VANGUARD
INTERNATIONAL VALUE
FUND
[PHOTO]
SEMIANNUAL
REPORT
JUNE 30, 1999
[THE VANGUARD GROUP LOGO]
<PAGE>
AT VANGUARD, WE BELIEVE
THAT TRADITION MATTERS
Our 9,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:
o The 200th anniversary of the Battle of the Nile, which commenced on August
1, 1798. HMS VANGUARD, the victorious British flagship at the Nile, is our
namesake. And its motto--"Leading the way"--serves as a guiding principle
for our company.
o The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped
to shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with
clients; and a focus on long-term investing. To our great regret, Mr.
Morgan died on September 2, 1998.
o The 70th anniversary, on December 28, 1998, of the incorporation of
Vanguard Wellington Fund. It is the nation's oldest balanced mutual fund,
and one of only a handful of funds created in the 1920s that are still in
operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
4
REPORT FROM
THE ADVISER
6
FUND PROFILE
8
PERFORMANCE SUMMARY
11
FINANCIAL STATEMENTS
12
FOR AN UPDATE ON OUR YEAR 2000
PREPAREDNESS, SEE PAGE 20.
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE>
FELLOW SHAREHOLDER,
[PHOTO]
JOHN J. BRENNAN JOHN C. BOGLE
CHAIRMAN & CEO SENIOR CHAIRMAN
Most of the world's major stock markets enjoyed strong gains in local currency
terms during the six months ended June 30, 1999, the first half of the fiscal
year for Vanguard International Value Fund. However, a rising dollar crimped
those returns for U.S. investors. In this mixed environment, your fund earned an
excellent half-year return of +11.6%.
The table below presents the six-month total returns (capital change plus
reinvested dividends) for the fund and its comparative standards--the average
international stock fund and the unmanaged Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index, which tracks the performance of 20
established markets. The fund's return exceeded that of its average peer by 3
percentage points and surpassed the performance of its benchmark index by the
wide margin of 7.5 percentage points.
- -------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
JUNE 30, 1999
- -------------------------------------------------
Vanguard International Value Fund +11.6%
- -------------------------------------------------
Average International Fund + 8.6%
- -------------------------------------------------
MSCI EAFE Index + 4.1%
- -------------------------------------------------
The fund's return is based on an increase in net asset value from $25.09
per share on December 31, 1998, to $28.00 per share on June 30, 1999, and is
adjusted for a dividend of $0.01 per share paid from net investment income.
THE PERIOD IN REVIEW
Sixteen of the twenty established foreign stock markets tracked by the EAFE
Index provided positive returns in local currencies during the six months ended
June 30. Seven bourses led the global advance, gaining +14% or more. Singapore
and Finland were like rockets, with total returns of +65.5% and +46.6%,
respectively. Hong Kong and Japan rebounded from a poor 1998 with big gains
(+31.7% and +29.6%, respectively). Sweden, France, and Norway were up +25.6%,
+15.4%, and +14.4%, respectively.
Yet the EAFE Index's overall rise of +13.6% in local currency terms was
held to a modest +4.1% for U.S. investors because a good portion of the stellar
local gains was eroded by a rise in the value of the U.S. dollar. A rising
dollar detracts from foreign investment returns because it diminishes the value
of securities denominated in other currencies. For example, on December 31,
1998, a U.S. dollar was worth 113 Japanese yen. By June 30, the dollar's rise
had made it worth 121 yen. So a share of Japanese stock selling for 5,000 yen
was worth $44.25 on December 31, but only $41.32 on June 30.
During the half-year, the dollar gained value versus almost every major
foreign currency, including the euro--the common currency of eleven European
nations. Since its debut on January 1, the euro has lost 13% of its value versus
the dollar. As a result of the greenback's rally, U.S. investors earned less
than the local currency returns in 18 of the markets tracked by the EAFE Index.
(The U.S. dollar fell against the Australian and New Zealand dollars, which
boosted the returns earned in those markets.) Currency fluctuations turned
positive local returns into losses for U.S. investors in six bourses,
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including Germany, where a gain of +9.3% in euros became a decline of -4.0% in
dollars. Total returns of +6.6% on both Spanish and Dutch stocks were
transformed into losses of -6.4%. (The table at right presents the deleterious
impact of currency fluctuations on returns during the half-year. It shows the
total returns of various international stock indexes in local currencies, the
effect on returns of currency fluctuations, and the net returns for dollar-based
investors.) On balance, the European slice of the EAFE Index declined -2.3% in
U.S.-dollar terms.
- --------------------------------------------------------------------------------
Total Returns
Six Months Ended June 30, 1999
------------------------------------
Local
Currency Currency U.S. Dollar
Stock Market Index Returns Impact Returns
- --------------------------------------------------------------------------------
MSCI EAFE +13.6% - 9.5% + 4.1%
- --------------------------------------------------------------------------------
MSCI Europe + 8.2% -10.5% - 2.3%
MSCI Pacific Free +27.3 - 6.2 +21.1
MSCI Emerging Markets Free +47.1 - 7.2 +39.9
- --------------------------------------------------------------------------------
S&P 500 +12.4% -- +12.4%
- --------------------------------------------------------------------------------
In the Pacific, gains were generally large as that region was perceived to
be recovering from a severe economic slowdown. The Pacific Rim component of the
EAFE Index gained +21.1% in U.S.-dollar terms. This turnabout was spurred by the
Japanese market, which posted a return of +29.6% in yen and +20.8% in U.S.
dollars. Investors sensed an end to Japan's recession--and indeed its economy
grew at a +7.8% annual rate in the first quarter. Outside of Japan, Pacific
region economies appeared to be snapping back from the Asian contagion of 1998.
The recovery in what were some of the world's most battered economies led to
improved profit prospects, greater intra-Asian trade activity, and an increase
in the ability of the region to purchase goods from other corners of the world.
By way of comparison, the overall U.S. stock market, as measured by the
Wilshire 5000 Equity Index, gained +11.8%--equivalent to more than a full year's
return based on historical norms.
Vanguard International Value Fund surpassed its comparative standards
during the six-month period. The fund benefited from adroit stock-picking by our
adviser, London-based Phillips & Drew. Chief among the reasons for the fund's
outperformance was its sizable position in Japan (about 23% of net assets as of
June 30). This stake exceeded the EAFE Index's Japanese weighting by only about
1 percentage point, but was more than twice the concentration in Japan of the
average international stock fund. Our adviser, which seeks stocks that are
generally out of favor with the market but are poised for change, believes that
Japanese shares are trading at relatively low valuations, given a growing
emphasis on the part of Japanese managers on boosting corporate profits. The
fund's overweighted position in France also contributed to its success during
the half-year.
IN SUMMARY
The strength of the U.S. dollar during the first half of 1999 demonstrates the
influence that currency fluctuations can have on returns from foreign
investments. This currency risk is a fact of life for investors in international
stocks, in addition to the price volatility that all common stocks exhibit. Of
course, currency fluctuations can work the other way--a falling dollar bolsters
the returns on foreign holdings. Moreover, it is precisely because international
stocks don't always move in step with U.S. stocks that they can add
2
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an important element of diversification to a balanced portfolio of domestic
stock funds, bond funds, and short-term reserves.
We look forward to reporting to you on our full 1999 results six months
hence.
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
July 17, 1999
3
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THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 1999
A markedly improved global economic outlook during the first half of 1999 led to
mostly positive stock market returns and lower bond prices.
As the year began, many observers expected that severe economic crises in
Asia, Russia, and some Latin American nations would restrain business activity
worldwide, even in the United States, which has been the world's economic
locomotive. By spring, however, a consensus emerged that global economic
activity was likely to be solid, if not robust. This change in sentiment stemmed
from several factors, including further vigorous growth in the U.S. economy, a
belief that Asia's slump had bottomed out, and moves in Europe to ease monetary
policy to encourage growth.
Interest rates rose as investors stopped wondering whether the Federal
Reserve Board would lower interest rates--as it had three times in autumn
1998--and began to wonder when the Fed would increase rates to slow growth and
thereby forestall inflation. Indeed, on the final day of the period, the Fed
boosted short-term rates by 0.25 percentage point. In the stock market, the
brighter economic outlook led to a change in leadership from glamorous
large-capitalization growth stocks to value stocks and small-cap stocks, both of
which had been among Wall Street's wallflowers in recent years.
- --------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED JUNE 30, 1999
--------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- --------------------------------------------------------------------------------
STOCKS
S&P 500 Index 12.4% 22.8% 27.9%
Russell 2000 Index 9.3 1.5 15.4
Wilshire 5000 Index 11.8 19.5 25.7
MSCI EAFE Index 4.1 7.9 8.5
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index -1.4% 3.2% 7.8%
Lehman 10 Year Municipal Bond Index -1.7 2.3 6.8
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.7 5.2
- --------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.4% 2.0% 2.3%
- --------------------------------------------------------------------------------
*Annualized.
U.S. STOCK MARKETS
The rise in stock prices reflected the healthy domestic economy and improving
prospects for corporate earnings. The overall market, as measured by the
Wilshire 5000 Index, rose 11.8% during the period, while the S&P 500 Index, a
yardstick for large-cap stocks, gained 12.4%.
Large-cap growth stocks, which are generally perceived as less vulnerable
than other stocks to economic slowdowns, continued to lead the market's climb
during the first quarter of the year. During the second quarter, however, value
stocks--especially producers of commodity products such as oil, aluminum, and
chemicals--moved to the front of the pack. Providing support were generally
upbeat corporate profit reports. Indeed, earnings gains were sufficient to send
prices higher despite rising interest rates, which often depress stock prices as
well as bond prices. For the six months, the S&P 500 Index's value stocks posted
a 14.0% return while its growth stocks gained 11.0% as a group.
4
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Small-cap stocks, as measured by the Russell 2000 Index, gained 9.3%,
although that fact masks a remarkable turnaround: Small-caps declined 5.4%
during the first quarter of 1999, then advanced 15.6% during the second quarter.
Even so, the cumulative return of the Russell 2000 over the past three years
lags the S&P 500 Index by nearly 80 percentage points (+37.6% for the Russell
2000 versus +115.2% for the S&P 500).
Four of the top-performing sectors within the S&P 500 Index during the
half-year were solidly in the value camp--the "other energy" group (+40%);
producer durables (+26%); materials & processing (+25%); and integrated-oils
(+17%). The strongest growth-oriented sector was the irrepressible technology
group (+24%). The poor performance of the consumer staples sector (-8%) was due
in part to the gains of the U.S. dollar against most foreign currencies, which
reduced the value of earnings from overseas operations.
U.S. BOND MARKETS
The powerful economic expansion that buoyed corporate profits and stock prices
was too much of a good thing for the bond market. Inflation was well
behaved--consumer prices rose 1.4% for the six months and 2.0% for the twelve
months ended June 30--but investors and Fed policymakers clearly were concerned
that an overheated economy might yet trigger significant increases in wages and
overall prices. Certainly, there was no evidence of the "natural slowing" that
many analysts expected for the economy, which is in the longest peacetime
expansion ever.
Yields on U.S. Treasury bonds rose by approximately 1 percentage point--a
significant rise for a six-month period. The yield of the 30-year Treasury bond
rose 86 basis points, to 5.96% on June 30 from 5.10% on December 31, 1998. The
yield of the 10-year Treasury rose 113 basis points, to 5.78% from 4.65%. Money
market rates didn't rise as far: Yields on 3-month T-bills increased on balance
by only 33 basis points, to 4.78% on June 30. Bond prices, which move in the
opposite direction from interest rates, fell. The Lehman Aggregate Bond Index, a
benchmark for investment-grade taxable bonds, declined 1.4% on a total-return
basis, as bond prices declined an average of 4.4%, outweighing the 3.0% in
interest income for the period.
INTERNATIONAL STOCK MARKETS
Led by sharp recoveries in stock prices in Japan and many emerging markets,
international stock prices generated positive returns in local currencies during
the six months. However, a pervasive rise in the value of the U.S. dollar
against other currencies reduced returns for U.S. investors (returns from abroad
are augmented when the dollar falls in value against other currencies).
Overall, the developed markets outside the United States gained 4.1% in
U.S.-dollar terms, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. The biggest increases were in the
Pacific region--up 27.3% in local-currency terms and 21.1% when measured in U.S.
dollars. Europe, which accounts for the lion's share of EAFE's market
capitalization, was up 8.2% in local currencies. But in U.S. dollars, the return
from European stocks was a negative 2.3%, as weakness in European
currencies--notably in the euro, the new 11-nation common currency--lopped more
than 10 percentage points from the local-currency returns. The MSCI Select
Emerging Markets Free Index shot up 31.5% in dollar terms, led by Asian markets
that rebounded from severe losses suffered in 1997 and 1998.
5
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REPORT FROM THE ADVISER
[PHOTO]
Vanguard International Value Fund provided a return of 11.6% during the first
half of 1999. This exceeded the 4.1% return for the MSCI EAFE Index and the 8.6%
return for the average international equity fund.
The major theme to your fund's investment activity during the first half of
1999 has been significant sales of holdings in emerging Asian markets and a
corresponding addition to our stake in continental European markets. Japanese
exposure rose slightly (from about 22% of equity assets to nearly 25%) mainly
due to that market's gains. The fund's cash position increased to about 6% of
assets toward the end of the period.
When the consensus on Asia was at its bleakest last year, we increased the
fund's exposure in Asia (excluding Japan) to around 7% of assets. We bought into
many good companies with stable core businesses, good management, and sound
finances whose competitiveness had been boosted by currency devaluations.
Subsequently, the consensus (overoptimistic, in our view) has become one of a
painless resumption of growth for the region. On the back of this shift, many of
the fund's holdings have skyrocketed and their valuations have gotten way ahead
of reality. A typical example is Hyundai Motor, the Korean car manufacturer
whose share price has risen 150% since our last purchase in 1998. Also, many
companies that had talked of restructuring when their stock prices were down are
putting off tough decisions now that their stocks have rallied. In our view,
this is a mistake. Consequently we have reduced the fund's exposure to Asian
emerging markets to 3% of assets.
The fund's position in Japan, at nearly one-quarter of fund assets, remains
close to that market's weighting in the EAFE Index but significantly higher than
the Japanese stake of the average international equity fund. Our emphasis on
Japan served the fund well this year as foreign investors returned to that
market. We are not underweighted in Japan primarily because many stocks there
have relatively low valuations and the managers of many companies are starting
to put profits higher up on the list of corporate objectives.
One of the most visible and ambitious examples of this change is Sony. It
has tar-geted a 10% reduction in its workforce, a reduction in the number of its
factories from 70 to 55, and a commitment to focus on the growing parts of its
portfolio of businesses, such as the games division. We believe these steps
should be good for shareholders. Increasingly, foreign companies are taking
stakes in Japanese companies, notably Renault buying part of Nissan and AT&T,
British Telecom, and Cable and Wireless buying into Japan's telecommunications
sector. Of particular interest is the fact that the Cable and Wireless
acquisition was the first contested bid in Japan for a long time. We suspect
that other bids may happen soon. Corporate restructurings are increasing in
number and importance in Japan, much as they did in continental Europe five to
six years ago.
INVESTMENT PHILOSOPHY
The fund reflects a belief that superior long-term investment results can be
achieved by investing in a diversified portfolio of international stocks that
are generally out of favor or undervalued by fundamental measures such as
price/earnings ratio or dividend yield.
The Japanese yen had strengthened considerably in the latter half of 1998,
and we had reduced the
6
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fund's exposure to a weakening of the yen versus the dollar by using a forward
currency contract. The yen later weakened, and we have closed this position at a
small profit. The fund has no currency hedges open at present.
The euro was successfully launched as a common currency for 11 nations on
January 1. It has subsequently been weaker than most commentators expected,
reflecting weakness in the German economy and strains in Italy's finances. The
differing growth rates of European economies--Germany and Italy are faltering
while Ireland, Spain, and Portugal are expanding very strongly--underscores the
problems of a "one size fits all" interest rate policy under the euro. France,
where the International Value Fund continues to have a bigger position than that
nation's weighting in the EAFE Index, has powered ahead of Germany this year,
helping our performance.
The lackluster performance of European stocks, particularly in relation to
Asia, has provided an opportunity to add to several positions there. These
purchases have primarily been in France and in medium-sized stocks in the United
Kingdom. Corporate activity has been exceptionally strong in Europe, with
hostile bids in Italy and France boosting prices for some of the fund's
holdings. Of particular interest are the hostile takeovers among French banking
and oil companies, something that would have been unthinkable a few years ago.
Several of the fund's holdings in European cyclicals, such as Akzo, the
Dutch chemical and pharmaceutical firm, have performed very strongly in recent
months, and we have reduced these holdings. We also reduced positions in stocks
whose prices had soared due to acquisition activity, such as Telecom Italia (bid
for by Olivetti) and Allied Domecq (whose chain of pubs is being sold). The
proceeds of these sales, along with new cash flow into the fund, have been
invested mostly in existing holdings and some Scandinavian banks.
As we have explained in previous reports, our positions in Europe have
focused on companies that are undervalued by some measure and have good
management that is capable of taking advantage of the opportunities that the new
Europe offers. On a sector basis, this leads the fund to be overweighted in
consumer and basic industries and underweighted in banks, insurance, and
pharmaceuticals.
Geographically, the fund's country positions are not very dissimilar to
those of the EAFE Index. However, this fact masks some very strong views,
particularly in regard to the market capitalization of stocks. In most markets,
the fund has a bias against very large-cap stocks and is instead tilted toward
mid- and small-cap issues with much lower valuations.
Wilson Phillips, Portfolio Manager
Phillips & Drew
July 12, 1999
7
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FUND PROFILE
INTERNATIONAL VALUE FUND
This Profile provides a snapshot of the fund's characteristics as of June 30,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
PORTFOLIO CHARACTERISTICS
- -------------------------------------------
INTERNATIONAL MSCI
VALUE EAFE
- -------------------------------------------
Number of Stocks 129 1,007
Turnover Rate 42%* --
Expense Ratio 0.61%* --
Cash Reserves 6.3% --
*Annualized.
FUND ALLOCATION BY REGION
- -------------------------
[PIE CHART]
EUROPE 62%
PACIFIC 34%
EMERGING MARKETS 4%
VOLATILITY MEASURES
- -------------------------------------
INTERNATIONAL MSCI
VALUE EAFE
- -------------------------------------
R-Squared 0.86 1.00
Beta 1.00 1.00
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -----------------------------------------------
Nestle SA (Registered) 2.5%
Elf Aquitaine SA 2.4
Akzo Nobel NV 2.2
Matsushita Electric Industrial Co., Ltd. 2.2
RWE AG 2.1
BG PLC 1.9
Shell Transport & Trading Co. 1.9
Invensys PLC 1.9
Allied Domecq PLC 1.9
Bayer AG 1.8
- -----------------------------------------------
Top Ten 20.8%
Country Diversification (% of Common Stocks) can be found on page 10.
8
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BETA. A measure of the magnitude of a fund'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 fund 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 fund'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.
COUNTRY DIVERSIFICATION. The percentages of a fund's common stock invested in
securities of various countries.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FUND ALLOCATION BY REGION. This chart shows the geographic distribution of a
fund's holdings.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,
the more diversified it is and the more likely to perform in line with the
overall stock market.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 30%.) As
this percentage rises, a fund'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. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
9
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COUNTRY DIVERSIFICATION (% OF COMMON STOCKS)
- --------------------------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1999
------------------------------------------
INTERNATIONAL INTERNATIONAL MSCI
VALUE VALUE EAFE
------------------------------------------
Australia ......................... 4.3% 4.4% 2.9%
Austria ........................... 0.0 0.0 0.3
Belgium ........................... 0.0 0.0 1.3
Denmark ........................... 1.6 1.0 0.8
Finland ........................... 0.0 1.0 1.9
France ............................ 14.5 14.3 9.7
Germany ........................... 10.4 7.6 9.8
Greece ............................ 0.4 0.1 0.0
Hong Kong ......................... 1.2 1.9 2.5
Indonesia ......................... 0.3 0.6 0.0
Ireland ........................... 0.0 0.0 0.4
Italy ............................. 1.5 1.9 4.4
Japan ............................. 25.0 24.9 23.8
Malaysia .......................... 0.1 0.0 0.0
Netherlands ....................... 6.3 5.2 5.7
New Zealand ....................... 0.6 0.3 0.2
Norway ............................ 0.4 0.0 0.4
Philippines ....................... 0.6 0.4 0.0
Portugal .......................... 0.3 0.2 0.5
Singapore ......................... 1.6 2.9 1.0
South Korea ....................... 2.8 0.9 0.0
Spain ............................. 0.0 0.9 3.0
Sweden ............................ 5.9 2.1 2.3
Switzerland ....................... 5.9 5.0 6.8
Thailand .......................... 1.3 1.5 0.0
United Kingdom .................... 15.0 22.9 22.3
- --------------------------------------------------------------------------------
Total . 100.0% 100.0% 100.0%
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PERFORMANCE SUMMARY
INTERNATIONAL VALUE FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely, so an investment in the fund could
lose money.
TOTAL INVESTMENT RETURNS: MAY 16, 1983-JUNE 30, 1999
- ----------------------------------------------------
INTERNATIONAL VALUE FUND MSCI EAFE
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------
1983 4.0% 1.8% 5.8% 11.0%
1984 -4.9 4.1 -0.8 7.9
1985 36.1 4.2 40.3 56.7
1986 46.8 3.9 50.7 69.9
1987 22.1 1.8 23.9 24.9
1988 14.8 4.0 18.8 28.6
1989 22.8 3.2 26.0 10.8
1990 -15.1 2.8 -12.3 -23.2
1991 6.9 3.1 10.0 12.5
1992 -11.0 2.3 -8.7 -11.8
1993 27.0 3.5 30.5 32.9
1994 3.5 1.8 5.3 8.1
1995 7.0 2.6 9.6 11.6
1996 7.5 2.7 10.2 6.4
1997 -7.2 2.6 -4.6 2.1
1998 14.7 4.8 19.5 20.3
1999* 11.6 0.0 11.6 4.1
- ----------------------------------------------------
*Six months ended June 30, 1999.
See Financial Highlights table on page 17 for
dividend and capital gains information for the past
five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
International Value Fund 5/16/1983 13.52% 8.72% 5.72% 2.81% 8.53%
- --------------------------------------------------------------------------------
11
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FINANCIAL STATEMENTS
JUNE 30, 1999 (UNAUDITED)
[PHOTO]
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
country. Other assets are added to, and liabilities are subtracted from, the
value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund 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 fund'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 fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date, but may differ because certain investments or
transactions may be treated differently for financial statement and tax
purposes. Any Accumulated Net Realized Losses, and any cumulative excess of
distributions over net income or net realized gains, will appear as negative
balances. Unrealized Appreciation (Depreciation) is the difference between the
market value of the fund's investments and their cost, and reflects the gains
(losses) that would be realized if the fund were to sell all of its investments
at their statement-date values.
- -----------------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL VALUE FUND SHARES (000)
- -----------------------------------------------------------------
COMMON STOCKS (93.5%)
- -----------------------------------------------------------------
AUSTRALIA (4.1%)
MIM Holdings Ltd. 12,354,090 8,750
Australia & New Zealand
Bank Group Ltd. 1,000,000 7,353
Pasminco Ltd. 5,883,000 6,495
WMC Ltd. 1,498,000 6,435
Goodman Fielder Ltd. 6,271,000 5,591
Pacific Dunlop Ltd. 1,500,000 2,164
Mayne Nickless Ltd. 284,149 972
o Burns Philp & Co., Ltd. 2,304,020 435
------------
38,195
------------
DENMARK (0.9%)
Unidanmark A/S A Shares 126,700 8,456
o Kapital Holding A/S 6,412 231
------------
8,687
------------
FINLAND (0.9%)
Stora Enso Oyj R Shares 504,743 5,413
Stora Enso Oyj A Shares 275,876 2,959
------------
8,372
------------
FRANCE (13.4%)
Elf Aquitaine SA 149,215 21,897
Danone Groupe SA 64,159 16,541
o Total Fina SA B Shares 127,151 16,404
Axa 132,000 16,104
CIE de St. Gobain SA 91,209 14,532
Alcatel 100,408 14,134
Banque Nationale de Paris SA 152,397 12,699
Lafarge SA 84,708 8,054
Societe National d'Exploitation
Industrielle des Tabacs et
Allumettes SA 47,500 2,743
Esso SA 7,660 632
------------
123,740
------------
GERMANY (7.1%)
RWE AG 420,180 19,452
Bayer AG 398,915 16,641
Volkswagen AG 150,956 9,730
Veba AG 161,000 9,497
Bayerische Hypo-und
Vereinsbank AG 128,000 8,314
Varta AG 15,480 1,884
------------
65,518
------------
GREECE (0.1%)
o STET Hellas
Telecommunications SA ADR 48,664 1,089
------------
HONG KONG (1.7%)
Hong Kong Land Holdings Ltd. 4,167,100 6,751
Wharf Holdings Ltd. 1,750,000 5,458
Swire Pacific Ltd. A Shares 788,000 3,900
------------
16,109
------------
INDONESIA (0.6%)
o PT Indah Kiat Pulp &
Paper Corp. 5,841,885 2,715
o PT Pabrik Kertas Tjiwi Kimia 3,175,751 1,222
o PT Bank Internasional
Indonesia (Foreign) 28,089,600 816
12
<PAGE>
- -----------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -----------------------------------------------------------------
o PT Kalbe Farma 706,000 215
o PT Inti Indorayon Utama 545,000 65
PT Unilever Indonesia 9,900 58
o PT Indah Kiat Pulp &
Paper Corp. Warrants
Exp. 7/11/2002 96,504 29
o PT Bank Dagang Nasional
Indonesia (Foreign) 3,100,998 0
------------
5,120
------------
ITALY (1.8%)
o Telecom Italia SpA 820,364 8,528
Ente Nazionale
Idrocarburi SpA 1,298,600 7,754
------------
16,282
------------
JAPAN (23.3%)
Matsushita Electric
Industrial Co., Ltd. 1,039,000 20,173
Hitachi Ltd. 1,687,000 15,820
Tokyo Gas Co., Ltd. 6,161,000 15,169
Mitsubishi Estate Co., Ltd. 1,310,000 12,782
Sakura Bank Ltd. 2,797,000 10,607
Fuji Heavy Industries Ltd. 1,343,000 10,364
Nippon Yusen Kabushiki
Kaisha Co. 2,640,000 10,164
Toyo Seikan Kaisha Ltd. 450,000 10,113
Nippon Telegraph and
Telephone Corp. 841 9,797
Nikko Securities Co., Ltd. 1,420,000 9,163
Yamaha Motor Co., Ltd. 947,000 8,794
West Japan Railway Co. 2,232 8,557
Sumitomo Marine &
Fire Insurance Co. 1,316,000 7,937
Fuji Photo Film Co., Ltd. 206,000 7,795
Daiichi Pharmaceutical
Co., Ltd. 488,000 7,572
Sankyo Co., Ltd. 235,000 5,922
Taiheiyo Cement Corp 2,028,800 5,816
Nisshinbo Industries, Inc. 1,252,000 5,700
Mitsubishi Heavy
Industries Ltd. 1,121,000 4,547
Koito Manufacturing Co., Ltd. 899,000 4,070
Canon, Inc. 137,000 3,939
Nissan Fire & Marine
Insurance Co., Ltd. 1,125,000 3,532
Kansai Paint Co., Ltd. 1,138,000 3,488
Toray Industries, Inc. 667,000 3,340
Uny Co., Ltd. 175,000 2,631
Kajima Corp. 585,000 2,127
Sanwa International Trust
1.25% Cvt. Pfd. 82 2,119
o Marudai Food Co., Ltd. 874,000 1,877
Japan Wool Textile Co., Ltd. 318,000 1,477
------------
215,392
------------
NETHERLANDS (4.9%)
Akzo Nobel NV 481,295 20,251
ING Groep NV 197,244 10,679
Kon KPN NV 159,646 7,491
Buhrmann NV 190,000 3,066
Philips Electronics N.V. 26,962 2,660
TNT Post Group NV 47,797 1,141
------------
45,288
------------
NEW ZEALAND (0.2%)
Fletcher Challenge Ltd. Paper 1,954,200 1,460
o Brierley Investments Ltd. 2,736,300 769
o Fletcher Challenge Ltd. Forest 18,168 10
------------
2,239
------------
PHILIPPINES (0.3%)
Philippine Long Distance
Telephone Co. 86,000 2,622
o JG Summit Holdings Inc.
Class B 3,226,000 356
o EEI Corp. 4,435,000 191
o Philex Mining Corp. Class B 5,710,500 57
------------
3,226
------------
PORTUGAL (0.2%)
Electricidade de Portugal SA 95,000 1,711
------------
SINGAPORE (2.8%)
Development Bank of
Singapore Ltd. (Foreign) 1,172,000 14,319
Keppel Corp., Ltd. 2,212,250 7,537
Dairy Farm International
Holdings Ltd. 1,585,740 1,903
Jardine Strategic Holdings Ltd. 651,000 1,693
------------
25,452
------------
SOUTH KOREA (0.8%)
SK Telecom Co., Ltd. 2,903 3,936
SK Telecom Co. Ltd. ADR 201,490 3,425
o Hyundai Motor Co., Ltd. GDR 44,000 250
o SK Telecom Co., Ltd. Rights
Exp. 7/26/1999 666 78
------------
7,689
------------
SPAIN (0.9%)
ENDESA SpA 380,402 8,113
------------
SWEDEN (2.0%)
Electrolux AB Series B 580,486 12,154
ForeningsSparbanken AB 427,800 6,038
------------
18,192
------------
SWITZERLAND (4.7%)
Nestle SA (Registered) 12,995 23,414
Novartis AG (Registered) 8,536 12,464
Schindler Holding AG (Ptg. Ctf.) 5,013 7,675
------------
43,553
------------
THAILAND (1.4%)
o Bangkok Bank PLC (Foreign) 1,300,000 4,865
o Thai Farmers Bank PLC
(Foreign) 1,500,000 4,637
o Shin Corporations PLC
(Foreign) 706,200 3,294
Thai Plastic & Chemical PLC
(Foreign) 187,850 346
o TPI Polene PLC (Foreign) 91,875 68
------------
13,210
------------
13
<PAGE>
- -----------------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL VALUE FUND SHARES (000)
- -----------------------------------------------------------------
UNITED KINGDOM (21.4%)
o BG PLC 2,922,000 17,848
Shell Transport & Trading Co. 2,365,900 17,743
Invensys PLC 3,714,375 17,580
Allied Domecq PLC 1,816,400 17,523
AstraZeneca Group PLC 308,333 11,983
Scottish Power PLC 1,368,100 11,818
MEPC PLC 1,373,862 11,175
British American Tobacco PLC 1,137,571 10,696
Scottish & Newcastle PLC 1,019,135 10,611
Safeway PLC 2,396,320 9,604
BOC Group PLC 432,044 8,445
United Biscuits Holdings PLC 2,322,666 6,984
United Utilities PLC 554,580 6,740
Tarmac PLC 2,816,036 5,282
IMI PLC 1,214,000 4,921
Royal & Sun Alliance
Insurance Group PLC 536,000 4,808
Smith & Nephew PLC 1,558,450 4,741
Slough Estates PLC 610,000 3,462
Great Portland Estates 997,030 3,446
BPB PLC 523,050 3,100
Rank Group PLC 727,800 2,894
Allied Zurich PLC 213,452 2,683
P&O Steam Navigation Co. 118,197 1,775
Coats Viyella PLC 1,734,500 1,394
Severn Trent PLC 59,000 871
------------
198,127
------------
- -----------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $786,590) 865,304
- -----------------------------------------------------------------
Face
Amount
(000)
- -----------------------------------------------------------------
CONVERTIBLE BOND (0.2%)
- -----------------------------------------------------------------
Burns, Philp & Co. Ltd.
1.50%, 8/10/2003
(COST $1,325) AUD 11,129.284 1,473
- -----------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (14.5%)
- -----------------------------------------------------------------
TIME DEPOSITS
HSBC Malaysia
3.75%, 7/2/1999 MYR 31 8
3.75%, 7/5/1999 MYR 3,220 847
4.00%, 7/3/1999 MYR 230 60
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.87%, 7/1/1999 $62,367 62,367
4.96%, 7/1/1999--Note F 70,578 70,578
- -----------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $133,860) 133,860
- -----------------------------------------------------------------
TOTAL INVESTMENTS (108.2%)
(COST $921,775) $1,000,637
- -----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-8.2%)
- -----------------------------------------------------------------
Other Assets--Note C 13,613
Security Lending Collateral
Payable to Brokers--Note F (70,578)
Other Liabilities (18,868)
------------
(75,833)
- -----------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------
Applicable to 33,026,625 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $924,804
=================================================================
NET ASSET VALUE PER SHARE $28.00
=================================================================
*See Note A in Notes to Financial Statements.
oNon-Income-Producing Security.
ADR--American Depositary Receipt.
AUD--Australian Dollar.
GDR--Global Depositary Receipt.
MYR--Malaysian Ringgit.
(Ptg. Ctf.)--Participating Certificate.
- -----------------------------------------------------------------
AT JUNE 30, 1999, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------
Paid in Capital $836,449 $25.32
Undistributed Net Investment
Income--Note D 2,363 .07
Accumulated Net Realized
Gains--Note D 7,280 .22
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 78,862 2.39
Foreign Currencies (150) --
- -----------------------------------------------------------------
NET ASSETS $924,804 $28.00
=================================================================
14
<PAGE>
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period--these
amounts include the effect of foreign currency movements on the value of the
fund's securities. Currency gains (losses) on the translation of other assets
and liabilities, combined with the results of any investments in forward
currency contracts during the period, are shown separately.
- --------------------------------------------------------------------------------
INTERNATIONAL VALUE FUND
SIX MONTHS ENDED JUNE 30, 1999
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* $11,588
Interest 667
Security Lending 294
-----------
Total Income 12,549
-----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 652
Performance Adjustment (85)
The Vanguard Group--Note C
Management and Administrative 1,566
Marketing and Distribution 76
Custodian Fees 254
Auditing Fees 4
Shareholders' Reports 35
Trustees' Fees and Expenses 1
-----------
Total Expenses 2,503
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 10,046
- --------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 14,933
Foreign Currencies and Forward Currency Contracts 2,471
- --------------------------------------------------------------------------------
REALIZED NET GAIN 17,404
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 63,684
Foreign Currencies and Forward Currency Contracts 1,799
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 65,483
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $92,933
================================================================================
*Dividends are net of foreign withholding taxes of $1,241,000.
15
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund'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 fund'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
fund, 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.
- --------------------------------------------------------------------------------
INTERNATIONAL VALUE FUND
-----------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 1999 DEC. 31, 1998
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 10,046 $ 22,970
Realized Net Gain 17,404 6,900
Change in Unrealized Appreciation (Depreciation) 65,483 112,495
-----------------------------
Net Increase in Net Assets Resulting from
Operations 92,933 142,365
-----------------------------
DISTRIBUTIONS
Net Investment Income (315) (32,297)
Realized Capital Gain -- (28,807)
-----------------------------
Total Distributions (315) (61,104)
-----------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 231,209 247,777
Issued in Lieu of Cash Distributions 283 56,521
Redeemed (205,609) (356,018)
-----------------------------
Net Increase (Decrease) from Capital Share
Transactions 25,883 (51,720)
- --------------------------------------------------------------------------------
Total Increase 118,501 29,541
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 806,303 776,762
-----------------------------
End of Period $924,804 $806,303
================================================================================
(1)Shares Issued (Redeemed)
Issued 8,796 9,809
Issued in Lieu of Cash Distributions 11 2,217
Redeemed (7,919) (14,192)
-----------------------------
Net Increase (Decrease) in Shares Outstanding 888 (2,166)
================================================================================
16
<PAGE>
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund'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 fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund 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 fund for
one year.
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL VALUE FUND
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ---------------------------------------------------------------
THROUGHOUT EACH PERIOD JUNE 30, 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $25.09 $22.64 $27.54 $31.11 $31.48 $31.04
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .32 .77 .690 .82 .750 .55
Net Realized and Unrealized Gain (Loss)
on Investments 2.60 3.64 (1.945) 2.20 2.185 1.08
-----------------------------------------------------------------------------
Total from Investment Operations 2.92 4.41 (1.255) 3.02 2.935 1.63
-----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.01) (1.06) (.690) (.82) (.790) (.56)
Distributions from Realized Capital Gains -- (.90) (2.955) (5.77) (2.515) (.63)
-----------------------------------------------------------------------------
Total Distributions (.01) (1.96) (3.645) (6.59) (3.305) (1.19)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $28.00 $25.09 $22.64 $27.54 $31.11 $31.48
====================================================================================================================================
TOTAL RETURN 11.64% 19.46% -4.58% 10.22% 9.65% 5.25%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $925 $806 $777 $917 $988 $1,053
Ratio of Total Expenses to
Average Net Assets 0.61%* 0.52% 0.49% 0.50% 0.47% 0.34%
Ratio of Net Investment Income to
Average Net Assets 2.43%* 2.77% 2.36% 2.50% 2.29% 1.71%
Portfolio Turnover Rate 42%* 39% 37% 82% 47% 40%
====================================================================================================================================
*Annualized.
</TABLE>
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Vanguard International Value Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company, or mutual fund. The fund
invests in securities of foreign issuers, which may subject it to investment
risks not normally associated with investing in securities of United States
corporations.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The fund 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. FOREIGN CURRENCY: Securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the
exchange rate on the valuation date as employed by Morgan Stanley Capital
International in the calculation of its indexes.
Realized gains (losses) and unrealized appreciation (depreciation) on
investment securities include the effects of changes in exchange rates since the
securities were purchased, combined with the effects of changes in security
prices. Fluctuations in the value of other assets and liabilities resulting from
changes in exchange rates are recorded as unrealized foreign currency gains
(losses) until the asset or liability is settled in cash, when they are recorded
as realized foreign currency gains (losses).
3. FORWARD CURRENCY CONTRACTS: The fund enters into forward currency
contracts to protect the value of securities and related receivables and
payables against changes in future foreign exchange rates. The fund's risks in
using these contracts include movement in the values of the foreign currencies
relative to the U.S. dollar and the ability of the counterparties to fulfill
their obligations under the contracts.
Forward currency contracts are valued at their quoted daily settlement
prices. The aggregate principal amounts of the contracts are not recorded in the
financial statements. Fluctuations in the value of the contracts are recorded in
the Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized forward currency contract gains
(losses).
4. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
5. REPURCHASE AGREEMENTS: The fund, 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.
6. 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.
7. 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.
18
<PAGE>
B. Phillips & Drew provides investment advisory services to the fund for a fee
calculated at an annual percentage rate of average net assets. The basic
advisory fee is subject to quarterly adjustments based on performance relative
to the Morgan Stanley Capital International Europe, Australasia, Far East Index.
For the six months ended June 30, 1999, the advisory fee represented an
effective annual basic rate of 0.16% of the fund's average net assets, before a
decrease of $85,000 (0.02%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the Board of Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At June 30, 1999, the fund had contributed capital of $133,000 to
Vanguard (included in Other Assets), representing 0.01% of the fund's net assets
and 0.2% of Vanguard's capitalization. The fund's Trustees and officers are also
Directors and officers of Vanguard.
D. During the six months ended June 30, 1999, the fund purchased $166,811,000 of
investment securities and sold $179,832,000 of investment securities, other than
temporary cash investments.
During the six months ended June 30, 1999, the fund realized net foreign
currency losses of $188,000, which decreased distributable net income for tax
purposes; accordingly, such losses have been reclassified from accumulated net
realized gains to undistributed net investment income.
During 1998, the fund received securities with a value of $10,586,000 in a
corporate spinoff that increased taxable income and the tax basis cost of
investments, but had no effect on net investment income or the cost of
investments for financial statement purposes. During the six months ended June
30, 1999, the fund realized gains on the sale of these securities of $3,665,000,
which were included in 1998 distributions from net investment income for tax
purposes; accordingly such gains have been reclassified from accumulated net
realized gains to undistributed net investment income. At June 30, 1999, the
required distribution of $6,921,000 related to the remaining securities is
reflected in the balance of undistributed net investment income, and the
corresponding difference between the securities' cost for financial statement
and tax purposes is reflected in unrealized appreciation.
E. At June 30, 1999, net unrealized appreciation of investment securities for
federal income tax purposes was $71,941,000, consisting of unrealized gains of
$164,191,000 on securities that had risen in value since their purchase and
$92,250,000 in unrealized losses on securities that had fallen in value since
their purchase. See Note D.
The fund had net unrealized foreign currency loss of $150,000 resulting
from the translation of other assets and liabilities at June 30, 1999.
F. The market value of securities on loan to broker/dealers at June 30, 1999,
was $67,279,000, for which the fund held cash collateral of $70,578,000. Cash
collateral received is invested in repurchase agreements.
19
<PAGE>
NOTICE TO SHAREHOLDERS ABOUT Y2K
As is well known by now, the approaching calendar change to 2000 has posed a
challenge to many computer systems worldwide. Computers that are not modified
could interpret "00" as 1900 rather than 2000 and produce errors in
date-dependent calculations, including bond interest payments, stock trade
settlements, retirement benefits, and other financial transactions.
OUR APPROACH
Vanguard has taken this challenge seriously. We have had a Year 2000 Project
under way since 1996 to fulfill our responsibility to safeguard our business
relationships and the security of our investors' accounts.
Our internal systems are Year 2000-compliant. They have been renovated
and thoroughly tested and are ready for the date change. As for the external
systems that connect with ours, we have been working for many months with
clients, business partners, and providers of products and services to assess
their compliance. We have analyzed the external services we require and have
developed contingency plans--including provision for alternative providers where
appropriate.
On New Year's Day, our telephone centers will be staffed and ready for
shareholder calls. However, we expect the volume of inquiries over the New
Year's weekend to be high, and we encourage shareholders to check their accounts
via our website or automated telephone systems, which offer much greater service
capacity and efficiency. This will also help our live representatives to provide
a higher level of service to those with specific transaction or other
service-related needs.
WHAT YOU CAN DO
We assure you we will protect our shareholders' records, so account records will
not be lost. Nevertheless, keeping copies of current records is always
advisable. You should keep at least your third-quarter statement and any
confirmations you receive from us between October 1, 1999, and year-end.
If you are a registered user of Access Vanguard(TM) (www.vanguard.com),
you can retrieve this information through the secure "Your Accounts" section and
print copies for your files. If you are not registered for Access Vanguard and
wish to have this flexibility, you should register as soon as possible so that
you can receive your password and become familiar with this service before the
New Year's weekend. Likewise, you may need personal identification numbers to
use our automated telephone services: Vanguard Tele-Account(R) for individual
investors (1-800-662-6273) and The VOICE(TM) Network for participants in
employer-sponsored retirement plans (1-800-523-1188).
Our Year 2000 Project's primary goal from the start has been to prepare our
systems for business as usual on behalf of our shareholders into 2000 and
beyond. We remain confident we will meet that goal, and we look forward to
serving you in the years to come.
20
<PAGE>
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and
Director/Trustee of The Vanguard Group, Inc.,
and each of the investment companies in
The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer,
and Director/Trustee of The Vanguard Group, Inc.,
and each of the investment companies in
The Vanguard Group.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson
& Johnson; Director of Johnson & JohnsonoMerck
Consumer Pharmaceuticals Co., Women First
HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and
Women's Research and Education Institute.
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, Banco Bilbao Gestinova, 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., NACCO Industries, and Newfield
Exploration Co.
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.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.;
Treasurer 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>
VANGUARD
MILESTONES
[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28,1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[SHIP LOGO]
[THE VANGUARD GROUP (R) LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's
shareholders. It may not be distributed
to prospective investors unless it
is preceded or accompanied by the
current fund prospectus.
Q462-08/18/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
