Dean Witter Discover & Co. 9,800 649
Federal Home Loan Mortgage Corp. 4,000 441
Federal National Mortgage Assn. 19,800 738
Finova Group, Inc. 1,500 96
First American Corp. (Tenn.) 5,100 294
First USA Inc. 36,800 1,274
Franklin Resources Corp. 1,100 75
KeyCorp 22,900 1,156
MGIC Investment Corp. 5,500 418
Marsh & McLennan Cos., Inc. 4,300 447
Marshall & Ilsley Corp. 4,300 149
Mercury Finance Co. 45,500 557
The Money Store 1,500 41
NationsBank Corp. 11,800 1,153
Norwest Corp. 4,000 174
Phoenix Duff & Phelps Corp. 22,400 160
Charles Schwab Corp. 22,300 714
Simon DeBartolo Group, Inc. 1,700 53
- - Southern Pacific Funding Corp. 4,000 125
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
TRUSTEES' EQUITY FUND- VALUE*
U.S. PORTFOLIO SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
State Street Boston Corp. 2,800 $ 181
Student Loan Marketing Assn. 11,500 1,071
Summit Bancorp 16,000 700
SunAmerica Inc. 33,000 1,464
Travelers Group Inc. 12,600 572
United Asset Management Corp. 10,300 274
-------
18,736
-------
HEALTH CARE (13.3%)
Abbott Laboratories 29,600 1,502
American Home Products Corp. 45,000 2,638
- - Amgen, Inc. 14,650 797
- - Boston Scientific Corp. 4,000 240
Columbia/HCA Healthcare Corp. 39,400 1,605
Dentsply International 11,200 532
- - Healthcare & Retirement Corp. 4,300 123
- - HealthCare Compare Corp. 1,900 81
- - HEALTHSOUTH Corp. 15,200 587
Hillenbrand Industries, Inc. 6,500 236
- - Lincare Holdings Inc. 15,800 648
Medtronic, Inc. 7,200 490
Merck & Co., Inc. 49,400 3,915
Omnicare, Inc. 3,200 103
- - OrNda Healthcorp 2,700 79
- - Oxford Health Plan 24,000 1,404
- - Pacificare Health Systems Inc.
Class A 200 16
Pfizer, Inc. 24,300 2,014
- - Physician Computer Network, Inc. 10,000 84
- - Quorum Health Group, Inc. 15,000 442
- - St. Jude Medical, Inc. 3,800 162
Schering-Plough Corp. 14,000 906
- - Steris Corp. 2,800 122
Stryker Corp. 2,500 75
- - Sybron International Corp. 2,800 92
- - Thermedics, Inc. 7,500 136
United Healthcare Corp. 18,700 841
United States Surgical Corp. 9,700 382
- - Vencor, Inc. 7,400 234
- - Watson Pharmaceuticals, Inc. 10,500 471
-------
20,957
-------
TECHNOLOGY (17.5%)
- - Adaptec, Inc. 8,000 320
- - Altera Corp. 4,700 341
- - American Power Conversion Corp. 7,000 191
- - Amphenol Corp. 7,500 167
- - Analog Devices, Inc. 10,400 352
- - Applied Materials, Inc. 10,000 359
- - Ascend Communications, Inc. 2,500 155
- - Atmel Corp. 11,400 378
Automatic Data Processing, Inc. 17,700 759
- - C-Cube Microsystems, Inc. 2,100 77
- - Cabletron Systems, Inc. 7,500 249
- - Cadence Design Systems, Inc. 6,750 268
- - Checkpoint Systems, Inc. 19,900 492
- - Cisco Systems, Inc. 24,700 1,571
- - Cognos Inc. 500 14
- - Compaq Computer Corp. 19,700 1,463
Computer Associates
International, Inc. 15,125 752
- - EMC Corp. 24,600 815
- - ESS Technology, Inc. 1,000 28
Electronic Data Systems Corp. 22,000 951
First Data Corp. 14,900 544
Hewlett-Packard Co. 28,700 1,442
Intel Corp. 25,400 3,324
International Business
Machines Corp. 20,400 3,080
- - Legato Systems, Inc. 3,900 126
- - Lexmark International Group, Inc.
Class A 16,100 445
- - McAfee Associates, Inc. 4,500 196
Micron Technology Inc. 14,200 414
- - Microsoft Corp. 39,600 3,272
Molex, Inc. 8,200 320
- - Oracle Corp. 24,500 1,020
- - Parametric Technology Corp. 6,200 319
Paychex, Inc. 3,150 162
- - PictureTel Corp. 5,700 147
Pitney Bowes, Inc. 11,100 605
- - Premisys Communications, Inc. 700 24
- - SCI Systems, Inc. 9,200 411
- - SGS-Thomson Microelectronics
NV ADR 1,100 77
- - Solectron Corp. 9,400 502
- - Tellabs, Inc. 11,400 429
Texas Instruments, Inc. 4,800 306
- - 3 Com Corp. 4,000 293
- - U.S. Robotics Corp. 5,500 396
- - Western Digital Corp. 600 34
-------
27,590
-------
TRANSPORT & SERVICES (1.5%)
CSX Corp. 17,500 739
ComAir Holdings, Inc. 10,100 242
- - Newport News Shipbuilding Inc. 940 14
Southwest Airlines Co. 10,200 226
- - UAL Corp. 1,600 100
Union Pacific Corp. 15,300 920
- - Wisconsin Central
Transportation Corp. 4,000 158
-------
2,399
-------
UTILITIES (6.4%)
AT&T Corp. 16,700 726
American Electric Power Co., Inc. 12,900 531
American Water Works Co., Inc. 8,200 169
Aquila Gas Pipeline Corp. 2,800 45
Baltimore Gas & Electric Co. 7,600 203
Bell Atlantic Corp. 20,600 1,334
Brooklyn Union Gas Co. 3,200 96
DQE Inc. 3,000 87
FPL Group, Inc. 16,700 768
GTE Corp. 45,700 2,079
Ipalco Enterprises, Inc. 9,600 262
National Fuel & Gas Co. 4,100 169
NYNEX Corp. 7,200 347
PP&L Resources Inc. 21,400 492
SBC Communications Inc. 20,800 1,076
Sprint Corp. 9,500 379
TECO Energy, Inc. 13,400 323
Unicom Corp. 21,300 578
UtiliCorp United, Inc. 3,000 81
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
Washington Water Power Co. 9,000 $ 168
Wisconsin Energy Corp. 8,900 239
-------
10,152
-------
MISCELLANEOUS (1.8%)
- - Access Health Marketing, Inc. 1,000 45
Alco Standard Corp. 2,700 139
AlliedSignal Inc. 4,300 288
American Financial Group, Inc. 18,900 714
- - APAC Teleservices, Inc. 300 11
Loews Corp. 3,500 330
Mark IV Industries, Inc. 7,400 167
McKesson Corp. 1,700 95
Minnesota Mining &
Manufacturing Co. 6,500 539
Service Corp. International 7,700 216
Tenneco, Inc. 4,700 212
-------
2,756
-------
</TABLE>
- ---------------------------------------------------------
TOTAL COMMON STOCKS
(COST $129,686) 156,251
- ---------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ---------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.4%)
- ---------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.39%, 1/2/97
(COST $2,267) $2,267 2,267
- ---------------------------------------------------------
TOTAL INVESTMENTS (100.5%)
(COST $131,953) 158,518
- ---------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.5%)
- ---------------------------------------------------------
Other Assets--Notes C and F 1,273
Liabilities--Note F (2,103)
-------
(830)
- ---------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------
Applicable to 4,252,316 outstanding
shares of beneficial interest
(unlimited authorization) $157,688
=========================================================
NET ASSET VALUE PER SHARE $37.08
=========================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------
<S> <C> <C>
Paid in Capital $122,418 $28.79
Overdistributed Net
Investment Income (33) (.01)
Accumulated Net Realized Gains 8,738 2.05
Unrealized Appreciation--Note E 26,565 6.25
- ---------------------------------------------------------
NET ASSETS $157,688 $37.08
=========================================================
</TABLE>
13
<PAGE> 16
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Trustees' Equity Fund-U.S. Portfolio
YEAR ENDED DECEMBER 31, 1996
(000)
- -----------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 2,991
Interest 155
---------
Total Income 3,146
---------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 511
Performance Adjustment (192)
The Vanguard Group--Note C
Management and Administrative 305
Marketing and Distribution 25
Taxes (other than income taxes) 11
Custodian Fees 30
Auditing Fees 8
Shareholders' Reports 11
Annual Meeting and Proxy Costs 2
Trustees' Fees and Expenses 1
---------
Total Expenses 712
- -----------------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,434
- -----------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 27,920
- -----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES (2,268)
- -----------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 28,086
=========================================================================================
</TABLE>
14
<PAGE> 17
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>
- ------------------------------------------------------------------------------------------
Trustees' Equity Fund-
U.S. Portfolio
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------
1996 1995
(000) (000)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 2,434 $ 2,230
Realized Net Gain 27,920 11,499
Change in Unrealized Appreciation (Depreciation) (2,268) 21,505
---------------------------
Net Increase in Net Assets Resulting from Operations 28,086 35,234
---------------------------
DISTRIBUTIONS
Net Investment Income (2,491) (2,220)
Realized Capital Gain (25,106) (3,834)
---------------------------
Total Distributions (27,597) (6,054)
---------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 19,717 22,182
Issued in Lieu of Cash Distributions 26,307 5,704
Redeemed (26,280) (32,389)
---------------------------
Net Increase (Decrease) from Capital Share Transactions 19,744 (4,503)
- ------------------------------------------------------------------------------------------
Total Increase 20,233 24,677
- ------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 137,455 112,778
---------------------------
End of Year $157,688 $137,455
==========================================================================================
(1)Shares Issued (Redeemed)
Issued 511 646
Issued in Lieu of Cash Distributions 713 160
Redeemed (686) (968)
---------------------------
Net Increase (Decrease) in Shares Outstanding 538 (162)
==========================================================================================
</TABLE>
15
<PAGE> 18
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>
- ------------------------------------------------------------------------------------------------------------------------
Trustees' Equity Fund-U.S. Portfolio
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $37.01 $29.09 $30.65 $28.43 $28.20
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .65 .62 .34 .43 .68
Net Realized and Unrealized Gain (Loss) on Investments 6.87 8.96 (1.53) 4.38 1.08
------------------------------------------------------------
Total from Investment Operations 7.52 9.58 (1.19) 4.81 1.76
DISTRIBUTIONS
Dividends from Net Investment Income (.67) (.61) (.34) (.43) (.67)
Distributions from Realized Capital Gains (6.78) (1.05) (.03) (2.16) (.86)
------------------------------------------------------------
Total Distributions (7.45) (1.66) (.37) (2.59) (1.53)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $37.08 $37.01 $29.09 $30.65 $28.43
========================================================================================================================
TOTAL RETURN 21.30% 33.21% -3.91% 17.24% 6.45%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $158 $137 $113 $119 $68
Ratio of Total Expenses to Average Net Assets 0.49% 0.56% 0.73% 0.90% 0.65%
Ratio of Net Investment Income to Average Net Assets 1.68% 1.79% 1.14% 1.43% 2.33%
Portfolio Turnover Rate 114% 77% 151% 139% 209%
Average Commission Rate Paid $.0534 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
Vanguard/Trustees' Equity Fund-U.S. Portfolio is registered under the Investment
Company Act of 1940 as a diversified open-end investment company, or mutual
fund.
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: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. 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. 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.
3. 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.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
5. 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. Under a contract that expires March 31, 1998, the Portfolio pays Geewax,
Terker & Company an investment advisory fee calculated at an annual percentage
rate of average net assets. The basic fee is subject to quarterly adjustments
based on performance relative to the S&P 500 Index. For the year ended December
31, 1996, the advisory fee represented an effective annual basic rate of 0.35%
of the Portfolio's average net assets before a decrease of $192,000 (0.13%)
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 December
31, 1996, the Portfolio had contributed capital of $14,000 to Vanguard (included
in Other Assets), representing 0.1% of Vanguard's capitalization. The
Portfolio's trustees and officers are also directors and officers of Vanguard.
D. During the year ended December 31, 1996, the Portfolio purchased $162,016,000
of investment securities and sold $162,613,000 of investment securities, other
than temporary cash investments.
E. At December 31, 1996, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $26,565,000,
consisting of unrealized gains of $28,638,000 on securities that had risen in
value since their purchase and $2,073,000 in unrealized losses on securities
that had fallen in value since their purchase.
F. The market value of securities on loan to broker/dealers at December 31,
1996, was $779,000, for which the Portfolio held cash collateral of $830,000.
17
<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Trustees of
Vanguard/Trustees' Equity Fund
In our opinion, the accompanying statement 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
Vanguard/Trustees Equity Fund-U.S. Portfolio (the "Portfolio") at December 31,
1996, and the results of its operations, the changes in its net assets and the
financial highlights for each of the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Portfolio'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 at December 31, 1996 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1997
18
<PAGE> 21
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
VANGUARD/TRUSTEES' EQUITY FUND-U.S. PORTFOLIO
This information for the fiscal year ended December 31, 1996, is included
pursuant to provisions of the Internal Revenue Code.
The Portfolio designates $23,476,000 as capital gain dividends (from net
long-term capital gains), of which $18,226,000 was distributed to shareholders
in December 1996 and $5,250,000 will be distributed in March 1997.
For corporate shareholders, 43.2% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
19
<PAGE> 22
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.;
Director of Sun Company, Inc. and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Co., Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and
Massa-chusetts Mutual Life Insurance Co.
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.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[VANGUARD 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
[email protected] http://www.vanguard.com
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) 1996 Vanguard Marketing Corporation, Distributor
<PAGE> 23
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 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/Trustees' Equity-International
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)
Q250-12/96
