<PAGE> 1
VANGUARD/TRUSTEES'
EQUITY FUND-
U.S. PORTFOLIO
Semiannual Report - June 30, 1998
[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 7,000 highly
motivated men and women--who form the cornerstone of our operations. We could
not survive long--let alone prosper--without them. That's why we chose this
fiscal year's fund reports 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
SENIOR CHAIRMAN CHAIRMAN & CEO
<TABLE>
<CAPTION>
CONTENTS
<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
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
Vanguard/Trustees' Equity Fund-U.S. Portfolio, benefiting from a continuance of
the unprecedented bull market in U.S. stocks, earned +16.4% during the first
half of 1998.
Our total return (capital change plus reinvested dividends) for the
half-year substan- tially exceeded that of the average general equity fund but
trailed our unmanaged benchmark--the Standard & Poor's 500 Composite Stock Price
Index.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
JUNE 30, 1998
- -------------------------------------------------------------------
<S> <C>
Vanguard/Trustees' Equity Fund-
U.S. Portfolio +16.4%
- -------------------------------------------------------------------
Average General Equity Fund +11.8%
- -------------------------------------------------------------------
S&P 500 Index +17.7%
- -------------------------------------------------------------------
</TABLE>
Our return is based on an increase in net asset value from $36.82 per
share on December 31, 1997, to $41.51 per share on June 30, 1998, with the
latter figure adjusted for dividends of $0.16 per share paid from net investment
income and a distribution of $1.14 per share paid from net realized capital
gains.
THE PERIOD IN REVIEW
The U.S. economy grew vigorously, inflation was subdued, and interest rates
declined during the first half of 1998. Strong consumer spending, triggered by
high employment and rising wages, was the economy's propellant and was more than
enough to offset the negative effects of Asia's severe economic slump.
Asia's troubles, which cut the prices of many products imported to
the United States, were partly responsible for the nation's benign
inflation--consumer prices rose 1.1% for the six months and 1.7% for the twelve
months ended June 30. Low inflation soothed the bond market, where bond prices
rose and interest rates declined: The yield on the 30-year U.S. Treasury bond
was 5.63% on June 30, down 29 basis points (0.29 percentage point) from its
yield at the start of the year. The Lehman Brothers Aggregate Bond Index, a
proxy for the taxable bond market, earned +3.9% during the half-year.
Stock prices wobbled at times--the S&P 500 Index dropped -1.9% on
April 27 alone--but the S&P 500 rose in every month except May. The market's
advance was led by a relatively narrow segment of blue-chip growth stocks.
Indeed, more than half of the S&P 500 Index's remarkable +17.7% return during
the period was accounted for by fewer than 20 very large-capitalization stocks.
The growth component of the S&P 500 Index returned +23.1%, nearly double the
+12.1% earned by its value stocks.
The U.S. Portfolio's +16.4% return during the half-year outdistanced
the average equity fund by a wide margin of 4.6 percentage points. The primary
reason for our outperformance versus competitors was the portfolio's emphasis on
stocks of the biggest companies--precisely the segment of the market that was
strongest during the period. The portfolio's median market capitalization as of
June 30 was $54.9 billion, above even the $50 billion median market cap of the
S&P 500 Index.
Despite its emphasis on large-cap stocks, the portfolio trailed the
S&P 500 Index by 1.3 percentage points. Two factors account for most of the
shortfall. First, although the portfolio invested in both growth and value
stocks, its holdings were tilted slightly toward value stocks during the period,
which turned out to be a slight handicap given the market's bias toward
large-cap growth stocks. The second factor is that the portfolio--
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like all mutual funds--incurs transaction and operating costs that do not
detract from the returns of the Index, which exists only on paper. And while our
annualized expense ratio is relatively low--0.57% of assets during the period,
compared with 1.45% charged by the average general equity fund--the Index, as a
theoretical construct, has no expenses.
IN SUMMARY
We admit to having been surprised--though quite gratified--by the strength of
the stock market's continuing advance during the first half of 1998. We note
that the return over the past twelve months for the S&P 500 Index (+30.2%) was
nearly THREE TIMES the long-term average annual return from stocks.
Though we claim no predictive powers, we feel safe in saying that
such outsized returns can't continue indefinitely. And we reiterate our
long-standing recommendation that investors hold balanced, broadly diversified
portfolios--consisting of bond and money market funds in addition to stock
funds--appropriate to their unique financial situations, goals, and
temperaments. Such portfolios are time-tested vehicles for reaping the rewards
of financial markets as well as for "staying the course" toward your long-term
objectives.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
July 23, 1998
Notice to Shareholders
REORGANIZATION INTO VANGUARD GROWTH AND INCOME PORTFOLIO
At a special meeting on July 31, 1998, shareholders of Vanguard/Trustees'
Equity Fund-U.S. Portfolio approved its reorganization into Vanguard Growth
and Income Portfolio, which has very similar investment objectives and
policies and offers the advantage of economies of scale. In anticipation of
the reorganization, the Board of Trustees appointed Franklin Portfolio
Associates to replace Geewax, Terker & Company as investment adviser to the
U.S. Portfolio as of May 21, 1998. Franklin Portfolio Associates has been
the adviser to Vanguard Growth and Income Portfolio since its inception in
1986. The reorganization was approved by 87.75% of the shares voted, with
2,595,395 shares in favor, 313,536 against, and 48,751 abstaining. The
reorganization took place on August 13, 1998, with Trustees' Equity
Fund-U.S. Portfolio shareholders receiving 1.3560339 shares of Vanguard
Growth and Income Portfolio for each share of the U.S. Portfolio.
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RESULTS OF JUNE 30 PROXY VOTING
At a special meeting on June 30, 1998, shareholders of Vanguard/Trustees'
Equity Fund-U.S. Portfolio approved four proposals. These proposals became
moot upon the July 31 approval by shareholders of the reorganization of U.S.
Portfolio into Growth and Income Portfolio. However, for the record, the
June 30 proposals and voting results were:
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. This change will reduce
the amount of state taxes paid each year by some Vanguard funds. The
portfolio would not have realized any tax savings as a result of the change,
but it would have benefited from the efficiency of being organized the same
way as other Vanguard funds. Approved by 97.43% of the shares voted, as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------
FOR AGAINST ABSTAIN
----------------------------------------------------
<S> <C> <C>
2,691,713 26,415 44,669
----------------------------------------------------
</TABLE>
2A. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. This change
would have permitted the portfolio to participate in Vanguard's interfund
lending program. Approved by 94.62% of shares voted, as follows:
<TABLE>
<CAPTION>
---------------------------------------------------
FOR AGAINST ABSTAIN
---------------------------------------------------
<S> <C> <C>
2,614,052 100,684 48,061
---------------------------------------------------
</TABLE>
2B. INVESTMENT LIMITATION CHANGES--BORROWING MONEY AND PLEDGING ASSETS. This
change sets standard limits of 15% of net assets on the amount of money
Vanguard funds can borrow from all sources and on the amount of assets that
can be pledged to secure any loans. Approved by 92.67% of the shares voted,
as follows:
<TABLE>
<CAPTION>
---------------------------------------------------
FOR AGAINST ABSTAIN
---------------------------------------------------
<S> <C> <C>
2,560,176 135,945 66,676
---------------------------------------------------
</TABLE>
2D. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN UNSEASONED COMPANIES. This
change would have eliminated the portfolio's policy of not investing more
than 5% of net assets in securities issued by companies that have fewer than
three years of operating history, taking into account any predecessors. The
policy was unduly restrictive. Approved by 90.45% of the shares voted, as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------
FOR AGAINST ABSTAIN
---------------------------------------------------
<S> <C> <C>
2,498,883 190,755 73,159
---------------------------------------------------
</TABLE>
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THE MARKETS IN PERSPECTIVE
Six Months Ended June 30, 1998
Blue skies predominated for U.S. financial markets during the first six months
of 1998, and even the occasional clouds had silver linings. The bond market
provided solid returns during the half-year, while the stock market's
performance was extraordinarily strong.
After expanding at a 5.4% annual pace during the first quarter, the
U.S. economy kept steaming along through June, fueled by powerful increases in
household spending. Consumers had reason to be upbeat: plentiful jobs
(unemployment fell to 4.3% of the workforce in May); rising wages (personal
income in May was 5.9% higher than in May 1997); and tame inflation (consumer
prices in June were up only 1.7% from a year before).
The economic push provided by consumers more than compensated for the
drag caused by Asia's severe economic problems. Weakening currencies and
business slowdowns in Asia cut into U.S. exports and lowered the cost of Asian
imports, causing the U.S. trade deficit to hit record levels. Ominously, Asia's
problems appear to be more serious and enduring than many economists expected.
Yet for Americans this "Asian contagion" has a bright side: It serves as an
escape valve for the inflationary pressures that ordinarily would be expected to
build up with the U.S. economy humming along at high speed.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998
-----------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 17.7% 30.2% 23.1%
Russell 2000 Index 4.9 16.5 16.0
MSCI EAFE Index 16.1 6.4 10.3
- ---------------------------------------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 3.9 10.5 6.9
Lehman 10-Year Municipal Bond Index 2.6 8.5 6.6
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.6 5.3 4.9
- ---------------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.1% 1.7% 2.5%
- ---------------------------------------------------------------------------------------
</TABLE>
*Annualized.
U.S. EQUITY MARKETS
The mixture of robust economic growth and anemic inflation was a tonic for the
U.S. stock market. Although prices generally rose, there were striking
disparities in returns between large-capitalization and small-cap stocks and
between growth and value stocks. The large-cap-dominated S&P 500 earned 17.7%
during the six months, nearly double the 9.4% return on the rest of the market
(as measured by the Wilshire 4500 Index) and more than triple the 4.9% return on
the small-cap Russell 2000 Index. Within the S&P 500 Index, growth stocks were
up 23.1%, while value stocks rose 12.1%.
A decline in interest rates contributed to the stock market's rise,
as falling rates on bonds tend to make equities more attractive and to boost the
price investors will pay for each dollar of a stock's earnings or dividends. Yet
growth in earnings and dividends--the long-term underpinning of stock
prices--was unimpressive during the first half of 1998.
Corporate earnings estimates were reduced in June, the tenth
consecutive month in which securities analysts have cut their earnings
estimates, according to I/B/E/S International, a financial research group.
Earnings by the S&P 500 companies were expected to
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rise by only about 2% for the first half of 1998, I/B/E/S reported. With gains
in prices outstripping increases in earnings and dividends, stock valuations are
at or near all-time highs, an indication that investors expect ideal conditions
to continue.
Technology stocks were the best-performing sector during the first
half of 1998, generating a 32.7% return. Three other sectors of the stock
market--health care, consumer discretionary stocks such as retailers, and auto &
transportation--each provided returns of about 25% for the six months. Companies
involved in energy, chemicals, or other commodity-based businesses were
generally laggards. Prices of many commodities have declined as Asia's economic
funk cuts demand for energy and other industrial materials in the face of
plentiful supplies.
U.S. FIXED-INCOME MARKETS
Investors in fixed-income securities enjoyed a moderate rise in the market value
of their holdings because of declining interest rates. This price appreciation,
added to coupon interest income, resulted in solid total returns. The 3.9% total
return of the Lehman Aggregate Bond Index during the half-year brought its
return for the 12 months ended June 30 to 10.5%, or a very generous 8.8% after
adjustment for inflation.
Yields on 10-year and 30-year U.S. Treasury bonds declined by 29
basis points (0.29 percentage point) to 5.45% and 5.63%, respectively, during
the first half of 1998, with most of the drop occurring during the second
quarter. The yield on 3-month Treasury bills declined 36 basis points to 4.99%.
Mild inflation--consumer prices were up 1.1% for the half-year--enabled rates to
decline despite the economy's strong growth.
Yields on corporate and municipal bonds did not decline as far as
those on Treasury securities because of a large increase in the supply of new
bonds issued by companies and municipalities taking advantage of lower rates to
refinance old debt. Similarly, mortgage-backed securities did not match
Treasuries' performance because of expectations that large numbers of homeowners
would pay off old, higher-coupon mortgage loans and refinance with new,
lower-rate loans.
INTERNATIONAL EQUITY MARKETS
Stock markets in Europe soared while those in Asia and most emerging economies
suffered steep declines in U.S.-dollar terms. The 16.1% overall return from
international markets, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East Index, masked the divergence between Europe and
other regions.
Europe's markets were up 27.1% when measured in local currencies and
26.5% in U.S. dollars, after adjusting for a slight overall rise in the dollar's
value. Stocks benefited from an upswing in most European economies, from signs
that corporate managers are increasingly focused on shareholder value, and from
optimism concerning next year's planned adoption of the euro as a single
European currency.
In the Pacific, which is dominated by Japan's stock market, stocks
were buffeted by several problems: slowing growth in economic activity;
continued instability in currencies; political upheavals; and widespread worries
about corporate and banking insolvencies. On balance, the region's stocks fell
6.0% in U.S.-dollar terms. Japanese stocks were down 2.5%, but losses were more
severe in the region's smaller markets.
Emerging markets were, on balance, down sharply. Asian stock markets
were hurt by continued weakness in the currency values of several countries, by
Japan's recession, and by a growing conviction that the region's economic
troubles are far from transitory. Venezuela and Mexico, both key oil-producing
nations, were hard hit by falling oil prices.
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<PAGE> 8
REPORT FROM THE ADVISER
We are pleased to report upon and discuss the U.S. Portfolio and the general
investment climate. Our stewardship of the portfolio will be brief, assuming
that shareholders approve its reorganization into Vanguard Growth and Income
Portfolio. Your portfolio has earned competitive returns recently, and our goal
will be to enhance those results through the consistent investment approach and
economies available in the Growth and Income Portfolio, which we also manage.
The funds have similar investment objectives and strategies.
The superior performance of large-capitalization stocks continued
during the half-year and was especially evident in the second quarter. The
Russell 1000 Index, comprising the 1,000 largest stocks as measured by market
capitalization, earned about 7 percentage points more during the second quarter
than the Russell 2000 Index, which consists of the next-largest 2,000 stocks.
The 25 largest stocks in the S&P 500 Index earned about 4 percentage points more
as a group than the entire Index did. Most actively managed portfolios have
trouble matching the S&P 500 Index when its largest components are driving its
performance. Actively managed funds typically perform better against the Index
when the largest stocks are laggards, not leaders.
Our investment approach with your assets since May 21, when we began
managing the U.S. Portfolio, is the same that will be applied after the
reorganization is completed. We build and maintain our holdings by making a
series of analytical measurements on a large universe of securities. In
attempting to identify undervalued stocks, we use three basic types of measures:
- Fundamental momentum measures. These yardsticks are employed to
identify companies whose current and near-term business prospects are relatively
strong.
- Relative value measures. These quantify the attractiveness of a
stock's price in relation to both its own history and such financial measures as
book value, sales, or earnings.
- Future cash flow. These analytical measures identify likely
favorable payoffs in terms of future earnings and dividends for an investment
made today.
We use all of these measures in developing investment strategies
because we believe that such a multiple-viewpoint approach to selecting
securities helps to deliver consistent results. During the first half of 1998,
the momentum-based measures did a good job of predicting performance, though our
value-based measures did not. Such patterns occur from time to time and are not
out of the ordinary.
We are long-term investors. We do not expect to be near the top of a
list of equity funds for every short-term period of comparison. We are, of
course, happy when this is the case; however, our goal is to be at the top of
these lists over the long term. Our investors should have a long-range
perspective and a desire for exposure to the stock market. We expect to be fully
invested in equities as a matter of investment policy. Our goal is to provide
superior equity returns over extended periods.
Our outlook is positive. We believe that we will outperform both our
actively managed peers and indexing alternatives to a meaningful degree. We
believe that we have a winning game plan: seeking to regularly outperform by a
modest margin while trying to
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<PAGE> 9
avoid periods of major loss. Our goal with your assets is to be consistently
above average, because doing so would build strong long-term performance. We
believe our approach provides an attractive option for equity investors.
Franklin Portfolio Associates
July 20, 1998
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PORTFOLIO PROFILE
Trustees' Equity Fund-U.S. Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of June
30, 1998, 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 328 500
Median Market Cap $54.9B $50.0B
Price/Earnings Ratio 26.3x 24.8x
Price/Book Ratio 5.0x 4.5x
Yield 0.8% 1.4%
Return on Equity 23.5% 21.6%
Earnings Growth Rate 19.7% 16.4%
Foreign Holdings 0.0% 1.7%
Turnover Rate 78%* --
Expense Ratio 0.57%* --
Cash Reserves 1.9% --
</TABLE>
*Annualized.
INVESTMENT FOCUS
- --------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------------------
U.S. PORTFOLIO S&P 500
- ----------------------------------------------------------------------
<S> <C> <C>
R-Squared 0.96 1.00
Beta 0.99 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------------------------------
<S> <C>
General Electric Co. 4.1%
Intel Corp. 3.3
Merck & Co., Inc. 3.2
Microsoft Corp. 3.1
Bristol-Myers Squibb Co. 3.0
Morgan Stanley Dean Witter & Co. 2.8
Wal-Mart Stores, Inc. 2.8
The Coca-Cola Co. 2.6
Cisco Systems, Inc. 2.5
Bell Atlantic Corp. 1.7
- --------------------------------------------------------------------
Top Ten 29.1%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
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JUNE 30, 1997 JUNE 30, 1998
-----------------------------------------------------------------
U.S. PORTFOLIO U.S. PORTFOLIO S&P 500
-----------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 3.8% 2.9% 3.3%
Consumer Discretionary 11.0 15.2 10.2
Consumer Staples 11.4 7.3 10.7
Financial Services 10.9 17.4 18.5
Health Care 13.7 13.8 12.1
Integrated Oils 8.5 3.5 6.5
Other Energy 2.4 1.7 1.0
Materials & Processing 7.5 4.7 5.2
Producer Durables 4.7 3.9 3.5
Technology 13.8 13.7 13.0
Utilities 6.2 8.6 10.3
Other 6.1 7.3 5.7
- ------------------------------------------------------------------------------------------------
</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. An indicator of the size of companies in which a portfolio
invests; the midpoint of market capitalization (market price x shares
outstanding) of a portfolio's stocks, weighted by the proportion of the
portfolio's assets invested in each stock. Stocks representing half of the
portfolio's assets have market capitalizations above the median, and the rest
are below it.
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 period. 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
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 an investment in the
portfolio could lose money.
<TABLE>
<CAPTION>
TRUSTEES' EQUITY FUND-U.S. PORTFOLIO
TOTAL INVESTMENT RETURNS: JANUARY 31, 1980-JUNE 30, 1998
- --------------------------------------------------------------------
TRUSTEES' EQUITY FUND-U.S. PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------
<C> <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
1998* 15.9 0.5 16.4 17.7
- --------------------------------------------------------------------
</TABLE>
*Six months ended June 30, 1998.
See Financial Highlights table on page 17 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
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 26.92% 19.70% 12.56% 2.44% 15.00%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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FINANCIAL STATEMENTS
June 30, 1998 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the portfolio's holdings, including
each security's market value on the last day of the reporting period. Securities
are grouped and subtotaled by asset type (common stocks, 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 (98.1%)
- ---------------------------------------------------------------------
AUTO & TRANSPORTATION (2.9%)
Arvin Industries, Inc. 5,600 $ 203
ASA Holdings Inc. 4,500 223
Burlington Northern
Santa Fe Corp. 3,000 294
Canadian National Railway Co. 50 3
ComAir Holdings, Inc. 10,550 326
Excel Industries, Inc. 4,800 69
Ford Motor Co. 24,300 1,434
- - Gentex Corp. 15,400 279
Genuine Parts Co. 10,600 366
- - Lear Corp. 13,100 672
- - Midwest Express Holdings, Inc. 3,450 125
Norfolk Southern Corp. 11,200 334
- - Northwest Airlines Corp. Class A 1,700 65
- - Offshore Logistics, Inc. 4,800 85
Southwest Airlines Co. 24,400 723
- - Swift Transportation Co., Inc. 8,850 175
Titan International, Inc. 3,800 65
- - Tower Automotive, Inc. 3,900 167
-----
5,608
-----
CONSUMER DISCRETIONARY (14.9%)
- - ADVO, Inc. 5,100 144
American Greetings Corp. Class A 4,900 249
- - AutoZone Inc. 3,100 99
Bob Evans Farms, Inc. 4,300 91
- - Catalina Marketing Corp. 3,400 176
- - CDW Computer Centers, Inc. 1,000 50
- - Cendant Corp. 67,992 1,419
Cintas Corp. 6,800 347
Cognizant Corp. 7,400 466
Cracker Barrel Old Country
Stores, Inc. 3,500 111
Del Laboratories, Inc. 3,466 75
The Walt Disney Co. 16,500 1,733
Dollar General Corp. 12,575 497
Family Dollar Stores, Inc. 6,400 118
Fingerhut Co. 4,800 158
Gannett Co., Inc. 14,300 1,016
Gaylord Entertainment Co. Class A 4,200 135
- - General Nutrition Cos., Inc. 5,600 174
Gillette Co. 14,800 839
Home Depot, Inc. 33,600 2,791
- - Interim Services, Inc. 3,400 109
International Game Technology 7,100 172
Interpublic Group of Cos., Inc. 7,950 482
- - Jacor Communications, Inc. 1,500 88
- - Jones Apparel Group, Inc. 4,800 176
- - King World Productions, Inc. 5,400 138
Knight Ridder 2,800 154
- - Kohls Corp. 11,600 602
Leggett & Platt, Inc. 11,800 295
Lowe's Cos., Inc. 17,000 690
Marriott International, Inc. Class A 22,700 735
Maytag Corp. 16,300 805
The McGraw-Hill Cos., Inc. 2,500 204
Media General, Inc. Class A 15,800 770
- - Men's Wearhouse, Inc. 4,200 139
- - Metamor Worldwide, Inc. 2,400 84
- - Fred Meyer Inc. 20,700 880
- - Nautica Enterprises Inc. 9,300 249
New York Times Co. Class A 2,600 206
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
TRUSTEES' EQUITY FUND- VALUE*
U.S. PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
Newell Co. 7,300 $ 364
- - Office Depot, Inc. 11,800 372
Omnicom Group Inc. 11,100 554
- - Outback Steakhouse 2,600 101
QRS Corp. 1,300 49
- - Robert Half International, Inc. 9,600 536
- - Staples, Inc. 32,400 938
- - Starbucks Corp. 3,400 182
- - Stein Mart, Inc. 4,400 59
Stewart Enterprises, Inc. Class A 8,200 218
TJX Cos., Inc. 22,400 540
- - Toys R Us, Inc. 10,200 240
Tribune Co. 6,700 461
Viad Corp. 7,500 208
Wal-Mart Stores, Inc. 90,100 5,474
The Warnaco Group, Inc. Class A 5,700 242
Washington Post Co. Class B 300 173
Wendy's International, Inc. 4,600 108
Whirlpool Corp. 8,100 557
- - World Color Press, Inc. 4,600 161
------
29,203
------
CONSUMER STAPLES (7.1%)
Brown-Forman Corp. Class B 1,000 64
CVS Corp. 12,800 498
The Clorox Co. 8,200 782
The Coca-Cola Co. 59,000 5,045
Colgate-Palmolive Co. 19,500 1,716
Hormel Foods Corp. 4,100 142
- - The Kroger Co. 8,900 382
Procter & Gamble Co. 30,700 2,796
RJR Nabisco Holdings Corp. 5,300 126
Sara Lee Corp. 30,800 1,723
- - Smithfield Foods, Inc. 2,700 82
J.M. Smucker Co. Class A 6,100 151
Sysco Corp. 12,300 315
Universal Foods Corp. 1,400 31
Weis Markets, Inc. 2,700 99
------
13,952
------
FINANCIAL SERVICES (17.0%)
AFLAC, Inc. 6,000 182
- - Affiliated Computer Services, Inc. 1,700 65
American Bankers Insurance
Group 5,000 301
American General Hospitality
Corp. REIT 6,500 138
American International Group, Inc. 17,400 2,540
- - AmeriCredit Corp. 2,700 96
AmSouth Bancorp 24,150 949
Associated Banc-Corp. 4,375 165
Associates First Capital Corp. 12,868 989
Banc One Corp. 26,500 1,479
H & R Block, Inc. 4,200 177
CCB Financial Corp. 3,800 404
CMAC Investment Corp. 1,400 86
Capital One Financial Corp. 3,800 472
The Chase Manhattan Corp. 37,528 2,833
Cincinnati Financial Corp. 6,000 230
Commonwealth Bancorp 9,500 218
Countrywide Credit Industries, Inc. 4,500 228
Developers Diversified Realty
Corp. REIT 4,200 165
Equifax, Inc. 14,900 541
Fannie Mae 45,200 2,746
Fidelity National Financial, Inc. 2,090 83
FINOVA Group, Inc. 5,700 323
First American Corp. (Tenn.) 8,000 385
- - Flserv, Inc. 6,300 268
Fremont General Corp. 3,900 211
General Growth Properties
Inc. REIT 1,700 64
Green Point Financial Corp. 8,200 309
Jack Henry & Associates 2,100 72
- - Imperial Bancorp 5,800 174
Jameson Inns, Inc. REIT 6,700 74
Jefferies Group, Inc. 2,700 111
MBIA, Inc. 6,700 502
MBNA Corp. 14,400 475
MGIC Investment Corp. 6,200 354
Marsh & McLennan Cos., Inc. 9,600 580
Mercury General Corp. 1,800 116
Morgan Stanley Dean Witter & Co. 61,000 5,574
National Community Bancorp 5,500 230
NationsBank Corp. 25,800 1,974
Northern Trust Corp. 6,700 511
Norwest Corp. 17,900 669
Omega Healthcare Investors,
Inc. REIT 4,600 162
- - Omega Worldwide, Inc. 1,220 9
Orion Capital Corp. 3,900 218
Paychex, Inc. 15,262 621
- - Policy Management Systems Corp. 6,000 236
T. Rowe Price 5,000 188
Progressive Corp. of Ohio 3,700 522
Regions Financial Corp. 10,000 411
Rollins Truck Leasing 21,900 271
Ryder System, Inc. 2,600 82
SAFECO Corp. 5,300 241
St. Paul Cos., Inc. 6,200 261
Charles Schwab Corp. 5,900 192
Simmons First National 1,600 76
- - SunGard Data Systems, Inc. 9,900 380
Torchmark Corp. 10,000 458
Transatlantic Holdings, Inc. 700 54
UNUM Corp. 11,900 660
United Bankshares, Inc. 5,400 184
Wilmington Trust Corp. 3,300 201
------
33,490
------
HEALTH CARE (13.6%)
American Home Products Corp. 20,000 1,035
C.R. Bard, Inc. 8,000 305
Becton, Dickinson & Co. 8,300 644
- - Biogen, Inc. 3,100 152
Bristol-Myers Squibb Co. 51,200 5,885
Cardinal Health, Inc. 7,500 703
Guidant Corp. 5,300 378
HBO & Co. 18,000 635
- - Health Management Associates
Class A 9,800 328
- - Healthcare & Retirement Corp. 3,600 142
- - Humana, Inc. 11,300 352
Johnson & Johnson 39,200 2,891
Merck & Co., Inc. 46,400 6,206
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
Pfizer, Inc. 3,000 $ 326
- - Phymatrix Corp. 3,800 33
- - Renal Care Group, Inc. 4,800 212
- - Res-Care, Inc. 4,200 77
Schering-Plough Corp. 31,800 2,914
Stryker Corp. 7,700 295
- - Sybron International Corp. 12,000 303
- - Total Renal Care Holdings, Inc. 5,000 173
- - Trigon Healthcare, Inc. 5,800 210
Warner-Lambert Co. 35,100 2,435
------
26,634
------
INTEGRATED OILS (3.5%)
Atlantic Richfield Co. 3,300 258
Exxon Corp. 46,900 3,345
Kerr-McGee Corp. 2,800 162
Mobil Corp. 17,700 1,356
Texaco Inc. 22,400 1,337
Unocal Corp. 9,600 343
------
6,801
------
OTHER ENERGY (1.7%)
- - AES Corp. 5,200 273
Anadarko Petroleum Corp. 1,400 94
Burlington Resources, Inc. 12,900 556
Devon Energy Corp. 5,400 189
ENSCO International, Inc. 3,500 61
El Paso Natural Gas 5,674 217
- - HS Resources Inc. 9,700 141
- - Louis Dreyfus Natural Gas Corp. 7,700 146
- - National-Oilwell, Inc. 2,200 59
Noble Affiliates, Inc. 3,600 137
- - Parker Drilling Co. 6,400 45
- - SEACOR SMIT Inc. 4,300 264
- - Smith International, Inc. 4,000 139
- - Thermo Ecotek Corp. 5,300 83
Tosco Corp. 11,500 338
Union Pacific Resources
Group, Inc. 7,100 125
Vintage Petroleum, Inc. 21,800 411
------
3,278
------
MATERIALS & PROCESSING (4.5%)
- - AEP Industries, Inc. 2,700 58
Aluminum Co. of America 5,800 382
Aptargroup Inc. 3,300 205
Bemis Co., Inc. 5,700 233
Crompton & Knowles Corp. 3,200 81
E.I. du Pont de Nemours & Co. 33,700 2,515
Ecolab, Inc. 15,700 487
W.R. Grace & Co. 9,600 164
Harsco Corp. 4,300 197
Intermet Corp. 4,600 83
- - International Specialty
Products, Inc. 8,800 164
Kaydon Corp. 1,400 49
Martin Marietta Materials, Inc. 7,700 347
Masco Corp. 5,200 315
Morton International, Inc. 6,200 155
Nalco Chemical Co. 3,100 109
Nucor Corp. 1,700 78
PPG Industries, Inc. 7,300 508
Precision Castparts Corp. 2,800 149
Rohm & Haas Co. 7,000 728
The Sherwin-Williams Co. 13,900 460
Signature Resorts, Inc. 3,400 56
The Timber Company 10,800 249
TJ International, Inc. 5,400 163
- - Triangle Pacific Corp. 5,000 275
USX-U.S. Steel Group 9,700 320
Valspar Corp. 5,800 230
Vulcan Materials Co. 2,000 213
------
8,973
------
PRODUCER DURABLES (3.8%)
- - American Power Conversion Corp. 9,300 279
Ametek Aerospace Products Inc. 9,800 287
- - Aztec Technology Partners, Inc. 699 5
Baldor Electric Co. 3,800 93
- - Cable Design Technologies 4,950 102
Case Corp. 3,100 150
- - Champion Enterprises, Inc. 3,500 102
Clayton Homes Inc. 17,400 331
Danaher Corp. 9,200 338
Donaldson Co., Inc. 10,200 241
Dover Corp. 7,400 253
Emerson Electric Co. 21,300 1,286
HON Industries, Inc. 6,200 211
Honeywell, Inc. 3,900 326
Hubbell Inc. Class B 3,100 129
- - Lexmark International Group, Inc.
Class A 3,400 207
Mark IV Industries, Inc. 6,700 145
- - MICROS Systems, Inc. 6,600 218
Herman Miller, Inc. 10,800 263
- - Navigant International, Inc. 349 3
- - Oak Industries, Inc. 4,700 166
Pitney Bowes, Inc. 23,200 1,117
Pittway Corp. Class A 1,900 140
Regal-Beloit Corp. 1,900 54
- - School Specialty, Inc. 388 6
Sundstrand Corp. 4,500 258
- - Thermo Instrument Systems, Inc. 11,075 291
- - U.S. Filter Corp. 14,700 413
- - U.S. Office Products Co. 873 17
- - Waters Corp. 700 41
- - Workflow Management, Inc. 466 4
------
7,476
------
TECHNOLOGY (13.4%)
- - American Tower Corp. Class A 1,500 37
- - Analog Devices, Inc. 5,200 128
- - Ascend Communications, Inc. 9,600 476
- - Avid Technology, Inc. 4,400 147
- - Cambridge Technology Partners 7,100 388
- - Cisco Systems, Inc. 53,250 4,902
Compaq Computer Corp. 18,300 519
Computer Sciences Corp. 6,600 422
- - Compuware Corp. 5,300 271
- - Dell Computer Corp. 4,200 390
- - Gateway, Inc. 8,900 451
Hewlett-Packard Co. 14,000 838
Intel Corp. 86,200 6,390
Lucent Technologies, Inc. 30,400 2,529
- - Maxim Integrated Products, Inc. 5,200 165
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
TRUSTEES' EQUITY FUND- VALUE*
U.S. PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
- - Mercury Interactive Corp. 2,600 $ 116
- - Microsoft Corp. 55,200 5,982
- - Network Associates, Inc. 4,650 223
- - P-Com, Inc. 3,000 27
- - PeopleSoft, Inc. 12,400 583
- - Sanmina Corp. 3,400 147
Symbol Technologies, Inc. 3,000 113
- - Tech Data Corp. 2,000 86
- - Tellabs, Inc. 9,600 688
- - Thermedics, Inc. 8,700 108
- - ThermoQuest Corp. 10,000 149
--------
26,275
--------
UTILITIES (8.5%)
- - AirTouch Communications, Inc. 17,600 1,029
Allegheny Energy, Inc. 8,400 253
American Water Works Co., Inc. 12,300 381
Baltimore Gas & Electric Co. 4,900 152
Bell Atlantic Corp. 74,800 3,413
Black Hills Corp. 4,350 100
CMS Energy Corp. 10,700 471
California Water Service Group 6,800 171
Carolina Power & Light Co. 4,800 208
Comcast Corp. Class A Special 17,400 706
Connecticut Energy Corp. 2,900 81
Consolidated Edison Inc. 7,900 364
Duke Energy Corp. 19,500 1,155
Energy East Corp. 5,900 246
FPL Group, Inc. 8,200 517
GTE Corp. 33,700 1,875
MCN Energy Group Inc. 9,500 236
MDU Resources Group, Inc. 4,400 157
- - MediaOne Group, Inc. 9,200 404
NIPSCO Industries, Inc. 8,200 230
Northwestern Corp. 4,300 108
PacifiCorp 10,100 229
Philadelphia Suburban Corp. 9,200 201
SBC Communications Inc. 68,200 2,728
Texas Utilities Co. 7,700 321
U S West, Inc. 251 12
UtiliCorp United, Inc. 2,500 94
Wicor, Inc. 5,400 125
- - WorldCom, Inc. 12,500 605
--------
16,572
--------
OTHER (7.2%)
Carlisle Co., Inc. 6,200 267
- - Coltec Inc. 8,000 159
Crane Co. 4,100 199
Dresser Industries, Inc. 3,800 167
General Electric Co. 87,600 7,972
Hillenbrand Industries, Inc. 3,100 186
Illinois Tool Works, Inc. 11,000 734
ITT Industries, Inc. 13,700 512
Johnson Controls, Inc. 2,100 120
Raytheon Co. Class A 867 50
Standard & Poor's
Depositary Receipts 25,680 2,910
Teleflex Inc. 4,600 175
- - Thermo Electron Corp. 14,600 499
U.S. Industries, Inc. 7,600 188
--------
14,138
--------
- ---------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $146,738) 192,400
- ---------------------------------------------------------------------
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.0%)
- ---------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.67%, 7/1/1998
(COST $3,867) $3,867 3,867
- ---------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(COST $150,605) 196,267
- ---------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.1%)
- ---------------------------------------------------------------------
Other Assets--Note C 275
Liabilities (518)
--------
(243)
- ---------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------
Applicable to 4,721,826 outstanding
shares of beneficial interest
(unlimited authorization) $196,024
=====================================================================
NET ASSET VALUE PER SHARE $41.51
=====================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
AT JUNE 30, 1998, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $144,720 $30.65
Undistributed Net
Investment Income 15 --
Accumulated Net
Realized Gains 5,627 1.19
Unrealized Appreciation--Note E 45,662 9.67
- ---------------------------------------------------------------------
NET ASSETS $196,024 $41.51
=====================================================================
</TABLE>
14
<PAGE> 17
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
SIX MONTHS ENDED JUNE 30, 1998
(000)
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 1,155
Interest 157
---------
Total Income 1,312
---------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 343
Performance Adjustment (118)
The Vanguard Group--Note C
Management and Administrative 254
Marketing and Distribution 19
Custodian Fees 20
Auditing Fees 4
Shareholders' Reports 9
Annual Meeting and Proxy Costs 1
---------
Total Expenses 532
- -----------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 780
- -----------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 5,711
- -----------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 21,654
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $28,145
=================================================================================================================
</TABLE>
15
<PAGE> 18
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
--------------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 1998 DEC. 31, 1997
(000) (000)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 780 $ 1,698
Realized Net Gain 5,711 41,201
Change in Unrealized Appreciation (Depreciation) 21,654 (2,557)
--------------------------------------
Net Increase in Net Assets Resulting from Operations 28,145 40,342
--------------------------------------
DISTRIBUTIONS
Net Investment Income (754) (1,676)
Realized Capital Gain (5,389) (38,119)
--------------------------------------
Total Distributions (6,143) (39,795)
--------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 17,651 36,243
Issued in Lieu of Cash Distributions 5,824 37,563
Redeemed (23,473) (58,021)
--------------------------------------
Net Increase from Capital Share Transactions 2 15,785
- ----------------------------------------------------------------------------------------------------------------------
Total Increase 22,004 16,332
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 174,020 157,688
--------------------------------------
End of Period $196,024 $174,020
======================================================================================================================
(1)Shares Issued (Redeemed)
Issued 454 889
Issued in Lieu of Cash Distributions 144 1,046
Redeemed (602) (1,461)
--------------------------------------
Net Increase (Decrease) in Shares Outstanding (4) 474
======================================================================================================================
</TABLE>
16
<PAGE> 19
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
TRUSTEES' EQUITY FUND-U.S. PORTFOLIO
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -------------------------------------------------------
THROUGHOUT EACH PERIOD JUNE 30, 1998 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $36.82 $37.08 $37.01 $29.09 $30.65 $28.43
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .16 .44 .65 .62 .34 .43
Net Realized and Unrealized Gain (Loss)
on Investments 5.83 9.64 6.87 8.96 (1.53) 4.38
---------------------------------------------------------------------
Total from Investment Operations 5.99 10.08 7.52 9.58 (1.19) 4.81
---------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.16) (.43) (.67) (.61) (.34) (.43)
Distributions from Realized Capital Gains (1.14) (9.91) (6.78) (1.05) (.03) (2.16)
---------------------------------------------------------------------
Total Distributions (1.30) (10.34) (7.45) (1.66) (.37) (2.59)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $41.51 $36.82 $37.08 $37.01 $29.09 $30.65
===================================================================================================================================
TOTAL RETURN 16.38% 29.48% 21.30% 33.21% -3.91% 17.24%
===================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $196 $174 $158 $137 $113 $119
Ratio of Total Expenses to
Average Net Assets 0.57%* 0.53% 0.49% 0.56% 0.73% 0.90%
Ratio of Net Investment Income to
Average Net Assets 0.83%* 1.09% 1.68% 1.79% 1.14% 1.43%
Portfolio Turnover Rate 78%* 139% 114% 77% 151% 139%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
17
<PAGE> 20
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: Equity securities 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. Prices are taken from the primary market in which each security
trades. Temporary cash investments are valued at cost, which approximates market
value. Securities for which market quotations are not readily available are
valued by methods deemed by the Board of Trustees to represent fair 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. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
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. Effective May 21, 1998, Franklin Portfolio Associates provides
investment advisory services to the portfolio for a fee calculated at an annual
percentage rate of average net assets. Advisory services had previously been
provided by Geewax, Terker & Company. For the six months ended June 30, 1998,
advisory fees represented an effective annual basic rate of 0.37% of the
portfolio's average net assets before a decrease of $118,000 (an annual rate of
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 June 30, 1998, the portfolio had contributed capital of $35,000 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 six months ended June 30, 1998, the portfolio purchased
$72,436,000 of investment securities and sold $80,948,000 of investment
securities, other than temporary cash investments.
E. At June 30, 1998, net unrealized appreciation of investment
securities for financial reporting and federal income tax purposes was
$45,662,000, consisting of unrealized gains of $48,891,000 on securities that
had risen in value since their purchase and $3,229,000 in unrealized losses on
securities that had fallen in value since their purchase.
18
<PAGE> 21
F. On July 31, 1998, the portfolio's shareholders approved the
reorganization of the portfolio into Vanguard Growth and Income Portfolio. The
portfolio made final distributions of net investment income and realized capital
gains totaling $1.2927 per share to shareholders of record on August 12, 1998.
The reorganization was then accomplished by a tax-free exchange of Vanguard
Growth and Income Portfolio's capital shares for all the outstanding shares of
the portfolio on August 13, 1998. The net asset values of the portfolio and
Vanguard Growth and Income Portfolio on August 13, 1998, were $38.43 and $28.34
respectively; as a result, shareholders received 1.3560339 shares of Vanguard
Growth and Income Portfolio for each share of the portfolio.
19
<PAGE> 22
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Senior 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
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc., and
of each of the investment companies in The Vanguard Group.
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(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," 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> 23
VANGUARD FAMILY OF FUNDS
STOCK FUNDS
Convertible Securities Fund
Equity Income Fund
Explorer Fund
Growth and Income Portfolio
Horizon Fund
Aggressive Growth Portfolio
Capital Opportunity Portfolio
Global Equity Portfolio
Index Trust
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Mid Capitalization Stock
Portfolio
Small Capitalization Growth
Stock Portfolio
Small Capitalization Stock
Portfolio
Small Capitalization Value
Stock Portfolio
Total Stock Market Portfolio
Value Portfolio
Institutional Index Fund
International Equity Index Fund
Emerging Markets Portfolio
European Portfolio
Pacific Portfolio
International Growth Portfolio
International Value Portfolio
Morgan Growth Fund
PRIMECAP Fund
Selected Value Portfolio
Specialized Portfolios
Energy Portfolio
Gold & Precious Metals
Portfolio
Health Care Portfolio
REIT Index Portfolio
Utilities Income Portfolio
Tax-Managed Fund
Capital Appreciation
Portfolio
Growth and Income Portfolio
Total International Portfolio
Trustees' Equity Fund
U.S. Portfolio
U.S. Growth Portfolio
Windsor Fund
Windsor II
MONEY MARKET FUNDS
Admiral Funds
U.S. Treasury Money Market
Portfolio
Money Market Reserves
Federal Portfolio
Prime Portfolio
Municipal Bond Fund
Money Market Portfolio
State Tax-Free Funds
(CA, NJ, NY, OH, PA)
Treasury Money Market Portfolio
BOND FUNDS
Admiral Funds
Intermediate-Term U.S.
Treasury Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term U.S. Treasury
Portfolio
Bond Index Fund
Intermediate-Term Bond
Portfolio
Long-Term Bond Portfolio
Short-Term Bond Portfolio
Total Bond Market Portfolio
Fixed Income Securities Fund
GNMA Portfolio
High Yield Corporate Portfolio
Intermediate-Term Corporate
Portfolio
Intermediate-Term U.S.
Treasury Portfolio
Long-Term Corporate
Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term Corporate
Portfolio
Short-Term Federal Portfolio
Short-Term U.S. Treasury
Portfolio
Municipal Bond Fund
High-Yield Portfolio
Insured Long-Term Portfolio
Intermediate-Term Portfolio
Limited-Term Portfolio
Long-Term Portfolio
Short-Term Portfolio
Preferred Stock Fund
State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Horizon Fund
Global Asset Allocation
Portfolio
LifeStrategy Portfolios
Conservative Growth
Portfolio
Growth Portfolio
Income Portfolio
Moderate Growth Portfolio
STAR Portfolio
Tax-Managed Fund
Balanced Portfolio
Wellesley Income Fund
Wellington Fund
Q252-6/1998
(C) 1998 Vanguard Marketing
Corporation, Distributor.
All rights reserved.
[THE VANGUARD GROUP LOGO]
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FUND INFORMATION
1-800-662-7447
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and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
