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VANGUARD/TRUSTEES'
EQUITY FUND-
U.S. PORTFOLIO
Annual Report - December 31, 1997
[PHOTO]
[THE VANGUARD GROUP LOGO]
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OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 6,000 highly motivated
men and women--who form the cornerstone of our operations. As with any
cornerstone, we could not survive long--let alone prosper--without it. That's
why we chose this fiscal year's annual report to celebrate the spirit,
enthusiasm, and achievements of our crew. (We call those who work at Vanguard
crew members, not employees, because they operate as a team to accomplish our
mission of serving you, our clients.)
But while we prize the collective contributions of our crew, we also take
time to recognize the importance of the individual. Each calendar quarter, we
present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more than
300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving you
in the years ahead.
[PHOTO] [PHOTO]
John C. Bogle John J. Brennan
Chairman President
CONTENTS
<TABLE>
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS .......................... 1
THE MARKETS IN PERSPECTIVE ............................. 4
REPORT FROM THE ADVISER ................................ 6
PORTFOLIO PROFILE ...................................... 8
PERFORMANCE SUMMARY .................................... 10
FINANCIAL STATEMENTS ................................... 11
REPORT OF INDEPENDENT ACCOUNTANTS ...................... 20
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
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FELLOW SHAREHOLDER,
Vanguard/Trustees' Equity Fund-U.S. Portfolio provided a powerful return of
+29.5% in 1997 as the U.S. stock market rewarded investors with another
astonishing performance, capping a three-year run during which market averages
more than doubled.
Our Portfolio easily outpaced the average general equity mutual fund but
did not match its primary unmanaged benchmark, the Standard & Poor's 500
Composite Stock Price Index, which is dominated by large, blue chip stocks. The
table at right presents the twelve-month total return (capital change plus
reinvested dividends) of the Portfolio and its two comparative standards. Our
return is based on a decrease in net asset value from $37.08 per share on
December 31, 1996, to $36.82 per share on December 31, 1997, with the latter
figure adjusted for dividends of $0.43 per share paid from net investment income
and distributions totaling $9.91 per share paid from net realized capital gains.
In March, we expect to make a supplemental distribution of about $1.10 per share
from net realized capital gains.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
TOTAL RETURNS
YEAR ENDED
DECEMBER 31, 1997
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<S> <C>
Vanguard/Trustees' Equity Fund-
U.S. Portfolio +29.5%
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Average General Equity Fund +24.4%
- ----------------------------------------------------------
S&P 500 Index +33.4%
- ----------------------------------------------------------
</TABLE>
THE FINANCIAL MARKETS IN BRIEF
The historic bull market in U.S. stocks that began in August 1982 continued in
impressive fashion during 1997. The economy,employment, and corporate earnings
all grew solidly, and consumer confidence strengthened. Yet interest rates
declined and inflation decelerated. In short, the domestic economic news
couldn't have been better. The sole dark cloud to be seen--severe turmoil in
Asian economies and currencies--only briefly darkened Wall Street's mood. After
a sharp decline in October--the S&P 500 Index tumbled -7% on October 27
alone--stocks resumed their climb, and the Index produced a +33.4% return for
the year.
Long-term interest rates rose through the first quarter of 1997 on
expectations that the economy's robust growth would cause inflation to
accelerate. The yield on the benchmark 30-year U.S. Treasury bond peaked at
7.17% in mid-April, but then, as the inflation news got better, not worse,
turned downward, falling to 5.92% on December 31, down 72 basis points from the
6.64% level at which it began the year.
Short-term interest rates bottomed out in June and began an irregular climb
that was apparently due to sales of short-term Treasuries by foreign central
banks and investors. At year-end 1997, the yield on three-month U.S. Treasury
bills was 5.35%, up just a bit from 5.17% when the year began. The spread
between yields on three-month T-bills and 30-year Treasury bonds was a very slim
0.57 percentage point on December 31, 1997. Such a "flattening" of the yield
curve has more often than not been the precursor of a slowing of the economy.
1997 PERFORMANCE OVERVIEW
During 1997, your Portfolio rode the market's rising tide to a +29.5% return,
the second highest in our 18 years of operation, trailing only the +33.2% gain
in 1995. Our substantial
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margin of superiority over the average general equity fund was due largely to
the stock selections made by our adviser, Geewax, Terker & Company. In all
candor, however,another factor was that your Portfolio emphasizes
large-capitalization stocks, while many of our competitors emphasize smaller-cap
issues. In 1997, big was better, as the market's gains were strongest for the
largest companies, particularly for some of the huge, blue chip "growth" stocks
that dominate the S&P 500 Index. The S&P 500's return of +33.4% during 1997 was
a remarkable 11 percentage points above the +22.4% return of the Russell 2000
Index of small-cap stocks.
Ironically, our shortfall versus the Index was due partly to the same
large-cap bias. The median market cap of stocks in the Portfolio, while solidly
in the large-cap camp at $12.7 billion, is far smaller than the $34.1 billion
that is the midpoint of market caps for the 500 stocks in the Index. Our
performance versus the Index also was hurt by subpar stock selection in the
health-care and technology sectors and, to a small extent, by modest
underweighting versus the Index in financial-services and utility stocks, two of
the year's high-performing industry groups.
LONG-TERM PERFORMANCE OVERVIEW
The table below compares the Portfolio's record over the decade ended December
31, 1997, with those of the average general equity fund and the S&P 500 Index.
It also shows how much a hypothetical $10,000 investment made ten years earlier
would have grown in each case, assuming the reinvestment of all income dividends
and capital gains distributions. As the table shows, we have achieved only a
slim edge over the average general equity fund and have significantly lagged the
unmanaged Index.
While the Portfolio's record over the full decade is only average, it has
improved considerably during the tenure of our current adviser, Geewax, Terker &
Company. Since April 1, 1992, when Geewax, Terker began advising the Portfolio,
it has earned an average annual return of +17.9%, substantially outpacing our
real-world competitor--the average general equity fund--which returned +16.2%
annually. We acknowledge, however, that we have fallen a bit short of the
stellar +19.4% annual average return on the S&P 500 Index during this 5 3/4-year
period.
<TABLE>
<CAPTION>
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TOTAL RETURNS
10 YEARS ENDED DECEMBER 31, 1997
---------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- ------------------------------------------------------------------------
<S> <C> <C>
Vanguard/Trustees' Equity Fund-
U.S. Portfolio +15.6% $42,533
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Average General Equity Fund +15.5% $42,312
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S&P 500 Index +18.1% $52,567
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</TABLE>
Our goal, of course, is to outperform the Index as well as our peers. The
Index, as you know, is a tough competitor for all actively managed mutual funds
because it exists only on paper and bears none of the operating and transaction
costs that all mutual funds incur to one degree or another. In this respect,
your Portfolio has a significant cost advantage over competing mutual funds; its
annual expense ratio (operating costs as a percentage of average net assets) of
0.53% in 1997 was 0.91 percentage point below the 1.44% expense ratio of the
average general equity fund. We fully expect this advantage to persist, giving
your Portfolio a head start year after year, in our quest to provide superior
returns. In short, as mutual fund investors are learning, costs matter.
We stress that the long-term returns shown in the table were unusually
high, since they encompass a ten-year period without a single serious downturn
in the U.S. stock
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market. Although financial markets are inherently unpredictable, we believe it
is safe to say that returns over the next decade are almost sure to be lower
than those of theprevious one.
IN SUMMARY
Returns from the U.S. stock market over the past three calendar years--indeed
over the past 15 years--have no precedent in American financial history. While
as investors we have every reason to be grateful for the bounty of the financial
markets, we also have reason to regard the future with some caution. Lengthy
bull markets can breed complacency and cause investors to discount the risks
inherent in investing in stocks. Make no mistake--the market will from time to
time demonstrate these risks.
However, the greatest risk is failure to invest in the first place. We
believe that the stock market's risks can be partially offset by holding a
balanced portfolio that includes not only stock funds but also bond funds and
money market funds. Investors who maintain such portfolios allocated in
accordance with their time horizon, financial situation, and tolerance for
market volatility should be well prepared to "stay the course" toward their
investment objectives, no matter what the future has in store.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
January 12, 1998
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THE MARKETS IN PERSPECTIVE
Year Ended December 31, 1997
U.S. EQUITY MARKETS
Despite some year-end rockiness, 1997 again provided U.S. equity investors with
exceptional returns, as illustrated by the 33.4% advance of the S&P 500 Index.
Investors' mettle was tested several times, however, and most severely by the
upheavals that devastated a number of Asian markets in the fourth quarter.
Beginning in late October, the U.S. market grew increasingly volatile, a direct
result of investors' struggle to understand the nature and implications of
Asia's economic turmoil. By the end of the year, it appeared that a new
consensus was emerging, grounded in two basic beliefs: (1) that the collapse of
currencies in the Far East would help keep inflation tame in the United States
and (2) that slower growth in Asia would most likely lead to weaker corporate
profits over the next several years.
As the dust continued to settle, many investors sought havens traditional
in periods of high uncertainty: large-capitalization issues and particularly the
"defensive" sectors of the stock market, such as utilities, consumer staples,
and health care. The closing weeks of 1997 saw a broad advance in these "safe"
sectors, with utilities gaining 20.1% and consumer staples 10.4% in the last
quarter. By contrast, more economically sensitive sectors were thrashed in the
wake of the Asian crisis, with technology issues falling 12.3% and producer
durables down 9.0% over the three months. After posting strong results in the
third quarter, small-company stocks also suffered in the fourth, falling 3.3%.
<TABLE>
<CAPTION>
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AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1997
----------------------------------
1 YEAR 3 YEARS 5 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 33.4% 31.2% 20.3%
Russell 2000 Index 22.4 22.3 16.4
MSCI EAFE Index 2.1 6.6 11.7
- --------------------------------------------------------------------------------
FIXED INCOME
Lehman Aggregate Bond Index 9.7% 10.4% 7.5%
Lehman 10-Year Municipal Bond Index 9.2 10.2 7.6
Salomon Brothers Three-Month
U.S. Treasury Bill Index 5.3 5.4 4.7
- --------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.7% 2.5% 2.6%
- --------------------------------------------------------------------------------
</TABLE>
The year-end excitement did not detract from 1997's overall record as a
stellar year for U.S. stock investors. The best-performing sector was financial
services, which rose 46.9%. This sector benefited from a number of factors,
including the strength of the economy, the vibrant financial markets, and merger
activity. By contrast, the commodity-oriented materials & processing sector
posted a gain of "only" 12.3%--in itself more than a percentage point above the
long-term average return from common stocks. Small-cap stocks also fared well
overall, as illustrated by the 22.4% increase of the Russell 2000 Index.
Small-company technology issues were the most glaring exception, mustering a
gain in 1997 of just 1.1%.
U.S. FIXED-INCOME MARKETS
In a year characterized by exceptionally low inflation, interest rates fell,
providing investors with very attractive total returns. The Lehman Aggregate
Bond Index, for example,
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posted a total return of 9.7% for 1997, comprising 7.2% in income return and
2.5% in capital appreciation. The decline in rates can be attributed largely to
better-than-expected reports about the inflation rate. Early in the year,
economists were projecting a 2.9% increase in the Consumer Price Index (CPI)
during 1997. In March, the Federal Reserve grew sufficiently concerned to boost
interest rates by 0.25% in an effort to temper economic growth and thereby ward
off inflation. By year-end, however, the worries seemed to have been
unnecessary, as the actual CPI increase was a mere 1.7%--its smallest increase
since 1986.
The bond market gradually gathered strength during the year as investors
grew more confident that four seemingly strange bedfellows--strong economic
growth, reasonable inflation, low unemployment, and stable wage growth--would
continue to coexist peacefully. In the fourth quarter, the market also was
bolstered by the "flight to quality" among investors concerned about Asia's
problems. Overall, the longest-maturity issues benefited most from the decline
in interest rates. The yield on the 30-year U.S. Treasury bond closed the year
at 5.92%, compared with 6.64% on December 31, 1996. Falling rates flattened the
yield curve considerably: Only 0.57% separated the yield on Treasury bills from
that on the 30-year issue, down from a spread of 1.47% at the end of 1996.
The best-performing sector in 1997 was long-term Treasuries, as illustrated
by the 15.1% return of the Lehman Long U.S. Treasury Index. Investors in
lower-quality securities also fared well, with the Lehman High Yield Bond Index
generating a 12.8% gain. The strength of the economy, together with the lack of
inflationary pressure, created an ideal environment for junk bonds.
INTERNATIONAL EQUITY MARKETS
Arguably, investors' greatest disappointments were in international
markets--and, of course, Asian markets in particular. During the year, the
Morgan Stanley Capital International (MSCI) Pacific Index declined by 25.7% in
U.S. dollar terms; the index fell 20.7% in the fourth quarter alone. Among
individual markets, the fiscal year saw sharp declines (in U.S. dollar terms) in
Japan, down 23.6% (including a 19.7% drop in the fourth quarter); Thailand, down
76.8%; and Malaysia, down 68.1%. The general slump in Asian markets began in
midsummer with currency devaluations by a number of countries.
By contrast, the European markets continued to provide U.S. investors with
solid returns, although they, too, stumbled in late October and subsequently
recovered. The MSCI Europe Index posted a gain of 23.7% for the 12 months. The
robust character of the European markets reflected strong corporate earnings and
optimism that the European Monetary Union would provide a solid framework for
future fiscal responsibility and economic growth.
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REPORT FROM THE ADVISER
The second half of 1997 was not a stellar period for Vanguard/Trustees'
Equity Fund- U.S. Portfolio or for actively managed funds in general. The
Portfolio underperformed the S&P 500 Index by 1.5 percentage points during the
second half of the year, which put our full-year results nearly 4 percentage
points behind the S&P 500 Index and nearly 2 percentage points behind the 31.3%
return of the Wilshire 5000 Index, a measure of the entire U.S. stock market.
Once again, it was a year dominated by large-capitalization stocks, a
fact that accounted for most of our underperformance relative to the large-cap
indexes. Details regarding the Portfolio's performance are contained in the
Message To Shareholders, beginning on page 1.
Throughout the year, a little over half of the Portfolio was invested in
"value" stocks--those characterized by relatively low prices in relation to such
fundamentals as book value, earnings, and dividend payouts. The remainder of
assets was invested in "growth" stocks, which are characterized by low dividend
yields and high prices in relation to book value and past earnings.
In the growth segment of your Portfolio, we emphasized large stocks from
the technology sector and large multinational consumer-products stocks. Overall,
these choices performed well. Not owning telecommunications stocks and our
underweighting versus the market in the pharmaceutical group hurt performance
slightly. But overall, this large growth segment of the Portfolio contributed
nicely to your overall return.
The Portfolio's value stocks were predominantly mid-cap stocks, an
emphasis that dramatically hurt our performance in relation to the S&P 500
Index, which is dominated by large-cap stocks. Going forward, the Portfolio will
continue to be tilted toward large, high-quality growth stocks and mid- to
small-cap value stocks. We continue to believe that any earnings disappointments
will severely punish the growth segment of the market. Furthermore, the mid- and
small-cap arenas offer some stock choices that are compelling from a valuation
basis. This is especially true in the financial-services area.
In general, the stock market seems fully valued at current interest
rates. Accordingly, your Portfolio will continue to emphasize minimizing risk,
and will place zero emphasis on "great stories." We truly believe that to make
money in 1998, you have to avoid the torpedo stocks lurking in the marketplace.
Good news will not be rewarded as it has in the past, although bad news will be
punished severely. This is why we have positioned your Portfolio as we have.
Although owning stocks outside of the S&P 500 Index has not been a
rewarding strategy in recent years, we will continue to purchase stocks both
within and without the Index as valuations dictate. Currently, approximately 20%
of your Portfolio consists of stocks that are not among the S&P 500. We think
this ratio will remain steady going forward. Likewise, you can
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expect us to own stocks from just about all major industry sectors. No one
industry looks so attractive that we feel compelled to significantly overweight
it. Accordingly, the Portfolio is well diversified across economic sectors.
Individual stock selection, not sector selection, will make money in 1998.
The market's bias toward large-capitalization stocks in 1997 was not kind
to our Portfolio management strategy. Nevertheless, we remain confident that the
Portfolio, as situated, will perform better in relation to large-cap stocks
during 1998. Thank you for your continued patience and loyalty.
John J. Geewax, General Partner
Geewax, Terker & Company
January 13, 1998
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.
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PORTFOLIO PROFILE
Trustees' Equity Fund-U.S. Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
December 31, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on page 9.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
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U.S. PORTFOLIO S&P 500
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 386 500
Median Market Cap $12.7B $34.1B
Price/Earnings Ratio 22.3x 21.9x
Price/Book Ratio 4.1x 4.1x
Yield 1.1% 1.6%
Return on Equity 21.3% 20.4%
Earnings Growth Rate 20.5% 17.6%
Foreign Holdings 0.0% 1.9%
Turnover Rate 139% --
Expense Ratio 0.53% --
Cash Reserves 0.2% --
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</TABLE>
INVESTMENT FOCUS
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[GRAPHIC]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
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U.S. PORTFOLIO S&P 500
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<S> <C> <C>
R-Squared 0.93 1.00
Beta 0.97 1.00
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -------------------------------------------------------
<S> <C>
Intel Corp. 3.5%
General Electric Co. 3.1
Merck & Co., Inc. 2.1
Procter & Gamble Co. 2.1
Wal-Mart Stores, Inc. 2.0
Bristol-Myers Squibb Co. 1.9
Standard & Poor's Depositary Receipts 1.9
Morgan Stanley, Dean Witter,
Discover and Co. 1.8
Cisco Systems, Inc. 1.7
Exxon Corp. 1.7
- -------------------------------------------------------
Top Ten 21.8%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1997
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U.S. PORTFOLIO U.S. PORTFOLIO S&P 500
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<S> <C> <C> <C>
Auto & Transportation 4.7% 3.5% 3.5%
Consumer Discretionary 10.1 15.4 9.8
Consumer Staples 9.5 8.3 11.5
Financial Services 13.6 21.7 17.7
Health Care 13.3 9.3 11.4
Integrated Oils 8.1 3.4 7.2
Other Energy 2.8 3.3 1.4
Materials & Processing 8.4 6.9 5.8
Producer Durables 6.0 4.6 4.0
Technology 15.1 10.8 11.2
Utilities 6.5 5.9 10.6
Other 1.9 6.9 5.9
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned 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%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
EARNINGS GROWTH RATE. The average annual 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.
FOREIGN HOLDINGS. The percentage of a portfolio's net assets represented by
stocks or American Depositary Receipts of companies based outside 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.
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.
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 whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a portfolio's common stocks that come
from each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a portfolio has invested
in its ten largest holdings. (The average for stock mutual funds is about 30%.)
As this percentage rises, a portfolio's returns are likely to be more volatile,
because they are 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 distribute capital gains (which are taxable to investors).
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. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
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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: JANUARY 31, 1980-DECEMBER 31, 1997
- ------------------------------------------------------------
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
1997 28.2 1.3 29.5 33.4
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</TABLE>
See Financial Highlights table on page 18 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: DECEMBER 31, 1987-DECEMBER 31, 1997
- ------------------------------------------------------------
TRUSTEES' EQUITY AVERAGE GENERAL S&P 500
FUND-U.S. PORTFOLIO EQUITY FUND INDEX
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
1987 12 10000 10000 10000
1988 03 11395 10777 10569
1988 06 12238 11368 11273
1988 09 12289 11277 11312
1988 12 12464 11444 11661
1989 03 13777 12225 12488
1989 06 14268 13124 13590
1989 09 15622 14350 15045
1989 12 14611 14189 15356
1990 03 14073 13855 14894
1990 06 14597 14668 15831
1990 09 12306 12384 13655
1990 12 13394 13300 14879
1991 03 15184 15569 17040
1991 06 14884 15426 17001
1991 09 15600 16658 17910
1991 12 16953 18036 19412
1992 03 16514 17914 18922
1992 06 16461 17433 19282
1992 09 16662 18030 19890
1992 12 18047 19639 20891
1993 03 19344 20201 21803
1993 06 20147 20470 21910
1993 09 21612 21660 22476
1993 12 21159 22096 22997
1994 03 20926 21298 22125
1994 06 19838 20779 22218
1994 09 20823 22048 23304
1994 12 20331 21725 23300
1995 03 22030 23206 25569
1995 06 23953 25325 28010
1995 09 26322 27668 30236
1995 12 27082 28477 32056
1996 03 28435 29881 33777
1996 06 29379 31388 35293
1996 09 30350 32343 36384
1996 12 32849 34024 39416
1997 03 33245 33117 40473
1997 06 39001 38294 47539
1997 09 42014 42887 51099
1997 12 42533 42312 52567
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1997
--------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trustees' Equity Fund-U.S. Portfolio 29.48% 18.70% 15.58% $42,533
Average General Equity Fund 24.36 16.59 15.52 42,312
S&P 500 Index 33.36 20.27 18.05 52,567
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Trustees' Equity Fund-U.S. Portfolio 1/31/1980 29.48% 18.70% 12.91% 2.67% 15.58%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
FINANCIAL STATEMENTS
December 31, 1997
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)
- ------------------------------------------------------------
COMMON STOCKS (99.8%)
- ------------------------------------------------------------
AUTO & TRANSPORTATION (3.5%)
<S> <C> <C>
Burlington Northern Santa Fe Corp. 4,600 $ 427
Chrysler Corp. 7,800 274
ComAir Holdings, Inc. 10,550 254
Ford Motor Co. 25,300 1,232
General Motors Corp. 13,600 824
- - Gentex Corp. 7,700 207
Genuine Parts Co. 10,600 360
Harley-Davidson, Inc. 9,600 263
- - Heartland Express, Inc. 3,300 89
Illinois Central Corp. 4,600 157
- - Lear Corp. 13,100 622
- - Midwest Express Holdings, Inc. 2,300 89
- - Offshore Logistics, Inc. 4,800 103
Southwest Airlines Co. 24,400 601
- - Swift Transportation Co., Inc. 5,900 191
- - TBC Corp. 8,300 79
Titan International, Inc. 3,800 76
USFreightways Corp. 5,200 169
Werner Enterprises, Inc. 3,600 74
----------
6,091
----------
CONSUMER DISCRETIONARY (15.4%)
- - ADVO, Inc. 5,100 99
- - Alternative Resources Corp. 6,400 148
- - America Online, Inc. 1,200 107
- - Barnes & Noble, Inc. 5,400 180
- - Bed Bath & Beyond, Inc. 4,800 184
Bowne & Co., Inc. 2,000 80
- - Brinker International, Inc. 5,500 88
Callaway Golf Co. 8,600 246
- - Catalina Marketing Corp. 3,400 157
- - Cendant Corp. 45,392 1,560
Central Newspapers Inc. 3,800 281
Cintas Corp. 4,800 187
Cognizant Corp. 10,000 446
- - Consolidated Stores, Inc. 8,893 391
- - COREStaff, Inc. 5,400 143
- - Costco Cos., Inc. 9,800 437
Cracker Barrel Old Country
Stores, Inc. 4,000 133
- - Daisytek International Corp. 1,400 49
Del Laboratories, Inc. 2,600 104
The Walt Disney Co. 22,000 2,179
Dollar General Corp. 4,125 150
- - Dollar Tree Stores, Inc. 4,200 174
Family Dollar Stores, Inc. 9,200 270
- - Federated Department Stores 22,600 973
G & K Services, Inc. 4,300 180
Gannett Co., Inc. 14,300 884
- - Gartner Group, Inc. Class A 6,000 223
- - General Nutrition Cos., Inc. 5,100 173
Home Depot, Inc. 33,600 1,978
- - Host Marriott Corp. 4,100 80
Houghton Mifflin Co. 2,500 96
International Game Technology 6,900 174
Interpublic Group of Cos., Inc. 3,750 187
- - Jones Apparel Group, Inc. 3,700 159
King World Productions, Inc. 3,100 179
- - Kohls Corp. 3,800 259
Leggett & Platt, Inc. 5,900 247
Liz Claiborne, Inc. 3,500 146
Lowe's Cos., Inc. 5,500 262
- - MSC Industrial Direct Co., Inc.
Class A 2,300 97
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- ------------------------------------------------------------
MARKET
TRUSTEES' EQUITY FUND- VALUE*
U.S. PORTFOLIO SHARES (000)
- ------------------------------------------------------------
<S> <C> <C>
- - MacFrugal's Bargains
Close-Outs, Inc. 7,200 $ 296
Marriott International 10,900 755
Mattel, Inc. 6,575 245
Maytag Corp. 5,000 187
The McGraw-Hill Cos., Inc. 3,500 259
Media General, Inc. Class A 15,800 661
- - Men's Wearhouse, Inc. 2,800 97
- - Fred Meyer Inc. 2,900 105
Mikasa, Inc. 4,300 63
Morrison Health Care Inc. 4,200 84
- - NFO Worldwide, Inc. 4,400 92
- - Nautica Enterprises Inc. 9,300 216
New York Times Co. Class A 4,600 304
Newell Co. 16,300 693
- - Office Depot, Inc. 11,800 282
Omnicom Group Inc. 7,200 305
- - On Assignment, Inc. 5,400 139
- - Personnel Group of America, Inc. 4,900 162
Pittston Brink's Group 2,600 105
Premark International, Inc. 5,400 157
- - Promus Hotel Corp. 13,682 575
- - QuickResponse Services, Inc. 2,300 84
St. John Knits, Inc. 4,000 160
- - Signature Resorts, Inc. 3,400 74
- - Staples, Inc. 21,600 599
- - Stein Mart, Inc. 2,200 58
Stewart Enterprises, Inc. Class A 4,100 191
- - Sylvan Learning Systems, Inc. 5,600 218
TJX Cos., Inc. 11,700 402
- - Tetra Tech, Inc. 3,800 76
The Toro Co. 1,900 81
VF Corp. 7,500 345
Viad Corp. 8,600 166
- - Viking Office Products 10,300 225
Wal-Mart Stores, Inc. 89,200 3,518
The Warnaco Group, Inc. Class A 8,400 264
Whirlpool Corp. 5,300 291
- - World Color Press, Inc. 5,800 154
---------
26,778
---------
CONSUMER STAPLES (8.2%)
Albertson's, Inc. 3,600 171
CPC International, Inc. 3,900 420
Colgate-Palmolive Co. 28,500 2,095
Dean Foods Corp. 6,900 411
Flowers Industries, Inc. 8,300 171
General Mills, Inc. 8,000 573
Gillette Co. 7,400 743
Hershey Foods Corp. 2,800 173
- - The Kroger Co. 12,100 447
PepsiCo, Inc. 47,400 1,727
Procter & Gamble Co. 44,700 3,568
RJR Nabisco Holdings Corp. 5,300 199
Richfood Holdings, Inc. 10,200 288
Sara Lee Corp. 42,500 2,393
- - Smithfield Foods, Inc. 5,400 176
Sysco Corp. 9,600 437
Universal Corp. 7,200 296
Universal Foods Corp. 2,100 89
---------
14,377
---------
FINANCIAL SERVICES (21.6%)
AFLAC, Inc. 10,000 511
AMBAC Financial Group Inc. 10,000 460
American Bankers
Insurance Group 5,000 230
American General Corp. 25,900 1,400
- - AmeriCredit Corp. 2,700 75
AmSouth Bancorp 16,100 874
Associates First Capital Corp. 8,700 619
Avalon Properties, Inc. REIT 21,000 650
Banc One Corp. 19,000 1,032
Bankers Trust New York Corp. 7,500 843
H & R Block, Inc. 4,200 188
CCB Financial Corp. 2,000 215
- - Capital Factors Holdings, Inc. 700 13
Capital One Financial Corp. 3,800 206
Chase Manhattan Corp. 21,664 2,372
- - CheckFree Holdings Corp. 3,600 97
Cincinnati Financial Corp. 2,000 281
Commercial Net Lease
Realty REIT 36,000 643
Commonwealth Bancorp 9,500 189
Countrywide Credit Industries, Inc. 4,500 193
Developers Diversified
Realty Corp. REIT 4,200 161
Equifax, Inc. 19,900 705
Executive Risk, Inc. 2,600 181
Fannie Mae 18,600 1,061
Fidelity National Financial, Inc. 2,090 65
FINOVA Group, Inc. 5,700 283
First American Corp. (Tenn.) 4,000 199
- - FIserv, Inc. 6,900 339
Franklin Resources Corp. 6,350 552
Freddie Mac 38,600 1,619
Fremont General Corp. 3,900 214
Golden West Financial Corp. 2,900 284
Green Point Financial Corp. 4,100 297
The Hartford Financial
Services Group Inc. 7,300 683
Jack Henry & Associates 2,100 57
- - Investment Technology Group, Inc. 4,000 112
Investors Financial Services
Corp. Class A 1,000 46
Jefferies Group, Inc. 3,700 151
Jefferson-Pilot Corp. 7,200 561
MBIA, Inc. 6,700 448
MBNA Corp. 33,900 926
MGIC Investment Corp. 2,700 180
Marsh & McLennan Cos., Inc. 6,400 477
Mercury General Corp. 5,800 320
The Money Store 3,200 67
J.P. Morgan & Co., Inc. 11,500 1,298
Morgan Stanley, Dean Witter,
Discover and Co. 52,300 3,092
National Community Bancorp 10,100 351
NationsBank Corp. 25,800 1,569
Northern Trust Corp. 2,800 195
Norwest Corp. 25,200 973
Paychex, Inc. 10,175 515
- - Policy Management Systems Corp. 1,400 97
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- ------------------------------------------------------------
MARKET
TRUSTEES' EQUITY FUND- VALUE*
U.S. PORTFOLIO SHARES (000)
- ------------------------------------------------------------
<S> <C> <C>
T. Rowe Price 3,100 $ 195
Progressive Corp. of Ohio 2,300 276
RFS Hotel Investors, Inc. REIT 38,600 770
Regions Financial Corp. 17,300 730
Rollins Truck Leasing 21,200 379
Starwood Lodging Trust REIT 3,300 191
Summit Bancorp. 6,450 343
SunAmerica Inc. 4,300 184
- - SunGard Data Systems, Inc. 6,800 211
Torchmark Corp. 10,000 421
Transamerica Corp. 2,400 256
Transatlantic Holdings, Inc. 4,800 343
Travelers Group Inc. 22,050 1,188
UNUM Corp. 11,900 647
United Bankshares, Inc. 3,700 177
Wachovia Corp. 15,400 1,249
Washington Federal Inc. 11,100 349
Weeks Corp. REIT 16,100 515
Wilmington Trust Corp. 1,600 99
---------
37,692
---------
HEALTH CARE (9.2%)
Abbott Laboratories 15,900 1,042
- - Access Health Marketing, Inc. 2,500 72
- - Agouron Pharmaceuticals, Inc. 2,400 70
Arrow International, Inc. 2,200 81
Ballard Medical Products 10,700 259
Becton, Dickinson & Co. 8,300 415
- - Beverly Enterprises, Inc. 5,200 68
Bristol-Myers Squibb Co. 35,000 3,312
Cardinal Health, Inc. 4,300 323
- - Concentra Managed Care 4,700 158
- - Dura Pharmaceuticals, Inc. 3,200 147
Guidant Corp. 2,700 168
- - Gulf South Medical Supply, Inc. 7,700 287
- - Health Management Associates
Class A 5,400 136
- - Healthcare & Retirement Corp. 3,600 145
- - HealthCare COMPARE Corp. 5,100 261
- - Humana, Inc. 7,300 151
- - INCYTE Pharmaceuticals, Inc. 4,400 192
Johnson & Johnson 29,200 1,924
- - Lincare Holdings, Inc. 1,600 91
Merck & Co., Inc. 34,900 3,708
- - MiniMed, Inc. 300 12
Mylan Laboratories, Inc. 14,300 299
- - NovaCare, Inc. 6,800 89
Pfizer, Inc. 3,000 224
- - PharMerica, Inc. 2,366 25
- - Phymatrix Corp. 5,800 91
- - PhyCor, Inc. 7,000 189
- - Renal Care Group, Inc. 4,800 154
- - Res-Care, Inc. 6,000 171
- - Respironics, Inc. 6,500 145
- - Henry Schein, Inc. 2,300 80
- - Spine-Tech, Inc. 3,700 190
- - STERIS Corp. 3,900 188
Stryker Corp. 6,600 246
- - Sybron International Corp. 6,000 282
- - Tenet Healthcare Corp. 3,645 121
- - Thermo Cardiosystems Inc. 6,900 185
United Healthcare Corp. 5,100 253
- - Watson Pharmaceuticals, Inc. 5,500 178
---------
16,132
---------
INTEGRATED OILS (3.4%)
Atlantic Richfield Co. 3,300 264
Exxon Corp. 47,800 2,925
Mobil Corp. 17,700 1,278
Murphy Oil Corp. 2,900 157
Texaco Inc. 22,400 1,218
---------
5,842
---------
OTHER ENERGY (3.3%)
- - AES Corp. 10,000 466
Anadarko Petroleum Corp. 7,100 431
Apache Corp. 2,300 81
Burlington Resources, Inc. 10,100 453
- - CalEnergy Co. 12,500 359
Devon Energy Corp. 15,300 589
El Paso Natural Gas 4,437 295
- - HS Resources Inc. 9,700 134
- - Louis Dreyfus Natural Gas Corp. 11,500 215
- - Parker Drilling Co. 6,400 78
Pogo Producing Co. 5,300 156
- - SEACOR SMIT Inc. 4,300 259
- - Smith International, Inc. 4,000 246
- - Thermo Ecotek Corp. 5,300 97
Tidewater, Inc. 8,900 491
Tosco Corp. 12,000 454
Union Pacific Resources
Group, Inc. 7,100 172
Valero Energy Corp. 2,700 85
Vintage Petroleum, Inc. 21,800 414
- - Weatherford Enterra, Inc. 5,000 219
---------
5,694
---------
MATERIALS & PROCESSING (6.9%)
Aluminum Co. of America 15,100 1,063
Archer-Daniels-Midland Co. 33,000 716
- - Barnett, Inc. 8,000 176
Carpenter Technology Corp. 3,400 163
Crompton & Knowles Corp. 6,800 180
Cyprus Amax Minerals Co. 3,600 55
Dow Chemical Co. 5,300 538
E.I. du Pont de Nemours & Co. 19,500 1,171
Georgia-Pacific Corp. 7,100 431
- - Georgia-Pacific Corp.
(Timber Group) 7,100 161
Great Lakes Chemical Corp. 3,400 153
Hercules, Inc. 3,600 180
Illinois Tool Works, Inc. 11,000 661
- - Jacobs Engineering Group Inc. 3,300 84
Lubrizol Corp. 3,900 144
Martin Marietta Materials, Inc. 7,700 282
Masco Corp. 7,600 387
Morton International, Inc. 17,900 615
Nalco Chemical Co. 4,100 162
Precision Castparts Corp. 2,800 169
RPM Inc. (Ohio) 31,625 482
Rohm & Haas Co. 5,500 527
- - Sealed Air Corp. 4,300 266
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- ------------------------------------------------------------
MARKET
TRUSTEES' EQUITY FUND- VALUE*
U.S. PORTFOLIO SHARES (000)
- ------------------------------------------------------------
<S> <C> <C>
Sherwin-Williams Co. 17,900 $ 497
Sigma-Aldrich Corp. 18,700 739
- - Triangle Pacific Corp. 5,000 169
USX-U.S. Steel Group, Inc. 5,000 156
Unifi, Inc. 6,600 269
Union Carbide Corp. 12,900 554
U.S. Industries, Inc. 12,600 380
Valspar Corp. 7,800 249
Vulcan Materials Co. 2,000 204
---------
11,983
---------
PRODUCER DURABLES (4.6%)
- - American Power Conversion Corp. 5,300 125
Ametek Aerospace Products Inc. 7,100 192
Clayton Homes Inc. 21,500 387
Danaher Corp. 4,400 278
Diebold, Inc. 3,500 177
- - Dionex Corp. 1,700 84
Donaldson Co., Inc. 5,100 230
Dover Corp. 12,400 448
W.W. Grainger, Inc. 1,900 185
HON Industries, Inc. 3,100 182
Honeywell, Inc. 6,900 473
IDEX Corp. 4,800 167
Ingersoll-Rand Co. 8,600 348
- - KLA-Tencor Corp. 3,900 150
- - MICROS Systems, Inc. 3,300 149
Herman Miller, Inc. 5,400 293
Oakwood Homes Corp. 11,400 378
Pitney Bowes, Inc. 11,600 1,043
Pittway Corp. Class A 2,900 202
Robbins & Myers, Inc. 2,800 111
Roper Industries Inc. 5,600 158
- - Solectron Corp. 15,800 657
Sundstrand Corp. 5,800 292
Tektronix, Inc. 4,050 161
- - Thermedics, Inc. 8,700 142
- - Thermo Instrument Systems, Inc. 11,075 381
- - U.S. Office Products Co. 8,550 166
United Technologies Corp. 4,200 306
- - Waters Corp. 3,000 113
---------
7,978
---------
TECHNOLOGY (10.8%)
- - ADC Telecommunications, Inc. 9,600 401
- - Atmel Corp. 10,600 197
Avnet, Inc. 5,600 370
- - CDW Computer Centers, Inc. 1,000 52
- - Cable Design Technologies 2,100 82
- - Cisco Systems, Inc. 53,250 2,969
- - Coherent Communications
Systems Corp. 3,000 84
Compaq Computer Corp. 15,150 855
- - Computer Sciences Corp. 3,300 276
- - Compuware Corp. 3,800 122
- - Comverse Technology, Inc. 3,400 132
- - Dell Computer Corp. 2,100 176
Electronic Data Systems Corp. 6,600 290
Hewlett-Packard Co. 14,000 875
- - Hyperion Software Corp. 3,000 107
- - Integrated Process
Equipment Corp. 5,400 85
Intel Corp. 86,200 6,050
- - JDA Software Group, Inc. 5,000 172
Lucent Technologies, Inc. 8,300 663
- - Microchip Technology, Inc. 2,600 78
- - Microsoft Corp. 20,600 2,661
- - PeopleSoft, Inc. 13,900 539
Pioneer Standard Electronics Inc. 11,000 168
- - SCI Systems, Inc. 5,400 235
- - Sapient Corp. 1,500 92
- - Security Dynamics
Technologies, Inc. 2,400 86
- - Sykes Enterprises, Inc. 3,500 68
Symbol Technologies, Inc. 2,000 75
- - Tech Data Corp. 4,400 171
- - Tellabs, Inc. 7,000 369
- - ThermoQuest Corp. 10,000 181
- - Wonderware Corp. 4,400 62
---------
18,743
---------
UTILITIES (5.9%)
- - AirTouch Communications, Inc. 10,000 416
ALLTEL Corp. 9,600 394
American Water Works Co., Inc. 7,600 208
Bell Atlantic Corp. 24,700 2,248
BellSouth Corp. 16,200 912
Black Hills Corp. 2,900 102
CMS Energy Corp. 6,900 304
California Water Service Co. 3,400 201
Carolina Power & Light Co. 4,800 204
Central & South West Corp. 15,800 428
Century Telephone Enterprises, Inc. 3,900 194
Connecticut Energy Corp. 2,900 87
Dominion Resources, Inc. 9,200 392
Enova Corp. 6,800 184
GTE Corp. 17,200 899
MCN Corp. 5,100 206
NIPSCO Industries, Inc. 4,100 203
National Fuel Gas Co. 3,800 185
NICOR, Inc. 4,500 190
Northwestern Public Service Co. 4,300 99
PacifiCorp 15,700 429
Philadelphia Suburban Corp. 6,900 203
Pinnacle West Capital Corp. 5,200 220
Texas Utilities Co. 9,600 399
- - U.S. Cellular Corp. 5,000 155
- - U S WEST Media Group 18,200 526
UtiliCorp United, Inc. 5,500 213
---------
10,201
---------
OTHER (7.0%)
Brunswick Corp. 7,400 224
Carlisle Co., Inc. 6,200 265
- - Coltec Inc. 8,000 185
Dresser Industries, Inc. 11,200 470
General Electric Co. 74,400 5,459
ITT Industries, Inc. 13,700 430
Johnson Controls, Inc. 7,000 334
National Service Industries, Inc. 3,800 188
Raytheon Co. Class A 867 43
Standard & Poor's
Depositary Receipts 33,700 3,267
Teleflex Inc. 4,600 174
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
- ------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ------------------------------------------------------------
<S> <C> <C>
Textron, Inc. 6,900 $ 431
- - Thermo Electron Corp. 14,600 650
--------
12,120
--------
- ------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $149,623) 173,631
- ------------------------------------------------------------
FACE
AMOUNT
(000)
- ------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (3.4%)
- ------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.54%, 1/2/1998 $5,278 5,278
6.50%, 1/2/1998--Note F 701 701
- ------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $5,979) 5,979
- ------------------------------------------------------------
TOTAL INVESTMENTS (103.2%)
(COST $155,602) 179,610
- ------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-3.2%)
- ------------------------------------------------------------
Other Assets--Note C 654
Liabilities--Note F (6,244)
---------
(5,590)
- ------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------
Applicable to 4,726,178 outstanding
shares of beneficial interest
(unlimited authorization) $174,020
============================================================
NET ASSET VALUE PER SHARE $36.82
============================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------
AT DECEMBER 31, 1997, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------
<S> <C> <C>
Paid in Capital--Note D $144,718 $30.62
Overdistributed Net
Investment Income (11) --
Accumulated Net
Realized Gains--Note D 5,305 1.12
Unrealized Appreciation--Note E 24,008 5.08
- ----------------------------------------------------------
NET ASSETS $174,020 $36.82
==========================================================
</TABLE>
15
<PAGE> 18
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, 1997
(000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 2,330
Interest 190
----------
Total Income 2,520
----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 615
Performance Adjustment (274)
The Vanguard Group--Note C
Management and Administrative 390
Marketing and Distribution 29
Custodian Fees 39
Auditing Fees 8
Shareholders' Reports 13
Annual Meeting and Proxy Costs 2
----------
Total Expenses 822
- -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,698
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 41,201
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES (2,557)
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $40,342
=========================================================================================================================
</TABLE>
16
<PAGE> 19
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
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,
-------------------------------
1997 1996
(000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 1,698 $ 2,434
Realized Net Gain 41,201 27,920
Change in Unrealized Appreciation (Depreciation) (2,557) (2,268)
-------------------------------
Net Increase in Net Assets Resulting from Operations 40,342 28,086
-------------------------------
DISTRIBUTIONS
Net Investment Income (1,676) (2,491)
Realized Capital Gain (38,119) (25,106)
-------------------------------
Total Distributions (39,795) (27,597)
-------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 36,243 19,717
Issued in Lieu of Cash Distributions 37,563 26,307
Redeemed (58,021) (26,280)
-------------------------------
Net Increase from Capital Share Transactions 15,785 19,744
- -------------------------------------------------------------------------------------------------------------------------
Total Increase 16,332 20,233
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 157,688 137,455
-------------------------------
End of Year $174,020 $157,688
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 889 511
Issued in Lieu of Cash Distributions 1,046 713
Redeemed (1,461) (686)
-------------------------------
Net Increase in Shares Outstanding 474 538
=========================================================================================================================
</TABLE>
17
<PAGE> 20
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 Securities and Exchange
Commission 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 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $37.08 $37.01 $29.09 $30.65 $28.43
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .44 .65 .62 .34 .43
Net Realized and Unrealized Gain (Loss) on Investments 9.64 6.87 8.96 (1.53) 4.38
------------------------------------------------------------
Total from Investment Operations 10.08 7.52 9.58 (1.19) 4.81
------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.43) (.67) (.61) (.34) (.43)
Distributions from Realized Capital Gains (9.91) (6.78) (1.05) (.03) (2.16)
------------------------------------------------------------
Total Distributions (10.34) (7.45) (1.66) (.37) (2.59)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $36.82 $37.08 $37.01 $29.09 $30.65
==========================================================================================================================
TOTAL RETURN 29.48% 21.30% 33.21% -3.91% 17.24%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $174 $158 $137 $113 $119
Ratio of Total Expenses to Average Net Assets 0.53% 0.49% 0.56% 0.73% 0.90%
Ratio of Net Investment Income to Average Net Assets 1.09% 1.68% 1.79% 1.14% 1.43%
Portfolio Turnover Rate 139% 114% 77% 151% 139%
Average Commission Rate Paid $.0480 $.0534 N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
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 areaccounted 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. Geewax, Terker & Company provides investment advisory services to the
Portfolio for a 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, 1997, the
advisory fee represented an effective annual basic rate of 0.40% of the
Portfolio's average net assets before a decrease of $274,000 (an annual rate of
0.18%) 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, 1997, the Portfolio had contributed capital of $11,000 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, 1997, the Portfolio purchased
$214,657,000 of investment securities and sold $234,290,000 of investment
securities, other than temporary cash investments.
During the year ended December 31, 1997, the Portfolio realized $6,515,000
of net capital gains resulting from in-kind redemptions--in which shareholders
exchanged Portfolio shares for securities held by the Portfolio rather than for
cash. Because such gains are not taxable to the Portfolio, and are not
distributed to shareholders, they have been reclassified from accumulated net
realized gains to paid in capital.
E. At December 31, 1997, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $24,008,000,
consisting of unrealized gains of $26,856,000 on securities that had risen in
value since their purchase and $2,848,000 in unrealized losses on securities
that had fallen in value since their purchase.
F. The market value of securities on loan to brokers/dealers at December 31,
1997, was $667,000, for which the Portfolio held cash collateral of $701,000.
Cash collateral received is invested in repurchase agreements.
19
<PAGE> 22
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,
1997, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended and the financial
highlights for each of the five years in the period then ended, 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, 1997 by
correspondence with the custodian and the application of alternative auditing
procedures where securities purchased had not been settled, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 6, 1998
SPECIAL 1997 TAX INFORMATION (UNAUDITED) FOR
VANGUARD/TRUSTEES' EQUITY FUND-U.S. PORTFOLIO
This information for the fiscal year ended December 31, 1997, is included
pursuant to provisions of the Internal Revenue Code.
The Portfolio designates $22,800,000 as capital gain dividends (from
net long-term capital gains), of which $19,858,000 was distributed to
shareholders in December 1997 and $2,942,000 will be distributed in March
1998. Of the $22,800,000 capital gain dividends, the Portfolio designates
$10,602,000 as a 20% rate gain distribution.
For corporate shareholders, 17.1% of investment income (dividend
income plus short-term gains, if any) qualifies for the dividends-received
deduction.
20
<PAGE> 23
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 Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; 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 Telecommunications 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. and The Mead Corp.; Trustee of Vanderbilt University
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director 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
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group
"Standard & Poor's 500," "S&P 500," "Standard & Poor's," "S&P," and "500" are
trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company is the owner
of trademarks and copyrights relating to the Russell Indexes. "Wilshire 4500"
and "Wilshire 5000" are trademarks of Wilshire Associates.
<PAGE> 24
VANGUARD FAMILY OF FUNDS
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Portfolio
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Portfolio
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Portfolio
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State Tax-Free Funds
(CA, NJ, NY, OH, PA
Q250-12/1997
(C) 1998 Vanguard Marketing
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[THE VANGUARD GROUP LOGO]
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