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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-65955-99) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 30
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 30
VANGUARD TRUSTEES' EQUITY FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON OCTOBER 9, 2000, PURSUANT TO PARAGRAPH (B) OF RULE 485.
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<PAGE>
VANGUARD INTERNATIONAL VALUE FUND
Prospectus
October 9, 2000
This prospectus contains
financial data for the
Fund for the six months
ended June 30, 2000.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[A MEMBER OF
THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD INTERNATIONAL VALUE FUND
Prospectus
October 9, 2000
An International Stock Mutual Fund
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CONTENTS
1 FUND PROFILE 14 FINANCIAL HIGHLIGHTS
3 ADDITIONAL INFORMATION 16 INVESTING WITH VANGUARD
4 A WORD ABOUT RISK 16 Services and Account Features
4 WHO SHOULD INVEST 17 Types of Accounts
5 PRIMARY INVESTMENT STRATEGIES 18 Buying Shares
10 THE FUND AND VANGUARD 20 Redeeming Shares
11 INVESTMENT ADVISER 23 Transferring Registration
12 DIVIDENDS, CAPITAL GAINS, AND TAXES 24 Fund and Account Updates
14 SHARE PRICE GLOSSARY (inside back cover)
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
International Value Fund. To highlight terms and concepts important to mutual
fund investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
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1
FUND PROFILE
The following profile summarizes key features of Vanguard International Value
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital growth and some income.
INVESTMENT STRATEGIES
The Fund invests mainly in common stocks of companies located outside the United
States that are considered by the Fund's adviser to be undervalued. Such stocks,
called "value" stocks, often are out of favor in periods when investors are
drawn to companies with strong prospects for growth. The prices of value stocks
therefore may be below average in comparison to such fundamental factors as
earnings, revenue, and book value. The Fund invests in small-, mid-, and
large-capitalization companies, and is expected to diversify its assets across
developed and emerging markets in Eastern and Western Europe, the Far East, and
Latin America.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- Currency risk, which is the chance investments in a particular country will
decrease in value if the U.S. dollar rises in value against that country's
currency.
- Country risk, which is the chance that domestic events--such as political
upheaval, financial troubles, or a natural disaster--will weaken a
country's securities markets. Investments in emerging market countries
involve a greater degree of country risk than investments in developed
countries.
- Investment style risk, which is the chance that returns from the types of
stocks held by the Fund--small-, mid-, and large-capitalization value
stocks--will trail returns from the overall stock market. Historically,
small- and mid-cap stocks have been much more volatile than large-cap
stocks.
- Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
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2
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 -12.26%
1991 9.96%
1992 -8.72%
1993 30.49%
1994 5.25%
1995 9.65%
1996 10.22%
1997 -4.58%
1998 19.46%
1999 21.81%
----------------------------------------------------
The Fund's year-to-date return as of the most recent
calendar quarter ended June 30, 2000, was 0.20%.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.62% (quarter ended December 31, 1998) and the lowest return for a
quarter was -18.00% (quarter ended September 30, 1990).
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
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1 YEAR 5 YEARS 10 YEARS
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Vanguard International Value Fund 21.81% 10.91% 7.34%
MSCI EAFE Index* 27.30 13.15 7.33
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*Morgan Stanley Capital International Europe, Australasia, Far East Index.
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FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.51%
12b-1 Distribution Fee: None
Other Expenses: 0.08%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.59%
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3
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year and that operating expenses remain the same. The results apply whether or
not you redeem your investment at the end of each period.
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------
$60 $189 $329 $738
-------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
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PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income or assets, are expressed as a percentage of the net
assets of the fund. Vanguard International Value Fund's expense ratio in fiscal
year 1999 was 0.59%, or $5.90 per $1,000 of average net assets. The average
international stock mutual fund had expenses in 1999 of 1.72%, or $17.20 per
$1,000 of average net assets (derived from data provided by Lipper Inc., which
reports on the mutual fund industry). Management expenses, which are one part of
operating expenses, include investment advisory fees as well as other costs of
managing a fund--such as account maintenance, reporting, accounting, legal, and
other administrative expenses.
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PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund may achieve. Even seemingly small differences in expenses can, over time,
have a dramatic effect on a fund's performance.
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accounts for minors
INVESTMENT ADVISER
Hansberger Global Investors, Inc., NEWSPAPER ABBREVIATION
Fort Lauderdale, Fla., since IntlVal
August 1, 2000
INCEPTION DATE VANGUARD FUND NUMBER
May 16, 1983 046
NET ASSETS AS OF JUNE 30, 2000 CUSIP NUMBER
$982 million 921939203
SUITABLE FOR IRAS TICKER SYMBOL
Yes VTRIX
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<PAGE>
4
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A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard
International Value Fund. It is important to keep in mind one of the main axioms
of investing: The higher the risk of losing money, the higher the potential
reward. The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in the Fund, you should also
take into account your personal tolerance for the daily fluctuations of
international stock and currency markets.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
================================================================================
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- You are seeking investment opportunities outside the United States.
- You wish to add a value-oriented international stock fund to your existing
holdings-- which could include other stock investments as well as bond,
money market, and tax-exempt investments.
- You are willing to accept the additional risks (country risk, currency
risk, etc.) associated with international investments.
- You are seeking growth of capital over the long term--at least five
years--along with some income.
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PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
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THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage short-
term trading:
- The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- The Fund reserves the right to stop offering shares at any time.
<PAGE>
5
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective, long-term growth of capital and some income. It also
explains how the adviser implements these strategies. In addition, this section
discusses several important risks--market risk, currency risk, country risk,
investment style risk, and manager risk--faced by investors in the Fund. The
Fund's Board of Trustees, which oversees the management of the Fund, may change
the Fund's investment objectives or strategies in the interest of shareholders
without a shareholder vote.
MARKET EXPOSURE
The Fund is a value-oriented fund that invests primarily in the common stocks of
large, medium-size and small foreign companies. Under normal circumstances, at
least 65% of the Fund's total assets will be invested in foreign stocks of at
least three different countries. As of June 30, 2000, the Fund's top three
country holdings were the United Kingdom (25.5%), Japan (24.2%), and France
(10.6%). These percentages, however, are subject to change, and consequently so
may the countries that constitute the top three holdings.
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PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $13 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1.5 billion and $13 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1.5 billion. Vanguard
periodically reassesses these classifications.
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[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
IN ADDITION, INVESTMENTS IN FOREIGN STOCK MARKETS CAN BE AS RISKY AS, IF
NOT MORE RISKY THAN, U.S. STOCK INVESTMENTS. THE PRICES OF INTERNATIONAL
STOCKS AND THE PRICES OF U.S. STOCKS HAVE OFTEN MOVED IN OPPOSITE
DIRECTIONS. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL
YEARS.
<PAGE>
6
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PLAIN TALK ABOUT
THE RISKS OF INTERNATIONAL INVESTING
Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stock may not be as liquid as the stock of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than their
counterparts in the United States. These factors, among others, could negatively
impact the returns Americans receive from a foreign investment.
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To illustrate the volatility of international stock prices, the following
table shows the best, worst, and average total returns for foreign stock markets
over various periods as measured by the MSCI Europe, Australasia, Far East (MSCI
EAFE) Index, a widely used barometer of international market activity. (Total
returns consist of dividend income plus change in market price.) Note that the
returns shown do not include the costs of buying and selling stocks or other
expenses that a real-world investment portfolio would incur. Note, also, that
the gap between best and worst tends to narrow over the long term.
-------------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1999)
-------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
-------------------------------------------------------------
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2% 1.5% 5.9% 12.0%
Average 15.2% 13.6% 14.5% 14.7%
--------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1999. Keep in mind that this was a particularly favorable period for all
stock markets. These average returns reflect past performance on international
stocks; you should not regard them as an indication of future returns from
either foreign markets as a whole or this Fund in particular.
Note that the table does not take into account returns for emerging
markets, which can be substantially more volatile than the more developed
markets included in the MSCI EAFE Index. To illustrate this variability, the
following table shows returns for different international markets--as well as
the U.S. market for comparison--from 1990 through 1999, as measured by their
respective indexes. Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur.
<PAGE>
7
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STOCK MARKET RETURNS FOR DIFFERENT INTERNATIONAL MARKETS*
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EUROPEAN PACIFIC EMERGING U.S.
MARKET MARKET MARKETS MARKETS
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1990 -2.00% -34.43% -10.55% -3.10%
1991 14.12 11.51 59.91 30.47
1992 -3.92 -18.51 11.40 7.62
1993 29.25 36.15 74.84 10.08
1994 2.82 12.82 -7.31 1.32
1995 22.08 2.89 0.01** 37.58
1996 21.42 -8.23 15.19 22.96
1997 23.75 -25.74 -16.37 33.36
1998 28.68 2.64 -18.39 28.58
1999 15.77 56.38 60.86 21.04
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*European market returns are measured by the MSCI Europe Index; Pacific market
returns are measured by the MSCI Pacific Free Index; emerging markets returns
are measured by the Select Emerging Markets Free Index; and U.S. market
returns are measured by the Standard & Poor's 500 Index.
**The inception date of the Select Emerging Markets Free Index was May 4, 1994;
returns shown for 1990 to 1994 are measured by the MSCI Emerging Markets Free
Index.
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[FLAG] THE FUND IS SUBJECT TO CURRENCY RISK, WHICH IS THE CHANCE THAT A STRONGER
U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS INVESTING OVERSEAS.
GENERALLY, WHEN THE DOLLAR RISES IN VALUE AGAINST ANOTHER COUNTRY'S
CURRENCY, YOUR INVESTMENT IN THAT COUNTRY LOSES VALUE BECAUSE IT IS
DENOMINATED IN A CURRENCY THAT IS WORTH FEWER U.S. DOLLARS. ON THE OTHER
HAND, A WEAKER U.S. DOLLAR GENERALLY LEADS TO HIGHER RETURNS FOR AMERICANS
HOLDING INVESTMENTS DENOMINATED IN FOREIGN CURRENCIES.
[FLAG] THE FUND IS SUBJECT TO COUNTRY RISK, WHICH IS THE CHANCE THAT POLITICAL
EVENTS (A WAR, NATIONAL ELECTIONS), FINANCIAL PROBLEMS (RISING INFLATION,
GOVERNMENT DEFAULT), OR NATURAL DISASTERS (AN EARTHQUAKE, A FLOOD) WILL
WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN THAT COUNTRY TO LOSE
MONEY.
<PAGE>
8
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PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such factors as earnings and book value, and
these stocks typically have above-average dividend yields. Growth funds
generally focus on companies believed to have above-average potential for growth
in revenue and earnings. Reflecting the market's high expectations for superior
growth, such stocks typically have low dividend yields and above-average prices
in relation to such measures as revenue, earnings, and book value. Value and
growth stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. (Source: Historic returns of
the Russell 3000 Value Index and the Russell 3000 Growth Index). In general,
value funds are appropriate for investors who want some dividend income and the
potential for capital gains, but are less tolerant of share-price fluctuations.
Growth funds, by contrast, appeal to investors who will accept more volatility
in hopes of a greater increase in share price. Growth funds also may appeal to
investors with taxable accounts who want a higher proportion of returns to come
as capital gains (which may be taxed at lower rates than dividend income).
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[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM VALUE STOCKS WILL TRAIL RETURNS FROM OTHER ASSET CLASSES OR
THE OVERALL STOCK MARKET. AS A GROUP, VALUE STOCKS TEND TO GO THROUGH
CYCLES OF DOING BETTER--OR WORSE--THAN COMMON STOCKS IN GENERAL. THESE
PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
SECURITY SELECTION
Hansberger Global Investors, Inc. (HGI), adviser to the Fund, employs an
intensive fundamental approach to selecting stocks. HGI seeks to identify stocks
with a market value that is believed to be less than a company's intrinsic
value, based on its long-term potential.
HGI's investment approach integrates extensive research (both internal and
external), proprietary valuation screens, and fundamental analysis of stocks
with a long-term investment perspective. This analysis involves evaluating a
company's prospects by focusing on such factors as: the quality of a company's
management; the company's competitive position within its industry; the
financial strength of the company; the quality and growth potential of its
earnings; and the outlook for the company's future based on these and other
similar factors. The objective of this analysis is to identify undervalued
securities for the Fund, to hold them for the long term, and to achieve
long-term capital growth as the marketplace realizes the value of these
securities over time. HGI will also consider other factors in its analysis,
including country and political risks, and economic and market conditions.
HGI seeks to broaden the scope, and increase the effectiveness, of its
fundamental analysis by searching for undervalued stocks in many countries
around the world. This global search provides the adviser with more diverse
opportunities and flexibility to shift portfolio investments not only from
company to company and industry to industry, but also from country to country,
in search of undervalued stocks.
<PAGE>
9
Under HGI's management, the Fund is expected to invest in 90-120 stocks,
across a broad spectrum of market capitalizations. The Fund's range of stock
holdings, and diversity of capitalization ranges, may differ significantly from
the typical international equity fund.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISER
WILL DO A POOR JOB OF SELECTING STOCKS.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long the securities have been held. The "Financial
Highlights" section of this prospectus shows historic turnover rates for the
Fund. A substantial portion of Fund assets will be turned over in the current
fiscal year as a result of HGI's restructuring of the Fund, following its
replacement of a prior adviser on August 1, 2000. In the long run, however, it
is expected that under normal circumstances the Fund's average annual turnover
rate will be less than 50%. (A turnover rate of 100% would occur, for example,
if the Fund sold and replaced securities valued at 100% of its net assets within
a one-year period.)
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PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of June 30, 2000, the average turnover rate for all
international stock funds was approximately 91%, according to Morningstar, Inc.
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OTHER INVESTMENT POLICIES AND RISKS
Besides investing in stocks of foreign companies, the Fund may make certain
other kinds of investments to achieve its objective.
The Fund may enter into forward foreign currency contracts, which help
protect its holdings against unfavorable short-term changes in exchange rates. A
forward foreign currency contract is an agreement to buy or sell a country's
currency at a specific price on a specific date, usually 30, 60, or 90 days in
the future. In other words, the contract guarantees an exchange rate on a given
date. Managers of international stock funds use these contracts to guard against
sudden, unfavorable changes in U.S. dollar/foreign currency exchange rates. The
contracts will not prevent the Fund's securities from falling in value during
foreign market downswings. The adviser may use these contracts to eliminate
some of the uncertainty of foreign exchange rates--but will not speculate on
changes in the market.
The Fund may also invest, to a limited extent, in futures and options
contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
<PAGE>
10
losses of an investment. The Fund's obligation to purchase securities under
futures contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may also invest in preferred stocks and convertible bonds. With
preferred stocks, holders receive set dividends from the issuer; their claim on
the issuer's income and assets ranks before that common stockholders, but after
that of bondholders. Convertible bonds are those that are convertible into, or
exchangeable for, common stocks.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
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PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some
futures and options have been trading on regulated exchanges for more than two
decades. These "traditional" derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. It is these characteristics that differentiate futures and options from
the relatively new types of derivatives. If used for speculation or as leveraged
investments, derivatives can carry considerable risks.
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THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group (R), a family of more than 35
investment companies with more than 100 funds holding assets worth more than
$580 billion. All of the Vanguard funds share in the expenses associated with
business operations, such as personnel, office space, equipment, and
advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
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PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
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<PAGE>
11
INVESTMENT ADVISER
Hansberger Global Investors, Inc. (HGI), 515 East Las Olas Boulevard, Suite
1300, Fort Lauderdale, FL 33301, founded in 1994, serves as the Fund's
investment adviser. As of June 30, 2000, HGI managed nearly $3 billion in
assets. HGI manages the Fund subject to the control of the trustees and officers
of the Fund.
The firm began advising the Fund on August 1, 2000, replacing a prior
adviser, Phillips & Drew. For the year ended December 31, 1999, the advisory fee
paid to Phillips & Drew represented an effective annual rate of 0.15% of the
Fund's average net assets before a decrease of 0.04% based on performance.
HGI's advisory fee is paid quarterly, and is based on certain annual
percentage rates applied to the Fund's average month-end assets for each
quarter.
In addition, starting September 30, 2001, HGI's advisory fee may be
increased or decreased, based on the cumulative investment performance of the
Fund over a trailing 36-month period as compared with the cumulative total
return of the MSCI EAFE Index over the same period. This index is a widely used
barometer of international market activity. Note that this performance fee
structure will not be in full operation until October 1, 2003; until then, the
fee will be phased in over a 36-month period, using certain transition rules.
Please consult the Fund's Statement of Additional Information for a complete
explanation of how advisory fees are calculated.
The Fund has authorized HGI to choose brokers or dealers to handle the
purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
In the interest of obtaining better execution of a transaction, HGI may at
times choose brokers that charge higher commissions. If more than one broker can
obtain the best available price and most favorable execution of a transaction,
then HGI is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to HGI or the Fund. Also, the Fund
may direct HGI to use a particular broker for certain transactions in exchange
for commission rebates or research services provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
<PAGE>
12
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER
The individual primarily responsible for overseeing the implementation of
Hansberger Global Investors' (HGI) strategy for the Fund is:
AJIT DAYAL, Deputy Chief Investment Officer of HGI, and Fund Manager; has worked
in investment management since 1987; with HGI since 1998; B.A., Bombay
University; M.B.A., University of North Carolina at Chapel Hill.
Assisting Mr. Dayal are:
THOMAS HANSBERGER, CFA, CIC, Chief Investment Officer of HGI; has worked in
investment management since 1965; founded HGI in 1994; B.S., Miami University
(Oxford, Ohio).
RONALD HOLT, Vice President-Research at HGI; has worked in investment management
since 1991; with HGI since 1997; B.A., Columbia University; M.B.A., Stern School
of Business at New York University.
AUREOLE L. W. FOONG, Managing Director-Asian Research at HGI; has worked in
investment management since 1989; with HGI since 1997; B.S., M.B.A., University
of Southern California at Los Angeles.
--------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Distributions generally occur in December. In addition,
the Fund may occasionally be required to make supplemental dividend or capital
gains distributions at some other time during the year. You can receive
distributions of income dividends or capital gains in cash, or you can have them
automatically reinvested in more shares of the Fund.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
- A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
<PAGE>
13
- The Fund may be subject to foreign taxes or foreign tax withholding on
dividends, interest, and some capital gains that it receives on foreign
securities. You may qualify for an offsetting credit or deduction under
U.S. tax laws for your portion of the Fund's foreign tax obligations,
provided that you meet certain requirements. See your tax adviser or IRS
Publications for more information.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- provide us with your correct taxpayer identification number;
- certify that the taxpayer identification number is correct; and
- confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a distribution, because doing so can cost you money in taxes. This is
known as "buying a dividend." For example: On December 15, you invest $5,000,
buying 250 shares for $20 each. If the fund pays a distribution of $1 per share
on December 16, its share price would drop to $19 (not counting market change).
You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received--even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
--------------------------------------------------------------------------------
<PAGE>
14
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = --------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV multiplied by
the number of shares you own gives you the dollar amount you would have received
had you sold all of your shares back to the Fund that day. Because foreign
securities markets may operate on days which are not business days in the United
States, the value of the Fund's holdings may change on days when shareholders
will not be able to purchase or redeem the Fund's shares.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees. The
Fund also may use fair value pricing if the value of a security held by the Fund
is materially affected by events occurring after the close of the primary
markets or exchanges on which such security is traded. In these situations,
prices used by the Fund to calculate its net asset value may differ from quoted
or published prices for the securities.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds." Different newspapers
use different abbreviations of the Fund's name, but the most common is INTLVAL.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each period
on an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<PAGE>
15
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began the six monther ended June 30, 2000 with a net asset value
(price) of $29.13 per share. During the period, the Fund earned $0.32 per share
from investment income (interest and dividends). There was a decline of $0.28
per share from investments that had depreciated in value or that were sold for
lower prices than the Fund paid for them.
Shareholders received $0.22 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's dividends or capital gains.
The earnings ($0.04 per share) minus the distributions ($0.22 per share)
resulted in a share price of $28.95 at the end of the period. This was a
decrease of $0.18 per share (from $29.13 at the beginning of the period to
$28.95 at the end of the period). For a shareholder who reinvested the
distributions in the purchase of more shares, the total return from the Fund was
0.20% for the period.
As of June 30, 2000, the Fund had $982 million in net assets. For the period,
its annualized expense ratio was 0.50% ($5.00 per $1,000 of net assets); and its
annualized net investment income amounted to 2.30% of its average net assets. It
sold and replaced securities valued at 38% of its net assets.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
VANGUARD INTERNATIONAL VALUE FUND
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED --------------------------------------------------------------
JUNE 30, 2000* 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $29.13 $25.09 $22.64 $27.54 $31.11 $31.48
---------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .32 .69 .77 .690 .82 .750
Net Realized and Unrealized Gain (Loss) on Investments (.28) 4.74 3.64 (1.945) 2.20 2.185
---------------------------------------------------------------------------------
Total from Investment Operations .04 5.43 4.41 (1.255) 3.02 2.935
---------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.03) (.66) (1.06) (.690) (.82) (.790)
Distributions from Realized Capital Gains (.19) (.73) (.90) (2.955) (5.77) (2.515)
---------------------------------------------------------------------------------
Total Distributions (.22) (1.39) (1.96) (3.645) (6.59) (3.305)
---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $28.95 $29.13 $25.09 $22.64 $27.54 $31.11
---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 0.20% 21.81% 19.46% -4.58% 10.22% 9.65%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $982 $1,045 $806 $777 $917 $988
Ratio of Total Expenses to Average Net Assets 0.50%+ 0.59% 0.52% 0.49% 0.50% 0.47%
Ratio of Net Investment Income to Average Net Assets 2.30%+ 2.54% 2.77% 2.36% 2.50% 2.29%
Turnover Rate 38%+ 41% 39% 37% 82% 47%
=================================================================================================================================
</TABLE>
*Unaudited.
+Annualized.
<PAGE>
16
--------------------------------------------------------------------------------
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOKLET]. Please call us to request copies.
--------------------------------------------------------------------------------
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
--------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Fund unless you notify us otherwise.
--------------------------------------------------------------------------------
VANGUARD(R) DIRECT DEPOSIT SERVICE [BOOKLET]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
--------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOKLET]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
--------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R) [BOOKLET]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
--------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS(R) [BOOKLET]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
--------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [BOOKLET]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange shares to and from most
Vanguard funds.
--------------------------------------------------------------------------------
ONLINE TRANSACTIONS [COMPUTER]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
- Open a new account.*
- Buy, sell, or exchange shares of most Vanguard funds.
- Change your name/address.
<PAGE>
17
- Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
--------------------------------------------------------------------------------
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
--------------------------------------------------------------------------------
CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273
Call Vanguard for information on your account, account transactions, and account
statements.
--------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
--------------------------------------------------------------------------------
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
--------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
--------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [BOOKLET]
Invest assets held in an existing personal trust.
--------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOKLET]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
--------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOKLET]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
--------------------------------------------------------------------------------
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
--------------------------------------------------------------------------------
VANGUARD PROTOTYPE PLANS
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
--------------------------------------------------------------------------------
<PAGE>
18
BUYING SHARES
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
regular trading on the New York Stock Exchange, generally 4:00 p.m. Eastern
time, you will buy your shares at that day's net asset value.
--------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
--------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
The Fund reserves the right to close any nonretirement fund account whose
balance falls below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$2,500. The low balance fee is waived for investors who have aggregate Vanguard
account assets of $50,000 or more.
--------------------------------------------------------------------------------
BY MAIL TO . . .[ENVELOPE]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-46
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
--------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
--------------------------------------------------------------------------------
BY TELEPHONE TO . . .[TELEPHONE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.)
<PAGE>
19
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.) Use Vanguard Fund Express (see
"Services and Account Features") to transfer assets from your bank account. Call
Client Services before your first use to verify that this option is available.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number (PIN) through Tele-Account at
least seven days before you request your first exchange.
--------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
--------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call Client Services to arrange your wire transaction. Wire transactions to
retirement accounts are only available for asset transfers and rollovers from
other financial institutions. Individual IRA contributions will not be accepted
by wire.
Wire to:
FRB ABA 021001088 HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard International Value Fund-46
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
--------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the Fund's next-determined net asset value after the request is
received, your redemption proceeds will not be available until payment for your
purchase is collected, which may take up to ten calendar days.
--------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt the Fund's
operation or performance.
--------------------------------------------------------------------------------
<PAGE>
20
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.
When Selling Shares:
- Vanguard sends the redemption proceeds to you or a designated third party.*
- You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 22.
When Exchanging Shares:
- The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- You must meet the receiving fund's minimum investment requirements.
- Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
- In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in the "Redeeming Shares"
section of this prospectus.
--------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
--------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are: VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and other retirement accounts. If you sell shares of these funds
online, you will receive a redemption check at your address of record.
--------------------------------------------------------------------------------
ONLINE REQUESTS www.vanguard.com [COMPUTER]
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
--------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
<PAGE>
21
--------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
--------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- The ten-digit account number.
- The name and address exactly as registered on the account.
- The primary Social Security or employer identification number as registered
on the account.
- The Personal Identification Number (PIN), if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
--------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES Vanguard reserves the right to revise or
terminate the telephone redemption privilege at any time, without notice. In
addition, Vanguard can stop selling shares or postpone payment at times when the
New York Stock Exchange is closed or under any emergency circumstances as
determined by the U.S. Securities and Exchange Commission. If you experience
difficulty making a telephone redemption during periods of drastic economic or
market change, you can send us your request by regular or express mail. Follow
the instructions on selling or exchanging shares by mail in this section.
--------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
Vanguard Retirement Accounts:
For information on how to request distributions from:
- Traditional IRAs and Roth IRAs--call Client Services.
- SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
<PAGE>
22
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
--------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
--------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, exchange
to another Vanguard fund, or Fund Express redemption.
--------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
--------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
--------------------------------------------------------------------------------
FUND EXPRESS(R) REDEMPTIONS
Vanguard will electronically transfer funds to your prelinked checking or
savings account.
--------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
- The Fund name and account number.
- The amount of the transaction (in dollars or shares).
- Signatures of all owners exactly as registered on the account (for mail
requests).
- Signature guarantees (if required).*
- Any supporting legal documentation that may be required.
- Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock
exchange.
<PAGE>
23
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
--------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
- You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.
- Your round trips through the Fund must be at least 30 days apart.
- The Fund may refuse a share purchase at any time, for any reason.
- Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the Fund.
--------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
--------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
--------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
--------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
--------------------------------------------------------------------------------
<PAGE>
24
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the advisers, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Client Services Department at
1-800-662-2739.
--------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
--------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOKLET]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
--------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in February and August for this Fund.
--------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
--------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOKLET]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.
--------------------------------------------------------------------------------
<PAGE>
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
COUNTRY RISK
The chance that domestic events--such as political upheaval, financial troubles,
or a natural disaster--will weaken a country's economy.
CURRENCY RISK
The chance that a foreign investment will decrease in value because of
unfavorable currency exchange rates.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, these
stocks typically have low dividend yields and above-average prices in relation
to such factors as revenue, earnings, and book value.
INTERNATIONAL STOCK FUND
A mutual fund that invests in the stocks of companies located outside the United
States.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below average in
comparison with such factors as earnings and book value, and these stocks
typically have above-average dividend yields.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard International Value Fund,
the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are incorporated
by reference into (and are thus
legally a part of) this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy information
about the Fund (including the SAI) at
the SEC's Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a fee,
by electronic request at the
following e-mail address:
[email protected], or by writing the
Public Reference Section, Securities
and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act
file number: 811-2968
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P046N 102000
<PAGE>
VANGUARD
INTERNATIONAL VALUE
FUND
Participant Prospectus
October 9, 2000
This prospectus contains
financial data for the
Fund for the six months ended
June 30, 2000.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[A MEMBER OF THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD INTERNATIONAL VALUE FUND
Participant Prospectus
October 9, 2000
An International Stock Mutual Fund
--------------------------------------------------------------------------------
CONTENTS
1 FUND PROFILE 12 DIVIDENDS, CAPITAL GAINS, AND TAXES
3 ADDITIONAL INFORMATION 13 SHARE PRICE
4 A WORD ABOUT RISK 13 FINANCIAL HIGHLIGHTS
4 WHO SHOULD INVEST 15 INVESTING WITH VANGUARD
5 PRIMARY INVESTMENT STRATEGIES 16 ACCESSING FUND INFORMATION BY COMPUTER
10 THE FUND AND VANGUARD GLOSSARY (inside back cover)
11 INVESTMENT ADVISER
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
International Value Fund. To highlight terms and concepts important to mutual
fund investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
IMPORTANT NOTE
This prospectus is intended for participants in employer-sponsored retirement or
savings plans. Another version--for investors who would like to open a personal
investment account--can be obtained by calling Vanguard at 1-800-662-7447.
--------------------------------------------------------------------------------
<PAGE>
1
FUND PROFILE
The following profile summarizes key features of Vanguard International Value
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital growth and some income.
INVESTMENT STRATEGIES
The Fund invests mainly in common stocks of companies located outside the United
States that are considered by the Fund's adviser to be undervalued. Such stocks,
called "value" stocks, often are out of favor in periods when investors are
drawn to companies with strong prospects for growth. The prices of value stocks
therefore may be below average in comparison to such fundamental factors as
earnings, revenue, and book value. The Fund invests in small-, mid-, and
large-capitalization companies, and is expected to diversify its assets across
developed and emerging markets in Eastern and Western Europe, the Far East, and
Latin America.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- Currency risk, which is the chance investments in a particular country will
decrease in value if the U.S. dollar rises in value against that country's
currency.
- Country risk, which is the chance that domestic events--such as political
upheaval, financial troubles, or a natural disaster--will weaken a
country's securities markets. Investments in emerging market countries
involve a greater degree of country risk than investments in developed
countries.
- Investment style risk, which is the chance that returns from the types of
stocks held by the Fund--small-, mid-, and large-capitalization value
stocks--will trail returns from the overall stock market. Historically,
small- and mid-cap stocks have been much more volatile than large-cap
stocks.
- Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
<PAGE>
2
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 -12.26%
1991 9.96%
1992 -8.72%
1993 30.49%
1994 5.25%
1995 9.65%
1996 10.22%
1997 -4.58%
1998 19.46%
1999 21.81%
----------------------------------------------------
The Fund's year-to-date return as of the most recent
calendar quarter ended June 30, 2000, was 0.20%.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.62% (quarter ended December 31, 1998) and the lowest return for a
quarter was -18.00% (quarter ended September 30, 1990).
-----------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-----------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
-----------------------------------------------------------------------------
Vanguard International Value Fund 21.81% 10.91% 7.34%
MSCI EAFE Index* 27.30 13.15 7.33
-----------------------------------------------------------------------------
*Morgan Stanley Capital International Europe, Australasia, Far East Index.
-----------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.51%
12b-1 Distribution Fee: None
Other Expenses: 0.08%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.59%
<PAGE>
3
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year and that operating expenses remain the same. The results apply whether or
not you redeem your investment at the end of each period.
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------
$60 $189 $329 $738
-------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income or assets, are expressed as a percentage of the net
assets of the fund. Vanguard International Value Fund's expense ratio in fiscal
year 1999 was 0.59%, or $5.90 per $1,000 of average net assets. The average
international stock mutual fund had expenses in 1999 of 1.72%, or $17.20 per
$1,000 of average net assets (derived from data provided by Lipper Inc., which
reports on the mutual fund industry). Management expenses, which are one part of
operating expenses, include investment advisory fees as well as other costs of
managing a fund--such as account maintenance, reporting, accounting, legal, and
other administrative expenses.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund may achieve. Even seemingly small differences in expenses can, over time,
have a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December IntlVal
INVESTMENT ADVISER VANGUARD FUND NUMBER
Hansberger Global Investors, Inc., 046
Fort Lauderdale, Fla., since
August 1, 2000
CUSIP NUMBER
INCEPTION DATE 921939203
May 16, 1983
TICKER SYMBOL
NET ASSETS AS OF JUNE 30, 2000 VTRIX
$982 million
--------------------------------------------------------------------------------
<PAGE>
4
================================================================================
A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard
International Value Fund. It is important to keep in mind one of the main axioms
of investing: The higher the risk of losing money, the higher the potential
reward. The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in the Fund, you should also
take into account your personal tolerance for the daily fluctuations of
international stock and currency markets.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
================================================================================
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- You are seeking investment opportunities outside the United States.
- You wish to add a value-oriented international stock fund to your existing
holdings--which could include other stock investments as well as bond,
money market, and tax-exempt investments.
- You are willing to accept the additional risks (country risk, currency
risk, etc.) associated with international investments.
- You are seeking growth of capital over the long term--at least five
years--along with some income.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
--------------------------------------------------------------------------------
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage
short- term trading:
- The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- There is a limit on the number of times you can exchange into and out of
the Fund (see "Exchanges" in the INVESTING WITH VANGUARD section).
- The Fund reserves the right to stop offering shares at any time.
<PAGE>
5
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective, long-term growth of capital and some income. It also
explains how the adviser implements these strategies. In addition, this section
discusses several important risks--market risk, currency risk, country risk,
investment style risk, and manager risk--faced by investors in the Fund. The
Fund's Board of Trustees, which oversees the management of the Fund, may change
the Fund's investment objectives or strategies in the interest of shareholders,
without a shareholder vote.
MARKET EXPOSURE
The Fund is a value-oriented fund that invests primarily in the common stocks of
large, medium-size and small foreign companies. Under normal circumstances, at
least 65% of the Fund's total assets will be invested in foreign stocks of at
least three different countries. As of June 30, 2000, the Fund's top three
country holdings were the United Kingdom (25.5%), Japan (24.2%), and France
(10.6%). These percentages, however, are subject to change, and consequently so
may the countries that constitute the top three holdings.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $13 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1.5 billion and $13 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1.5 billion. Vanguard
periodically reassesses these classifications.
--------------------------------------------------------------------------------
[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
IN ADDITION, INVESTMENTS IN FOREIGN STOCK MARKETS CAN BE AS RISKY AS, IF
NOT MORE RISKY THAN, U.S. STOCK INVESTMENTS. THE PRICES OF INTERNATIONAL
STOCKS AND THE PRICES OF U.S. STOCKS HAVE OFTEN MOVED IN OPPOSITE
DIRECTIONS. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL
YEARS.
<PAGE>
6
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE RISKS OF INTERNATIONAL INVESTING
Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stock may not be as liquid as the stock of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than their
counterparts in the United States. These factors, among others, could negatively
impact the returns Americans receive from a foreign investment.
--------------------------------------------------------------------------------
To illustrate the volatility of international stock prices, the following
table shows the best, worst, and average total returns for foreign stock markets
over various periods as measured by the MSCI Europe, Australasia, Far East (MSCI
EAFE) Index, a widely used barometer of international market activity. (Total
returns consist of dividend income plus change in market price.) Note that the
returns shown do not include the costs of buying and selling stocks or other
expenses that a real-world investment portfolio would incur. Note, also, that
the gap between best and worst tends to narrow over the long term.
-------------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1999)
-------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
-------------------------------------------------------------
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2% 1.5% 5.9% 12.0%
Average 15.2% 13.6% 14.5% 14.7%
--------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1999. Keep in mind that this was a particularly favorable period for all
stock markets. These average returns reflect past performance on international
stocks; you should not regard them as an indication of future returns from
either foreign markets as a whole or this Fund in particular.
Note that the table does not take into account returns for emerging
markets, which can be substantially more volatile than the more developed
markets included in the MSCI EAFE Index. To illustrate this variability, the
following table shows returns for different international markets--as well as
the U.S. market for comparison--from 1990 through 1999, as measured by their
respective indexes. Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur.
<PAGE>
7
--------------------------------------------------------------------------------
STOCK MARKET RETURNS FOR DIFFERENT INTERNATIONAL MARKETS*
--------------------------------------------------------------------------------
EUROPEAN PACIFIC EMERGING U.S.
MARKET MARKET MARKETS MARKETS
--------------------------------------------------------------------------------
1990 -2.00% -34.43% -10.55% -3.10%
1991 14.12 11.51 59.91 30.47
1992 -3.92 -18.51 11.40 7.62
1993 29.25 36.15 74.84 10.08
1994 2.82 12.82 -7.31 1.32
1995 22.08 2.89 0.01** 37.58
1996 21.42 -8.23 15.19 22.96
1997 23.75 -25.74 -16.37 33.36
1998 28.68 2.64 -18.39 28.58
1999 15.77 56.38 60.86 21.04
--------------------------------------------------------------------------------
*European market returns are measured by the MSCI Europe Index; Pacific market
returns are measured by the MSCI Pacific Free Index; emerging markets returns
are measured by the Select Emerging Markets Free Index; and U.S. market
returns are measured by the Standard & Poor's 500 Index.
**The inception date of the Select Emerging Markets Free Index was May 4, 1994;
returns shown for 1990 to 1994 are measured by the MSCI Emerging Markets Free
Index.
--------------------------------------------------------------------------------
[FLAG] THE FUND IS SUBJECT TO CURRENCY RISK, WHICH IS THE CHANCE THAT A STRONGER
U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS INVESTING OVERSEAS.
GENERALLY, WHEN THE DOLLAR RISES IN VALUE AGAINST ANOTHER COUNTRY'S
CURRENCY, YOUR INVESTMENT IN THAT COUNTRY LOSES VALUE BECAUSE IT IS
DENOMINATED IN A CURRENCY THAT IS WORTH FEWER U.S. DOLLARS. ON THE OTHER
HAND, A WEAKER U.S. DOLLAR GENERALLY LEADS TO HIGHER RETURNS FOR AMERICANS
HOLDING INVESTMENTS DENOMINATED IN FOREIGN CURRENCIES.
[FLAG] THE FUND IS SUBJECT TO COUNTRY RISK, WHICH IS THE CHANCE THAT POLITICAL
EVENTS (A WAR, NATIONAL ELECTIONS), FINANCIAL PROBLEMS (RISING INFLATION,
GOVERNMENT DEFAULT), OR NATURAL DISASTERS (AN EARTHQUAKE, A FLOOD) WILL
WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN THAT COUNTRY TO LOSE
MONEY.
<PAGE>
8
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such factors as earnings and book value, and
these stocks typically have above-average dividend yields. Growth funds
generally focus on companies believed to have above-average potential for growth
in revenue and earnings. Reflecting the market's high expectations for superior
growth, such stocks typically have low dividend yields and above-average prices
in relation to such measures as revenue, earnings, and book value. Value and
growth stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. (Source: Historic returns of
the Russell 3000 Value Index and the Russell 3000 Growth Index). In general,
value funds are appropriate for investors who want some dividend income and the
potential for capital gains, but are less tolerant of share-price fluctuations.
Growth funds, by contrast, appeal to investors who will accept more volatility
in hopes of a greater increase in share price. Growth funds also may appeal to
investors with taxable accounts who want a higher proportion of returns to come
as capital gains (which may be taxed at lower rates than dividend income).
--------------------------------------------------------------------------------
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM VALUE STOCKS WILL TRAIL RETURNS FROM OTHER ASSET CLASSES OR
THE OVERALL STOCK MARKET. AS A GROUP, VALUE STOCKS TEND TO GO THROUGH
PERIODS OF DOING BETTER--OR WORSE--THAN COMMON STOCKS IN GENERAL. THESE
PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
SECURITY SELECTION
Hansberger Global Investors, Inc. (HGI), adviser to the Fund, employs an
intensive fundamental approach to selecting stocks. HGI seeks to identify stocks
with a market value that is believed to be less than a company's intrinsic
value, based on its long-term potential.
HGI's investment approach integrates extensive research (both internal and
external), proprietary valuation screens, and fundamental analysis of stocks
with a long-term investment perspective. This analysis involves evaluating a
company's prospects by focusing on such factors as: the quality of a company's
management; the company's competitive position within its industry; the
financial strength of the company; the quality and growth potential of its
earnings; and the outlook for the company's future based on these and other
similar factors. The objective of this analysis is to identify undervalued
securities for the Fund, to hold them for the long term, and to achieve
long-term capital growth as the marketplace realizes the value of these
securities over time. HGI will also consider other factors in its analysis,
including country and political risks, and economic and market conditions.
HGI seeks to broaden the scope, and increase the effectiveness, of its
fundamental analysis by searching for undervalued stocks in many countries
around the world. This global search provides the adviser with more diverse
opportunities and flexibility to shift portfolio investments not only from
company to company and industry to industry, but also from country to country,
in search of undervalued stocks.
<PAGE>
9
Under HGI's management, the Fund is expected to invest in 90-120 stocks,
across a broad spectrum of market capitalizations. The Fund's range of stock
holdings, and diversity of capitalization ranges, may differ significantly from
the typical international equity fund.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISER
WILL DO A POOR JOB OF SELECTING STOCKS.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long the securities have been held. The "Financial
Highlights" section of this prospectus shows historic turnover rates for the
Fund. A substantial portion of Fund assets will be turned over in the current
fiscal year as a result of HGI's restructuring of the Fund, following its
replacement of a prior adviser on August 1, 2000. In the long run, however, it
is expected that under normal circumstances the Fund's average annual turnover
rate will be less than 50%. (A turnover rate of 100% would occur, for example,
if the Fund sold and replaced securities valued at 100% of its net assets within
a one-year period.)
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of June 30, 2000, the average turnover rate for all
international stock funds was approximately 91%, according to Morningstar, Inc.
--------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in stocks of foreign companies, the Fund may make certain
other kinds of investments to achieve its objective.
The Fund may enter into forward foreign currency contracts, which help
protect its holdings against unfavorable short-term changes in exchange rates. A
forward foreign currency contract is an agreement to buy or sell a country's
currency at a specific price on a specific date, usually 30, 60, or 90 days in
the future. In other words, the contract guarantees an exchange rate on a given
date. Managers of international stock funds use these contracts to guard against
sudden, unfavorable changes in U.S. dollar/foreign currency exchange rates. The
contracts will not prevent the Fund's securities from falling in value during
foreign market downswings. The adviser may use these contracts to eliminate
some of the uncertainty of foreign exchange rates--but will not speculate on
changes in the market.
The Fund may also invest, to a limited extent, in futures and options
contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation to purchase securities under
futures contracts will not exceed 20% of its total assets.
<PAGE>
10
The reasons for which the Fund will invest in futures and options are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may also invest in preferred stocks and convertible bonds. With
preferred stocks, holders receive set dividends from the issuer; their claim on
the issuer's income and assets ranks before that common stockholders, but after
that of bondholders. Convertible bonds are those that are convertible into, or
exchangeable for, common stocks.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some
futures and options have been trading on regulated exchanges for more than two
decades. These "traditional" derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. It is these characteristics that differentiate futures and options from
the relatively new types of derivatives. If used for speculation or as leveraged
investments, derivatives can carry considerable risks.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group (R) , a family of more than 35
investment companies with more than 100 funds holding assets worth more than
$580 billion. All of the Vanguard funds share in the expenses associated with
business operations, such as personnel, office space, equipment, and
advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
--------------------------------------------------------------------------------
<PAGE>
11
INVESTMENT ADVISER
Hansberger Global Investors, Inc. (HGI), 515 East Las Olas Boulevard, Suite
1300, Fort Lauderdale, FL 33301, founded in 1994, serves as the Fund's
investment adviser. As of June 30, 2000, HGI managed nearly $3 billion in
assets. HGI manages the Fund subject to the control of the trustees and officers
of the Fund.
The firm began advising the Fund on August 1, 2000, replacing a prior
adviser, Phillips & Drew. For the year ended December 31, 1999, the advisory fee
paid to Phillips & Drew represented an effective annual rate of 0.15% of the
Fund's average net assets before a decrease of 0.04% based on performance.
HGI's advisory fee is paid quarterly, and is based on certain annual
percentage rates applied to the Fund's average month-end assets for each
quarter.
In addition, starting September 30, 2001, HGI's advisory fee may be
increased or decreased, based on the cumulative investment performance of the
Fund over a trailing 36-month period as compared with the cumulative total
return of the MSCI EAFE Index over the same period. This index is a widely used
barometer of international market activity. Note that this performance fee
structure will not be in full operation until October 1, 2003; until then, the
fee will be phased in over a 36-month period, using certain transition rules.
Please consult the Fund's Statement of Additional Information for a complete
explanation of how advisory fees are calculated.
The Fund has authorized HGI to choose brokers or dealers to handle the
purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
In the interest of obtaining better execution of a transaction, HGI may at
times choose brokers that charge higher commissions. If more than one broker can
obtain the best available price and favorable execution of a transaction, then
HGI is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to HGI or the Fund. Also, the Fund
may direct HGI to use a particular broker for certain transactions in exchange
for commission rebates or research services provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
<PAGE>
12
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER
The individual primarily responsible for overseeing the implementation of
Hansberger Global Investors' (HGI) strategy for the Fund is:
AJIT DAYAL, Deputy Chief Investment Officer of HGI, and Fund Manager; has worked
in investment management since 1987; with HGI since 1998; B.A., Bombay
University; M.B.A., University of North Carolina at Chapel Hill.
Assisting Mr. Dayal are:
THOMAS HANSBERGER, CFA, CIC, Chief Investment Officer of HGI; has worked in
investment management since 1965; founded HGI in 1994; B.S., Miami University
(Oxford, Ohio).
RONALD HOLT, Vice President-Research at HGI; has worked in investment management
since 1991; with HGI since 1997; B.A., Columbia University; M.B.A., Stern School
of Business at New York University.
AUREOLE L. W. FOONG, Managing Director-Asian Research at HGI; has worked in
investment management since 1989; with HGI since 1997; B.S., M.B.A., University
of Southern California at Los Angeles.
--------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Distributions generally occur in December. In addition,
the Fund may occasionally be required to make supplemental dividend or capital
gains distributions at some other time during the year.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
--------------------------------------------------------------------------------
<PAGE>
13
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = --------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV multiplied by
the number of shares you own gives you the dollar amount you would have received
had you sold all of your shares back to the Fund that day. Because foreign
securities markets may operate on days which are not business days in the United
States, the value of the Fund's holdings may change on days when shareholders
will not be able to purchase or redeem the Fund's shares.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees. The
Fund also may use fair value pricing if the value of a security held by the Fund
is materially affected by events occurring after the close of the primary
markets or exchanges on which such security is traded. In these situations,
prices used by the Fund to calculate its net asset value may differ from quoted
or published prices for the securities.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds." Different newspapers
use different abbreviations of the Fund's name, but the most common is INTLVAL.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each period
on an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<PAGE>
14
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began the six monther ended June 30, 2000 with a net asset value
(price) of $29.13 per share. During the period, the Fund earned $0.32 per share
from investment income (interest and dividends). There was a decline of $0.28
per share from investments that had depreciated in value or that were sold for
lower prices than the Fund paid for them.
Shareholders received $0.22 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's dividends or capital gains.
The earnings ($0.04 per share) minus the distributions ($0.22 per share)
resulted in a share price of $28.95 at the end of the period. This was a
decrease of $0.18 per share (from $29.13 at the beginning of the period to
$28.95 at the end of the period). For a shareholder who reinvested the
distributions in the purchase of more shares, the total return from the Fund was
0.20% for the period.
As of June 30, 2000, the Fund had $982 million in net assets. For the period,
its annualized expense ratio was 0.50% ($5.00 per $1,000 of net assets); and its
annualized net investment income amounted to 2.30% of its average net assets. It
sold and replaced securities valued at 38% of its net assets.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
VANGUARD INTERNATIONAL VALUE FUND
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED --------------------------------------------------------------
JUNE 30, 2000* 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $29.13 $25.09 $22.64 $27.54 $31.11 $31.48
---------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .32 .69 .77 .690 .82 .750
Net Realized and Unrealized Gain (Loss) on Investments (.28) 4.74 3.64 (1.945) 2.20 2.185
---------------------------------------------------------------------------------
Total from Investment Operations .04 5.43 4.41 (1.255) 3.02 2.935
---------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.03) (.66) (1.06) (.690) (.82) (.790)
Distributions from Realized Capital Gains (.19) (.73) (.90) (2.955) (5.77) (2.515)
---------------------------------------------------------------------------------
Total Distributions (.22) (1.39) (1.96) (3.645) (6.59) (3.305)
---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $28.95 $29.13 $25.09 $22.64 $27.54 $31.11
---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 0.20% 21.81% 19.46% -4.58% 10.22% 9.65%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $982 $1,045 $806 $777 $917 $988
Ratio of Total Expenses to Average Net Assets 0.50%+ 0.59% 0.52% 0.49% 0.50% 0.47%
Ratio of Net Investment Income to Average Net Assets 2.30%+ 2.54% 2.77% 2.36% 2.50% 2.29%
Turnover Rate 38%+ 41% 39% 37% 82% 47%
=================================================================================================================================
</TABLE>
*Unaudited.
+Annualized.
<PAGE>
15
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.
- If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next- determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of regular trading on the New York Stock Exchange, generally 4 p.m.
Eastern time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- Make sure to read that fund's prospectus. Contact Vanguard's Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
- Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>
16
ACCESSING FUND INFORMATION BY COMPUTER
--------------------------------------------------------------------------------
VANGUARD ON THE WORLD WIDE WEB www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
--------------------------------------------------------------------------------
<PAGE>
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
COUNTRY RISK
The chance that domestic events--such as political upheaval, financial troubles,
or a natural disaster--will weaken a country's economy.
CURRENCY RISK
The chance that a foreign investment will decrease in value because of
unfavorable currency exchange rates.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, these
stocks typically have low dividend yields and above-average prices in relation
to such factors as revenue, earnings, and book value.
INTERNATIONAL STOCK FUND
A mutual fund that invests in the stocks of companies located outside the United
States.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRINCIPAL
The amount of money you put into an investment.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below average in
comparison with such factors as earnings and book value, and these stocks
typically have above-average dividend yields.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP]
[THE VANGUARD GROUP]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard International Value Fund,
the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are incorporated
by reference into (and are thus
legally a part of) this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT ACCESS CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
TEXT TELEPHONE:
1-800-662-2738
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy information
about the Fund (including the SAI) at
the SEC's Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a fee,
by electronic request at the
following e-mail address:
[email protected], or by writing the
Public Reference Section, Securities
and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act
file number: 811-2968
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I046N 102000
<PAGE>
PART B
VANGUARD TRUSTEES' EQUITY FUND
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
October 9, 2000
This Statement is not a prospectus but should be read in conjunction with
Vanguard International Value Fund's Prospectus dated October 9, 2000. To obtain,
without charge, the Prospectus or the most recent Annual Report to shareholders,
which contains Vanguard International Value Fund's financial statements as
hereby incorporated by reference, please call the Investor Information
Department:
1-800-662-7447
TABLE OF CONTENTS
PAGE
DESCRIPTION OF THE TRUST ........................................B-1
INVESTMENT POLICIES..............................................B-3
SHARE PRICE......................................................B-10
PURCHASE OF SHARES...............................................B-11
REDEMPTION OF SHARES.............................................B-11
YIELD AND TOTAL RETURN...........................................B-12
FUNDAMENTAL INVESTMENT LIMITATIONS...............................B-13
MANAGEMENT OF THE FUND...........................................B-14
INVESTMENT ADVISORY SERVICES.....................................B-17
PORTFOLIO TRANSACTIONS...........................................B-20
COMPARATIVE INDEXES..............................................B-20
FINANCIAL STATEMENTS.............................................B-22
DESCRIPTION OF THE TRUST
ORGANIZATION
The Trust was organized as a Maryland corporation in 1979, reorganized as a
Pennsylvania business trust in 1984, then reorganized as a Delaware business
trust in August, 1998. Prior to its reorganization as a Delaware business trust,
the Trust was known as Vanguard/Trustees' Equity Fund. The Trust is registered
with the United States Securities and Exchange Commission (the Commission) under
the Investment Company Act of 1940, as amended (the 1940 Act) as an open-end,
diversified management investment company. It currently offers one fund and
class of shares, as follows:
VANGUARD INTERNATIONAL VALUE FUND (THE FUND)-INVESTOR SHARES
The Trust has the ability to offer additional funds or classes of shares.
There is no limit on the number of full and fractional shares that the Trust may
issue for a single fund or class of shares.
SERVICE PROVIDERS
CUSTODIAN. Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109-3661 serves as the Trust's custodian. The custodian is
responsible for maintaining the custody of the Trust's assets, keeping all
necessary accounts and records of Trust assets and appointing any foreign
sub-custodians or foreign securities depositories.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, Two Commerce Square,
Suite 1700, 2001 Market Street, Philadelphia, Pennsylvania 19103-7042, serves as
the Trust's independent
B-1
<PAGE>
accountants. The accountants audit financial statements for the Trust and
provide other related services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Trust's transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.
CHARACTERISTICS OF THE TRUST'S SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Trust's shares, other
than the possible future termination of the Trust. The Trust may be terminated
by reorganization into another mutual fund or by liquidation and distribution of
the assets of the Trust. Unless terminated by reorganization or liquidation, the
Trust will continue indefinitely.
SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of the Trust will
not be personally liable for payment of the Trust's debts except by reason of
his or her own conduct or acts. In addition, a shareholder could incur a
financial loss on account of a Trust obligation only if the Trust itself had no
remaining assets with which to meet such obligation. We believe that the
possibility of such a situation arising is extremely remote.
DIVIDEND RIGHTS. The shareholders of any fund of the Trust are entitled to
receive any dividends or other distributions declared for such fund. No shares
have priority or preference over any other shares of the same fund with respect
to distributions. Distributions will be made from the assets of a fund, and will
be paid ratably to all shareholders of the fund (or class) according to the
number of shares of such fund (or class) held by shareholders on the record
date. The amount of income dividends per share may vary between separate share
classes of the same fund based upon differences in the way that expenses are
allocated between share classes pursuant to a multiple class plan.
VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any class or fund; or (iii)
the Trustees determine that it is necessary or desirable to obtain a shareholder
vote. The 1940 Act requires a shareholder vote under various circumstances,
including to elect or remove Trustees upon the written request of shareholders
representing 10% or more of the Trust's net assets, and to change any
fundamental policy of a fund. Shareholders of the Trust receive one vote for
each dollar of net asset value owned on the record date, and a fractional vote
for each fractional dollar of net asset value owned on the record date. However,
only the shares of the fund affected by a particular matter are entitled to vote
on that matter. Voting rights are non-cumulative and cannot be modified without
a majority vote.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the Trust's net assets.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with the
Trust's shares.
CONVERSION RIGHTS. There are no conversion rights associated with the
Trust's shares.
REDEMPTION PROVISIONS. The Trust's redemption provisions are described in
its current prospectus and elsewhere in this Statement of Additional
Information.
SINKING FUND PROVISIONS. The Trust has no sinking fund provisions.
CALLS OR ASSESSMENT. The Trust's shares, when issued, are fully paid and
non-assessable.
TAX STATUS OF THE FUND
The Fund intends to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code. This special tax status means
that the Fund will not be liable for federal tax on income and capital gains
distributed to shareholders. In order to preserve its tax status, the Fund must
comply with certain requirements. If it fails to meet these requirements in any
taxable year, it will be subject to tax on its taxable income at corporate
rates, and all distributions from earnings and profits, including any
distributions of net tax-exempt income and net long-term capital gains, will be
taxable to shareholders as ordinary income. In addition, the Fund could be
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required to recognize unrealized gains, pay substantial taxes and interest, and
make substantial distributions before regaining its tax status as a regulated
investment company.
INVESTMENT POLICIES
The following policies supplement the investment objective and policies set
forth in the Fund's Prospectus:
FOREIGN INVESTMENTS
Under normal circumstances, at least 65% of the Fund's assets will be invested
in foreign stocks of at least three different countries. Investors should
recognize that investing in foreign companies involves certain special
considerations which are not typically associated with investing in U.S.
companies.
CURRENCY RISK. Securities of foreign companies are frequently denominated
in foreign currencies, and since the Fund may temporarily hold uninvested
reserves in bank deposits in foreign currencies. Accordingly, the Fund will be
affected by changes in currency rates and in exchange control regulations
(favorably or unfavorably), and may incur costs in connection with conversions
between various currencies. Exchange rates between the U.S. dollar and the
currencies of emerging markets countries may be particularly volatile. The Fund
may enter into forward foreign currency exchange contracts in order to hedge its
holdings and commitments against changes in the level of future currency rates.
Such contracts involve an obligation to purchase or sell a specific currency at
a future date at a price set at the time of the contract.
INFORMATION. Publicly available information about foreign issuers and
economies may be limited. Foreign issuers are not generally subject to uniform
accounting, auditing and financial and other reporting standards and
requirements comparable to those applicable to U.S. companies. Statistical
information about the economy in an emerging market country may be unavailable,
or if available may be unreliable or not directly comparable to information
regarding the economy of the U.S. or other more developed countries.
REGULATION. There may be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the U.S.
LIQUIDITY AND CONCENTRATION. Many foreign securities market have
substantially less volume than U.S. national securities exchanges. Available
investments in emerging countries may be highly concentrated in a small number
of issuers, or the issuers may be unseasoned and/or have significantly smaller
market capitalization than in the U.S. or more developed countries.
Consequently, securities of foreign issuers may be less liquid and more volatile
than those of comparable domestic issuers.
BROKERAGE. Brokerage commissions and other transaction costs on foreign
securities exchanges are generally higher than in the U.S.
TAXES. Dividends and interest paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid to the Fund by
U.S. companies. It is expected that the Funds' shareholders will be able to
claim a credit for U.S. purposes for any such foreign taxes, although there can
be no assurance that they will be able to do so.
POLITICAL/ECONOMY. Political and economic developments may present risks. A
foreign jurisdiction might impose or change withholding taxes on income payable
in connection with foreign securities. There are risks of seizure,
nationalization or expropriation of a foreign issuer or foreign deposits, and
adoption of foreign governmental restrictions such as exchange controls. Many
emerging or developing countries have less stable political and economic
environments than some more developed countries, and may face external stresses
(including war) as well as internal ones (including hyperinflation, currency
depreciation, limited resource self-sufficiency, and balance of payments issues
and associated social unrest). It may be more difficult to obtain a judgment in
a court outside the U.S.
REPATRIATION RESTRICTIONS. Foreign governments may delay or restrict
repatriation of a Fund's investment income or other assets. If, for any reason,
a Fund were unable, through borrowing or otherwise, to distribute an amount
equal to substantially all of its investment company taxable income (as defined
for U.S. tax purposes) within required time periods, the Fund would cease to
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qualify for the favorable tax treatment afforded regulated investment companies
under the U.S. Internal Revenue Code of 1986, as amended (the Internal Revenue
Code).
FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the
federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option and similar
financial instrument if such instrument is not marked to market. The disposition
of a currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and nonequity options are generally
not subject to the special currency rules if they are or would be treated as
sold for their fair market value at year-end under the marking-to-market rules
applicable to other futures contracts unless an election is made to have such
currency rules apply. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss on
the underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts and
options that are capital assets in the hands of the taxpayer and which are not
part of a straddle. The Treasury Department issued regulations under which
certain transactions subject to the special currency rules that are part of a
"section 988 hedging transaction" (as defined in the Internal Revenue Code and
the Treasury regulations) will be integrated and treated as a single transaction
or otherwise treated consistently for purposes of the Internal Revenue Code. Any
gain or loss attributable to the foreign currency component of a transaction
engaged in by the Fund which is not subject to the special currency rules (such
as foreign equity investments other than certain preferred stocks) will be
treated as capital gain or loss and will not be segregated from the gain or loss
on the underlying transaction. It is anticipated that some of the non-U.S.
dollar-denominated investments and foreign currency contracts Vanguard
International Value Fund may make or enter into will be subject to the special
currency rules described above.
FOREIGN TAX CREDIT. Foreign governments may withhold taxes on dividends and
interest paid with respect to foreign securities. Foreign governments may also
impose taxes on other payments or gains with respect to foreign securities. If,
at the close of its fiscal year, more than 50% of the Fund's total assets are
invested in securities of foreign issuers, the Fund may elect to pass through
foreign taxes paid, and thereby allow shareholders to take a tax credit or
deduction on their tax returns. If shareholders meet certain holding period
requirements with respect to Fund shares, an offsetting tax credit may be
available. If shareholders do not meet the holding period requirements, they may
still be entitled to a deduction for certain foreign taxes. In either case, a
shareholder's tax statement will show more taxable income or capital gains than
were actually distributed by the Fund, but will also show the amount of the
available offsetting credit or deduction.
A shareholder that is a nonresident alien for U.S. tax purposes may be
subject to adverse U.S. tax consequences. For example, dividends and short-term
capital gains paid by the Fund will generally be subject to U.S. federal
withholding tax at a rate of 30% (or lower treaty rate if applicable). Foreign
investors are urged to consult their tax advisers regarding the U.S. tax
treatment of ownership of shares in the Fund.
FOREIGN CURRENCY TRANSACTIONS. Although the Fund values its assets daily in
U.S. dollars, the Fund is not required to convert its holdings of foreign
currencies to U.S. dollars on a daily basis. The Fund's foreign currencies
generally will be held as "foreign currency call accounts" at foreign branches
of foreign or domestic banks. These accounts bear interest at negotiated rates
and are payable upon relatively short demand periods. If a bank became
insolvent, the Fund could suffer a loss of some or all of the amounts deposited.
The Fund may convert foreign currency to U.S. dollars from time to time.
Although foreign exchange dealers generally do not charge a stated commission or
fee for conversion, the prices posted generally include a "spread," which is the
difference between the prices at which the dealers are buying and selling
foreign currencies.
FOREIGN INVESTMENT COMPANIES. Some of the countries in which the Fund may
invest may not permit, or may place economic restrictions on, direct investment
by outside investors. Investments in such countries may only be permitted
through foreign government- approved or- authorized investment vehicles, which
may include other investment companies. The Fund may also invest in registered
or unregistered closed-end investment companies that invest in foreign
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securities. Investing through such vehicles may involve frequent or layered fees
or expenses and may also be subject to limitation under the 1940 Act. Under the
1940 Act, generally the Fund may invest up to 10% of its assets in shares of
investment companies and up to 5% of its assets in any one investment company as
long as the investment does not represent more than 3% of the voting stock of
the acquired investment company. If the Fund invests in investment companies,
shareholders will bear not only their proportionate share of the Fund's expenses
(including operating expenses and the fees of the Adviser), but also,
indirectly, the similar expenses of the underlying investment companies.
FUTURES CONTRACTS AND OPTIONS
The Fund may enter into stock futures contracts, options, options on futures
contracts and foreign currency futures contracts for several reasons: to
maintain cash reserves while remaining fully invested, to facilitate trading, to
reduce transaction costs, or to seek higher investment returns when a futures
contract is priced more attractively than the underlying equity security or
index. Futures contracts provide for the future sale by one party and purchase
by another party of a specified amount of a specific security at a specified
future time and at a specified price. Futures contracts which are standardized
as to maturity date and underlying financial instrument are traded on national
futures exchanges. Futures exchanges and trading are regulated under the
Commodity Exchange Act by the Commodity Futures Trading Commission (CFTC), a
U.S. government agency. Assets committed to futures contracts will be segregated
to the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin
deposits that may range upward from less than 5% of the value of the contract
being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on their margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the market value of the underlying securities. The Fund will not use futures and
options for speculative purposes. The Fund will use futures and options to
simulate full investment in underlying securities while retaining a cash balance
for fund management purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish any
non-hedging positions do not exceed five percent of the value of the Fund's
portfolio. The Fund will only sell futures contracts to protect securities it
owns against price declines or purchase contracts to protect against an increase
in the price of securities it intends to purchase. As evidence of this hedging
interest, each Fund expects that approximately 75% of its futures contract
purchases will be "completed"; that is, equivalent amounts of related securities
will have been purchased or are being purchased by the Fund upon sale of open
futures contracts.
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Although techniques other than the sale and purchase of futures contracts
could be used to control the exposure of Fund income to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While the Fund will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of U.S. Government securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. The Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of the Fund's total assets. In addition, the Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the Fund's total assets.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying interest rate futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the ability to effectively hedge its portfolio.
The Fund will minimize the risk that it will be unable to close out a futures
contract by only entering into futures contracts which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Fund are engaged in only for hedging purposes, the investment
adviser does not believe that the Fund is subject to the risks of loss
frequently associated with futures transactions. The Fund would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying security and sold it after the decline.
Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities or currency underlying futures
contracts have different maturities than the portfolio securities being hedged.
It is also possible that the Fund could both lose money on futures contracts and
also experience a decline in value of its portfolio securities. There is also
the risk of loss by a fund of margin deposits in the event of bankruptcy of a
broker with whom the fund has an open position in a futures contract or related
option. Additionally, investments in futures contracts and options involve the
risk that the investment adviser will incorrectly predict stock market, interest
rate trends, or currency exchange rates.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjection some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. The Fund is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on futures contracts as of the end of the year as
well as those actually realized during the year. In most cases, any gain or loss
recognized with respect to a futures contract is considered to be 60% long-term
capital gain or loss and 40% short-term capital gain or loss, without regard to
the holding period of
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the contract. Furthermore, sales of futures contracts which are intended to
hedge against a change in the value of securities held by the Fund may affect
the holding period of such securities and, consequently, the nature of the gain
or loss on such securities upon disposition. A fund may be required to defer the
recognition of losses on futures contracts to the extent of any unrecognized
gains on related positions held by the Fund.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or foreign currencies or other income derived with respect to the
Fund's business of investing in securities. It is anticipated that any net gain
realized from the closing out of futures contracts will be considered qualifying
income for purposes of the 90% requirement.
The Fund will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised on the nature of
the distributions.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements with commercial banks, brokers or
dealers either for defensive purposes due to market conditions or to generate
income from its excess cash balances. A repurchase agreement is an agreement
under which the Fund acquires a fixed-income security (generally a security
issued by the U.S. Government or an agency thereof, a banker's acceptance or a
certificate of deposit) from a commercial bank, broker, or dealer, subject to
resale to the seller at an agreed upon price and date (normally, the next
business day). A repurchase agreement may be considered a loan collateralized by
securities. The resale price reflects an agreed upon interest rate effective for
the period the instrument is held by the Fund and is unrelated to the interest
rate on the underlying instrument. In these transactions, the securities
acquired by the Fund (including accrued interest earned thereon) must have a
total value in excess of the value of the repurchase agreement and are held by a
custodian bank until repurchased. In addition, the Fund's Board of Trustees will
monitor the Fund's repurchase agreement transactions generally and will
establish guidelines and standards for review by the investment adviser of the
creditworthiness of any bank, broker, or dealer party to a repurchase agreement
with the Fund.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under bankruptcy or other laws, a court may determine that the underlying
security is collateral for a loan by the fund not within the control of the fund
and therefore the realization by a fund on such collateral may be automatically
stayed. Finally, it is possible that the Fund may not be able to substantiate
its interest in the underlying security and may be deemed an unsecured creditor
of the other party to the agreement. While the adviser acknowledges these risks,
it is expected that they will be controlled through careful monitoring
procedures.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities. Illiquid
securities are securities that may not be sold or disposed of in the ordinary
course of business within seven business days at approximately the value at
which they are being carried on the Fund's books.
The Fund may invest in restricted, privately placed securities that, under
securities laws, may be sold only to qualified institutional buyers. Because
these securities can be resold only to qualified institutional buyers or after
they have been held a certain length of time, they may be considered illiquid
securities--meaning that they could be difficult for the Fund to convert to cash
if needed.
If a substantial market develops for a restricted security held by the
Fund, it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Fund's Board of Trustees. This generally includes
securities that are unregistered that can be sold to qualified institutional
buyers in accordance with Rule 144A under the Securities Act of 1933, as amended
(the 1933 Act). While the Fund's investment adviser determines the liquidity of
restricted securities on a daily basis, the Board oversees and retains ultimate
responsibility for the adviser's decisions. Several factors that the Board
considers in monitoring these decisions include the valuation of a
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security, the availability of qualified institutional buyers, and the
availability of information about the security's issuer.
LENDING OF SECURITIES
The Fund may lend its investment securities on a short-term or long-term basis
to qualified institutional investors (typically brokers, dealers, banks or other
financial institutions) who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its portfolio
securities, the Fund attempts to increase its net investment income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund. The terms, the structure, and the aggregate amount of such
loans must be consistent with the 1940 Act, and the rules and regulations or
interpretations of the Commission thereunder. These provisions limit the amount
of securities the Fund may lend to 33 1/3% of the Fund's total assets, and
require that: (a) the borrower pledge and maintain with the Fund collateral
consisting of cash, an irrevocable letter of credit issued by a domestic U.S.
bank, or securities issued or guaranteed by the U.S. Government having a value
at all times not less than 100% of the value of the securities loaned, (b) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis), (c) the loan
be made subject to termination by the Fund at any time, and (d) the Fund receive
reasonable interest on the loan (which may include the Fund's investing any cash
collateral in interest bearing short-term investments), any distribution on the
loaned securities and any increase in their market value. Loan arrangements made
by the Fund will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange, which rules presently
require the borrower, after notice, to redeliver the securities within the
normal settlement time of three business days. All relevant facts and
circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Fund's Board of Trustees.
At the present time, the staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Trustees. In addition, voting rights pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
VANGUARD INTERFUND LENDING PROGRAM
The Commission has issued an exemptive order permitting the Fund and other funds
to participate in Vanguard's interfund lending program. This program allows the
Vanguard funds to borrow money from and loan money to each other for temporary
or emergency purposes. The program is subject to a number of conditions,
including the requirement that no fund may borrow or lend money through the
program unless it receives a more favorable interest rate than is available from
a typical bank for a comparable transaction. In addition, a fund may participate
in the program only if and to the extent that such participation is consistent
with the fund's investment objective and other investment policies. The Board of
Trustees of the Vanguard funds are responsible for ensuring that the interfund
lending program operates in compliance with all conditions of the Commission's
exemptive order.
TEMPORARY INVESTMENTS
The Fund may take temporary defensive measures that are inconsistent with the
Fund's normal fundamental or non-fundamental investment policies and strategies
in response to adverse market, economic, political, or other conditions. Such
measures could include investments in: (a) highly liquid short-term fixed income
securities issued by or on behalf of municipal or corporate issuers, obligations
of the U.S. Government and its agencies, commercial paper, and bank certificates
of deposit; (b) shares of other investment companies which have investment
objectives consistent with those of the Fund; (c) repurchase agreements
involving any such securities; and (d) other money market instruments or cash.
There is no limit on the extent to which the Fund may take temporary defensive
measures. In taking such measures, the Fund may fail to achieve its investment
objective.
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DEPOSITARY RECEIPTS
The Fund may invest in sponsored or unsponsored depositary receipts and
other similar instruments, including American Depositary Receipts (ADRs),
European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs)
(collectively, Depositary Receipts). Depositary Receipts are typically issued by
a financial institution (depository) and evidence ownership interests in a
security or a pool of securities (underlying securities) that have been
deposited with the depository. In ADRs, the depository is typically a U.S.
financial institutional and the underlying securities are issued by a foreign
issuer. In other Depositary Receipts, the depository may be a foreign or a U.S.
entity, and the underlying securities may have a foreign or a U.S. issuer.
Depositary Receipts will not necessarily be denominated in the same currency as
their underlying securities. Generally, ADRs are issued in registered form,
denominated in U.S. dollars, and designed for use in the U.S. securities
markets. Other Depositary Receipts, such as GDRs and EDRs, may be issued in
bearer form and denominated in other currencies, and are generally designed for
use in securities markets outside the U.S. While the two types of Depositary
Receipt facilities (unsponsored or sponsored) are similar, there are differences
regarding a holder's rights and obligations and the practices of market
participants. A depository may establish an unsponsored facility without
participation by (or acquiescence of) the underlying issuer; typically, however,
the depository requests a letter of non-objection from the underlying issuer
prior to establishing the facility. Holders of unsponsored Depository Receipts
generally bear all the costs of the facility. The depository usually charges
fees upon the deposit and withdrawal of the underlying securities, the
conversion of dividends into U.S. dollars or other currency, the disposition of
non-cash distributions, and the performance of other services. The depository of
an unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the underlying issuer or to pass
through voting rights to Depository Receipt holders with respect to the
underlying securities.
Sponsored Depository Receipt facilities are created in generally the same
manner as unsponsored facilities, except that sponsored Depository Receipts are
established jointly by a depository and the underlying issuer through a deposit
agreement. The deposit agreement sets out the rights and responsibilities of the
underlying issuer, the depository and the Depository Receipt holders. With
sponsored facilities, the underlying issuer typically bears some of the costs of
the Depository Receipts (such as dividend payment fees of the depository),
although most sponsored Depository Receipts holders may bear costs such as
deposit and withdrawal fees. Depositories of most sponsored Depository Receipts
agree to distribute notices of shareholder meetings, voting instructions, and
other shareholder communications and information to the Depository Receipt
holders at the underlying issuer's request.
For purposes of the Fund's investment policies, investments in Depository
Receipts will be deemed to be investments in the underlying securities. Thus, a
Depository Receipt representing ownership of common stock will be treated as
common stock.
WHEN-ISSUED SECURITIES
The Fund may purchase securities on a when-issued or delayed delivery basis. The
price of debt obligations purchased on a when-issued basis is fixed at the time
the Fund commits to purchase, but delivery and payment for the securities
("settlement") takes place at a later date. The price of these securities may be
expressed in yield terms; the Fund will enter into these transactions in order
to lock in the yield (price) available at the time of commitment. Normally, the
settlement date on when-issued securities occurs within one month of purchase
commitment, but may take longer, albeit not more than 120 days after the trade
date.
At the time the Fund commits to purchase a security on a when-issued basis,
it will record the transaction and reflect the value of that security in
determining its net asset value. The Adviser does not believe that any Fund's
net asset value will be adversely affected by purchases of securities on a
when-issued basis.
While when-issued securities may be sold prior to settlement, the Adviser
intends to purchase such securities with the purpose of actually acquiring them
unless a sale appears desirable for investment reasons. The Fund will maintain a
separate account with the Custodian, with a segregated portfolio of cash and
marketable securities at least equal in value to the Fund's commitments to
purchase when-issued securities. Such segregated securities will mature (or, if
necessary, be sold) on or before the settlement date. When the time comes for
the Fund to pay for when-issued securities, it will meet its obligations from
the then-available cash flow, the sale of the securities held in this separate
account, the sale of other securities; although it would not normally
B-9
<PAGE>
expect to do so, the Fund may also meet this obligation from the sale of the
when-issued securities themselves, which may have increased or decreased in
market value.
Between purchase and settlement, the Fund assumes the ownership risk of the
when-issued securities, including the risk of fluctuations in the securities'
market value due to, among other factors, a change in the general level of
interest rates. However, no interest accrues to the Fund during this period. The
Fund's current policy is to limit its aggregate when-issued commitments to 15%
of the market value of its total assets less liabilities, other than the
obligations created by these commitments.
INVESTING IN SMALLER CAPITALIZATION STOCKS
The Adviser believes that the issuers of smaller capitalization stocks often
have sales and earnings growth rates which exceed those of larger companies, and
that such growth rates may in turn be reflected in more rapid share price
appreciation. However, investing in smaller capitalization stocks can involve
greater risk than is customarily associated with investing in stocks of larger,
more established companies. For example, smaller capitalization companies often
have limited product lines, markets, or financial resources, may be dependent
for management on one or a few key persons, and can be more susceptible to
losses. Also, their securities may be thinly traded (and therefore have to be
sold at a discount from current prices or sold in small lots over an extended
period of time), may be followed by fewer investment research analysts and may
be subject to wider price swings and thus may create a greater chance of loss
than securities of larger capitalization companies. Transaction costs in stocks
of smaller capitalization companies may be higher than those of larger
capitalization companies.
SHARE PRICE
The Fund's share price, or "net asset value" per share, is calculated by
dividing the total assets of the Fund, less all liabilities, by the total number
of shares outstanding. The net asset value is determined as of the close of
regular trading on the New York Stock Exchange (the Exchange, generally 4:00
p.m. Eastern time) on each day the Exchange is open for trading.
Portfolio securities for which market quotations are readily available
(includes those securities listed on national securities exchanges, as well as
those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales
price on the day the valuation is made. Such securities which are not traded on
the valuation date are valued at the mean of the last quoted bid and ask prices.
Price information on exchange-listed securities is taken from the exchange where
the security is primarily traded. Any foreign securities are valued at the
latest quoted sales price available before the time when assets are valued.
Securities may be valued on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair market value of such
securities.
Short-term instruments (those acquired with remaining maturities of 60 days
or less) may be valued at cost, plus or minus any amortized discount or premium,
which approximates market value.
Bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Foreign securities are valued at the last quoted sales price, or the most
recently determined closing price calculated according to local market
convention, available at the time the Fund is valued. Prices are obtained from
the broadest and most representative market on which the securities trade. If
events which materially affect the value of the Fund's investments occur after
the close of the securities markets on which such securities are primarily
traded, those investments may be valued by such methods as the Board of Trustees
deems in good faith to reflect fair value.
In determining the Fund's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars using the officially quoted daily exchange rates used by Morgan
Stanley Capital International in calculating various benchmarking indexes. This
officially quoted exchange rate may be determined prior to or after the close of
a particular securities market. If such quotations are not available or do not
reflect market conditions at the time the Fund is valued, the rate of exchange
will be determined in accordance with policies established in good faith by the
Board of Trustees.
B-10
<PAGE>
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect fair value.
The share price for the Fund can be found daily in the mutual fund listings
of most major newspapers under the heading of "Vanguard Funds".
PURCHASE OF SHARES
The purchase price of shares of the Fund is the net asset value next determined
after the order is received. The net asset value is calculated as of the close
of trading on the Exchange, generally 4:00 p.m. Eastern time on each day the
Exchange is open for business, and on any other day on which there is sufficient
trading in the Fund's investment securities to materially affect the Fund's net
asset value per share. An order received prior to the close of the Exchange will
be executed at the price computed on the date of receipt; and an order received
after the close of the Exchange will be executed at the price computed on the
next day the Exchange is open.
The Fund reserves the right in its sole discretion: (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts such as employee
benefit plans or under circumstances where certain economies can be achieved in
sales of the Fund's shares.
TRADING SHARES THROUGH CHARLES SCHWAB
The Fund has authorized Charles Schwab & Co., Inc. (Schwab) to accept on its
behalf purchase and redemption orders under certain terms and conditions. Schwab
is also authorized to designate other intermediaries to accept purchase and
redemption orders on the Fund's behalf subject to those terms and conditions.
Under this arrangement, the Fund will be deemed to have received a purchase or
redemption order when Schwab or, if applicable, Schwab's authorized designee,
accepts the order in accordance with the Fund's instructions. Customer orders
that are properly transmitted to the Fund by Schwab, or if applicable, Schwab's
authorized designee, will be priced as follows:
Orders received by Schwab before 3 p.m. Eastern time on any business
day, will be sent to Vanguard that day and your share price will be based
on the Fund's net asset value calculated at the close of trading that day.
Orders received by Schwab after 3 p.m. Eastern time, will be sent to
Vanguard on the following business day and your share price will be based
on the Fund's net asset value calculated at the close of trading that day.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment: (i)
during any period that the Exchange is closed, or trading on the Exchange is
restricted as determined by the Commission, (ii) during any period when an
emergency exists as defined by the Commission as a result of which it is not
reasonably practicable for a Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period.
No charge is made by the Fund for redemptions. Shares redeemed may be worth
more or less than what was paid for them, depending on the market value of the
securities held by the Fund.
SIGNATURE GUARANTEES. To protect your account, the Fund, and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Fund to verify the identity of the person who has
authorized a redemption from your account. Signature guarantees are required in
connection with: (1) all redemptions, regardless of the amount involved, when
the proceeds are to be paid to someone other than the registered owner(s) and/
or to an address other than the address of record; and (2) share transfer
requests. These requirements may be waived by the Fund in certain instances.
B-11
<PAGE>
A guarantor must be a bank, a trust company, a member firm of a domestic
stock exchange, or a foreign branch of any of the foregoing. Notaries public are
not acceptable signature guarantors.
YIELD AND TOTAL RETURN
The average annual total return of the Fund for the following periods ended
June 30, 2000 is set forth below:
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
6/30/2000 6/30/2000 6/30/2000
------------ ------------- --------------
Vanguard International Value Fund 9.33% 10.21% 7.03%
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return for
the periods of one year, five years, ten years or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by finding
the average annual compounded rates of return of a hypothetical investment over
such periods according to the following formula (average annual total return is
then expressed as a percentage):
T = (ERV/P)1/N-1
Where:
T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period.
AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION
We calculate the Fund's average annual after-tax total return by finding the
average annual compounded rate of return over the 1-, 5-, and 10-year periods
that would equate the initial amount invested to the after-tax value, according
to the following formulas:
After-tax return:
P (1+T)N = ATV
Where:
P = a hypothetical initial payment of $1,000
T = average annual after-tax total return
n = number of years
ATV = after-tax value at the end of the 1-, 5-, or 10-year
periods of a hypothetical $1,000 payment made at the
beginning of the time period, assuming no liquidation
of the investment at the end of the measurement
periods.
Instructions.
1. Assume all distributions by the Fund are reinvested--less the taxes due on
such distributions--at the price on the reinvestment dates during the
period. Adjustments may be made for subsequent re-characterizations of
distributions.
2. Calculate the taxes due on distributions by the Fund by applying the
highest federal marginal tax rates to each component of the distributions
on the reinvestment date (e.g., ordinary income, short-term capital gain,
long-term capital gain, etc.). For periods after December 31, 1997, the
federal marginal tax rates used for the calculations are 39.6% for ordinary
income and short-term capital gains and 20% for long-term capital gains.
Note that the applicable tax rates may vary
B-12
<PAGE>
over the measurement period. Assume no taxes are due on the portions of any
distributions classified as exempt interest or non-taxable (i.e., return of
capital). Ignore any potential tax liabilities other than federal tax
liabilities (e.g., state and local taxes).
3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the Fund's mean (or median) account size. Assume that
no additional taxes or tax credits result from any redemption of shares
required to pay such fees.
4. State the total return quotation to the nearest hundredth of one percent.
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of each Fund's shares and assume that
all dividends and capital gains distributions during the period were reinvested
in each Fund's shares. Cumulative total return is calculated by finding the
cumulative rates of a return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed as
a percentage):
C = (ERV/P)-1
Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period.
SEC YIELDS
Yield is the net annualized yield based on a specified 30-day (or one month)
period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((A-B)/CD+1)6-1]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
FUNDAMENTAL INVESTMENT LIMITATIONS
The Fund is subject to the following fundamental investment limitations, which
cannot be changed in any material way without the approval of the holders of a
majority of the Fund's shares. For these purposes, a "majority" of the Fund's
shares means shares representing the lesser of: (i) 67% or more of the shares
voted, so long as shares representing more than 50% of the Fund's outstanding
shares are present or represented by proxy; or (ii) more than 50% of the Fund's
shares.
BORROWING. The Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 15% of the Fund's net assets. The Fund may
borrow money through banks, reverse repurchase agreements, or Vanguard's
interfund lending program only, and must comply with all applicable regulatory
conditions. The Fund may not make any additional investments whenever its
outstanding borrowings exceed 5% of net assets.
COMMODITIES. The Fund may not invest in commodities, except that it may
invest in stock futures contracts, stock options, and options on stock futures
contracts. No more than 5% of the
B-13
<PAGE>
Fund's total assets may be used as initial margin deposit for futures contracts,
and no more than 20% of the Fund's total assets may be invested in futures
contracts or options at any time.
DIVERSIFICATION. With respect to 75% of its total assets, the Fund may not:
(i) purchase more than 10% of the outstanding voting securities of any one
issuer; or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies or instrumentalities.
ILLIQUID SECURITIES. The Fund may not acquire any security if, as a result,
more than 15% of its net assets would be invested in securities that are
illiquid.
INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total
assets in any one industry.
INVESTING FOR CONTROL. The Fund may not invest in a company for purposes of
controlling its management.
INVESTMENT COMPANIES. The Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
LOANS. The Fund may not lend money to any person except: by purchasing
fixed income securities that are publicly distributed; by entering into
repurchase agreements, provided, however, that repurchase agreements maturing in
more than seven days, together with securities which do not have readily
available market quotations, will not exceed 15% of the Fund's total assets; by
lending its portfolio securities; or through Vanguard's interfund lending
program.
MARGIN. The Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.
OIL, GAS, MINERALS. The Fund may not invest in interests in oil, gas or
other mineral exploration, or development programs.
PLEDGING ASSETS. The Fund may not pledge, mortgage, or hypothecate more
than 15% of its net assets.
PUT OR CALL OPTIONS. The Fund may not purchase or write put or call
options, except as permitted by the Fund's investment policies relating to
commodities.
REAL ESTATE. The Fund may not invest directly in real estate, although it
may invest in securities of companies or investment trusts that deal or invest
in real estate or interests therein.
SENIOR SECURITIES. The Fund may not issue senior securities, except in
compliance with the 1940 Act.
UNDERWRITING. The Fund may not engage in the business of underwriting
securities issued by other persons. The Fund will not be considered an
underwriter when disposing of its investment securities.
The above-mentioned investment limitations are considered at the time
investment securities are purchased.
None of these limitations prevents the Fund from participating in The
Vanguard Group (Vanguard). Because the Fund is a member of the Group, it may own
securities issued by Vanguard, make loans to Vanguard, and contribute to
Vanguard's costs or other financial requirement. See "Management of the Fund"
for more information.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The officers of the Trust manage its day-to-day operations and are responsible
to the Trust Board of Trustees. The Trustees set broad policies for the Fund and
choose the officers. The following is a list of the Trustees and officers and a
statement of their present positions and principal occupations during the past
five years. As a group, the Trustees and officers own less than 1% of the
outstanding shares of the Fund. Each Trustee also serves as a Director of The
Vanguard Group, Inc., and as a Trustee of each of the 109 funds administered by
Vanguard (108 in the case of Mr. Malkiel
B-14
<PAGE>
and 99 in the case of Mr. MacLaury). The mailing address of the Trustees and
officers of the Fund is Post Office Box 876, Valley Forge, Pennsylvania 19482.
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive Committee
of Johnson & Johnson (Pharmaceuticals/Consumer Products), Director of Johnson &
Johnson*MERCK Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution (Independent Non-Partisan
Research Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co. (Investment Management), The Jeffrey Co. (Holding Company), and Select
Sector SPDR Trust (Exchange-Traded Mutual Fund).
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries,
Inc. (Machinery/Coal/ Appliances); and Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals).
JOHN C. SAWHILL, (DOB: 6/12/1936, Died in May, 2000) Trustee
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group); Director of Pacific Gas and Electric Co., Procter & Gamble
Co., NACCO Industries (Machinery/Coal/Appliances), and Newfield Exploration Co.
(Energy); formerly, Director and Senior Partner of McKinsey & Co., and President
of New York University.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Retired Chairman of Rohm & Haas Co., (Chemicals); Director of Cummins Engine Co.
(Diesel Engine Company), and The Mead Corp. (Paper Products); and Trustee of
Vanderbilt University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.
ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
*Officers of the Fund are "interested persons" as defined in the 1940 Act.
THE VANGUARD GROUP
Vanguard Trustees' Equity Fund is a member of The Vanguard Group of Investment
Companies which consists of more than 35 investment companies (the funds).
Through their jointly-owned subsidiary, The Vanguard Group, Inc. (Vanguard), the
Fund and the other funds in the Group obtain at cost virtually all of their
corporate management, administrative, and distribution services. Vanguard also
provides investment advisory services on an at-cost basis to several of the
Vanguard funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the funds and also
furnishes the funds with necessary office space,
B-15
<PAGE>
furnishings, and equipment. Each Fund pays its share of Vanguard's net expenses
which are allocated among the Funds under methods approved by the Board of
Trustees of each Fund. In addition, each Fund bears its own direct expenses,
such as legal, auditing, and custodian fees.
Vanguard, the Fund's adviser, the Fund's distributor, and the Fund have
adopted Codes of Ethics designed to prevent employees who may have access to
nonpublic information about the trading activities of the Fund (access persons)
from profiting from that information. The Codes permit access persons to invest
in securities for their own accounts, including securities that may be held by
the Fund, but place substantive and procedural restrictions on their trading
activities. For example, the Codes require that access persons receive advance
approval for every securities trade (unless an exception applies) to ensure that
there is no conflict with the trading activities of the Fund.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the Funds.
The amounts which each of the Funds has invested are adjusted from time to time
in order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. At June 30, 2000, the
Fund had contributed capital of $181,000 to Vanguard, representing 0.02% of the
Fund's net assets and 0.2% of Vanguard's capitalization. The Amended and
Restated Funds' Service Agreement provides as follows: (a) each Vanguard Fund
may be called upon to invest up to 0.40% of its current assets in Vanguard, and
(b) there is no other limitation on the dollar amount that each Vanguard Fund
may contribute to Vanguard's capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties.
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc., provides all distribution and marketing activities for
the Fund. The principal distribution expenses are for advertising, promotional
materials, and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of The Vanguard Group. The
Trustees and officers of Vanguard determine the amount to be spent annually on
distribution activities, the manner and amount to be spent on each Fund, and
whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Vanguard funds based upon their relative net assets. The
remaining one half of these expenses is allocated among the Funds based upon
each Fund's sales for the preceding 24 months relative to the total sales of the
Funds as a Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of the average distribution expense rate for The Vanguard
Group, and that no Fund shall incur annual distribution expenses in excess of 1%
of its average month-end net assets. During the fiscal years ended December 31,
1997, 1998, and 1999, the Fund incurred approximately $2,492,000, $2,719,000,
and $3,702,000 of The Vanguard Group's management (including transfer agency),
distribution, and marketing expenses.
INVESTMENT ADVISORY SERVICE. Vanguard provides investment advisory services
to several Vanguard funds. These services are provided on an at-cost basis from
a money management staff employed directly by Vanguard. The compensation and
other expenses of this staff are paid by the funds utilizing these services.
TRUSTEE COMPENSATION
The same individuals serve as Trustees of all Vanguard funds (with two
exceptions, which are noted in the table on page B-17), and each fund pays a
proportionate share of the Trustees' compensation. The funds employ their
officers on a shared basis, as well. However, officers are compensated by The
Vanguard Group, Inc., not the funds.
INDEPENDENT TRUSTEES. The funds compensate their independent Trustees--that
is, the ones who are not also officers of the fund --in three ways:
. The independent Trustees receive an annual fee for their service to the
fund, which is subject to reduction based on absences from scheduled Board
meetings.
. The independent Trustees are reimbursed for the travel and other expenses
that they incur in attending Board meetings.
B-16
<PAGE>
. Upon retirement, the independent Trustees receive an aggregate annual fee
of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.
"INTERESTED" TRUSTEE. Mr. Brennan serves as a Trustee, but is not paid in
this capacity. He is, however, paid in his role as officer of The Vanguard
Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for
each of the Trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Fund
for each Trustee. In addition, the table shows the total amount of benefits that
we expect each Trustee to receive from all Vanguard funds upon retirement, and
the total amount of compensation paid to each Trustee by all Vanguard funds.
VANGUARD TRUSTEES' EQUITY FUND COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL
BENEFITS ACCRUED COMPENSATION
AGGREGATE AS PART OF THIS ESTIMATED FROM ALL
COMPENSATION FUND'S ANNUAL BENEFITS VANGUARD FUNDS
NAMES OF TRUSTEES FROM THIS FUND(1) EXPENSES(1) UPON RETIREMENT PAID TO TRUSTEES(2)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John C. Bogle(3) . . . . . . . . None None None None
John J. Brennan. . . . . . . . . None None None None
JoAnn Heffernan Heisen . . . . . $192 $11 $15,000 $80,000
Bruce K. MacLaury. . . . . . . . $198 $18 $12,000 $75,000
Burton G. Malkiel. . . . . . . . $193 $17 $15,000 $80,000
Alfred M. Rankin, Jr.. . . . . . $192 $13 $15,000 $80,000
John C. Sawhill(4) . . . . . . . $192 $16 $15,000 $80,000
James O. Welch, Jr.. . . . . . . $192 $19 $15,000 $80,000
J. Lawrence Wilson . . . . . . . $192 $13 $15,000 $80,000
</TABLE>
(1) The amounts shown in these columns are based on the Fund's fiscal year
ended December 31, 1999.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 103 Vanguard funds (102
in the case of Mr. Malkiel; 93 in the case of Mr. MacLaury) for the 1999
calendar year. Each Vanguard Fund pays a proportionate share of its
Trustees' compensation.
(3) Mr. Bogle has retired from the Funds' Board, effective December 31, 1999.
(4) Mr. Sawhill died in May, 2000.
INVESTMENT ADVISORY SERVICES
The Fund employs Hansberger Global Investors, Inc. (HGI) under an investment
advisory agreement dated July 31, 2000 (the Agreement) to manage the investment
and reinvestment of such assets of the Fund as the Board of Trustees may assign
to HGI (the HGI Portfolio). HGI discharges its responsibilities subject to the
control of the Trust's officers and Board of Trustees, and in conformance with
the Fund's stated investment objective and policies. HGI conducts a world-wide
portfolio management business that provides a broad range of portfolio
management services to customers in the United States and abroad. HGI's
principal office is at 515 East Las Olas Boulevard, Fort Lauderdale, Florida,
and it maintains additional offices in Burlington, Ontario, Hong Kong and
Moscow.
B-17
<PAGE>
As compensation for the services rendered by HGI under the Agreement, the
Fund pays HGI quarterly a Basic Fee calculated by applying a quarterly rate,
based on the following annual percentage rates, to the average month-end net
assets of the HGI Portfolio, for the quarter.
NET ASSETS ANNUAL RATE
---------- -----------
First $50 million ................ 0.475%
Next $450 million ................ 0.150%
Next $500 million ................ 0.120%
Assets in excess of $1 billion ... 0.110%
The Basic Fee is increased or decreased by applying a Performance Fee
Adjustment reflecting the investment performance of the HGI Portfolio relative
to the return of the Morgan Stanley Capital International Europe, Australasia
and Far East (MSCI-EAFE) Index over a 36-month period ending with the then-ended
quarter. The Performance Fee Adjustment applies as follows:
CUMULATIVE 36-MONTH ADJUSTMENT AS
PERFORMANCE OF HGI A PERCENTAGE
VS. THE INDEX OF BASIC FEE*
------------------- -------------
More than 13.5% 50%
4.5% through 13.5% 25%
0 through 4.5% None
-9% through 0 25%
Less than -9% 50%
* For purposes of this calculation, the Basic Fee is calculated based on
average month-end net assets over the same time period which the
performance is measured.
TRANSITION RULES FOR CALCULATING HGI'S COMPENSATION. The Adjustment
described above will not be fully operable until the close of the quarter ending
September 30, 2003. Until that time, the following transition rules will apply:
(A) JULY 31, 2000 THROUGH JUNE 30, 2001. The HGI's compensation will be the
Basic Fee. No Adjustment will apply during this period.
(B) JULY 1, 2001 THROUGH SEPTEMBEr 30, 2003. Beginning July 1, 2001, the
Adjustment will take effect on a progressive basis with regards to the
number of months elapsed between October 1, 2000, and the quarter for which
HGI's fee is being computed. During this period, the Adjustment outlined in
Section 4.0 will be multiplied by a fraction. The fraction will equal the
number of months elapsed since October 1, 2000, divided by thirty-six.
(C) ON AND AFTER SEPTEMBER 30, 2003. Commencing September 30, 2003, the
Adjustment will be fully operable.
HGI PORTFOLIO PERFORMANCE. The investment performance of the HGI Portfolio
for any period, expressed as a percentage of the "HGI Portfolio unit value" at
the beginning of such period, is computed as the sum of: (i) the change in the
HGI Portfolio unit value during such period; (ii) the unit value of the Fund's
cash distributions from the HGI Portfolio's net investment income and realized
net capital gains (whether long-term or short-term) having an ex-dividend date
occurring within such period; and (iii) the unit value of capital gains taxes
paid or accrued during such period by the Fund for undistributed realized
long-term capital gains realized from the HGI Portfolio.
HGI PORTFOLIO UNIT VALUE. The "HGI Portfolio unit value" is determined by
dividing the total net assets of the HGI Portfolio by a given number of units.
Initially, the number of units in the HGI Portfolio will equal a nominal value
as determined by dividing initial assets by a unit value of $100.00 on October
1, 2000. Subsequently, as assets are added to or withdrawn from the HGI
Portfolio, the number of units of the HGI Portfolio will be adjusted based on
the unit value of the HGI Portfolio on the day such changes are executed. Any
cash buffer maintained by the Fund outside of the HGI Portfolio shall neither be
included in the total net assets of the HGI Portfolio nor included in the
computation of the HGI Portfolio Unit Value.
INDEX PERFORMANCE. The investment record of the Index for any period,
expressed as a percentage of the Index at the beginning of such period, shall be
the sum of: (i) the change in the
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level of the Index during such period, and (ii) the value, computed consistently
with the Index of cash distributions having an ex-dividend date occurring within
such period made by companies whose securities comprise the Index. For this
purpose, cash distributions on the securities which comprise the Index shall be
treated as reinvested in the Index at least as frequently as the end of each
calendar quarter following the payment of the dividend.
SAMPLE ADVISORY FEES. The following table shows the TOTAL ANNUAL ADVISORY
FEE--that is, the Basic Fee plus the Performance Adjustment-- payable to HGI at
varying levels of investment performance:
ANNUALIZED PERFORMANCE
NET ASSETS OF FUND OVER 36-MONTH PERIOD TOTAL ANNUAL RATE
------------------ ----------------------------------- -----------------
$50 million Trails Index by more than 9% 0.2375%
Trails Index by 0 to 9% 0.3563%
Exceeds Index by 0 to 4.5% 0.4750%
Exceeds Index by 4.5% through 13.5% 0.5938%
Exceeds Index by more than 13.5% 0.7125%
$500 million Trails Index by more than 9% 0.0913%
Trails Index by 0 to 9% 0.1369%
Exceeds Index by 0 to 4.5% 0.1825%
Exceeds Index by 4.5% through 13.5% 0.2281%
Exceeds Index by more than 13.5% 0.2738%
$1 billion Trails Index by more than 9% 0.0756%
Trails Index by 0 to 9% 0.1134%
Exceeds Index by 0 to 4.5% 0.1513%
Exceeds Index by 4.5% through 13.5% 0.1891%
Exceeds Index by more than 13.5% 0.2269%
$1.5 billion Trails Index by more than 9% 0.0688%
Trails Index by 0 to 9% 0.1031%
Exceeds Index by 0 to 4.5% 0.1375%
Exceeds Index by 4.5% through 13.5% 0.1719%
Exceeds Index by more than 13.5% 0.2063%
PRIOR INVESTMENT ADVISER FOR VANGUARD INTERNATIONAL VALUE FUND
From April 1, 1996 through July 31, 2000, the Fund employed Phillips and Drew as
its investment adviser. During the fiscal years ended December 31, 1997, 1998,
and 1999, the Fund paid Phillips & Drew advisory fees totaling $1,371,000 (0.15%
of the Fund's average net assets), $1,321,000 (0.16% of the Fund's average net
assets), before a decrease of $353,000 based on performance, and $1,387,000
(0.15% of the Fund's average net assets), before a decrease of $341,000 based on
performance, respectively.
DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS
The Agreement with HGI will continue in effect until July 31, 2002, and is
renewable thereafter, for successive one-year periods, if specifically approved
at least annually by vote of the Board of Trustees of the Fund at a meeting
called for the purpose of considering such approval. The Board's approval must
include the affirmative votes of a majority of the Trustees who are neither
parties to the Agreement or interested persons of such parties. The Agreement
may be terminated at any time, without penalty, by vote of the Board of Trustees
of the Fund on 30 days' written notice to HGI, or by HGI on 90 days' written
notice to the Fund. An agreement will automatically terminate in the event of
its assignment.
The Fund's Board of Trustees may, without the approval of shareholders,
provide for:
a. the employment of a new investment adviser pursuant to the terms of a new
advisory agreement, either as a replacement for an existing adviser or as
an additional adviser;
b. a change in the terms of an advisory agreement; and
c. the continued employment of an existing adviser on the same advisory
contract terms where a contract has been assigned because of a change in
control of the adviser.
Any such change will be communicated to shareholders in writing.
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<PAGE>
CONTROL OF THE ADVISER
HGI, a Delaware corporation, is a wholly-owned subsidiary of Hansberger Group,
Inc. (Group Inc.). Group Inc. is also a Delaware corporation, whose shareholders
owning 10% or more of such corporation are as follows: Thomas L. Hansberger, SLW
Family Limited Partnership, Brera/HGI Holdings, LLC, Alberto Cribiore
(indirectly through ownership of units in Brera/HGI Holdings, Inc.), and Max C.
Chapman, Jr. (through direct ownership and indirectly through ownership of units
in Brera/HGI Holdings, Inc.).
PORTFOLIO TRANSACTIONS
The investment advisory agreement authorizes the investment adviser to select
the brokers or dealers that will execute the purchases and sales of investment
securities for the Fund, and directs the investment adviser to use its best
efforts to obtain the best available price and most favorable execution with
respect to all transactions for the Fund. Twice a year, HGI, through a committee
of its securities analysts, will consider the amount and nature of research and
research services provided by brokers, as well as the extent to which such
services are relied upon, and attempt to allocate a portion of the brokerage
business of the Fund and other advisory clients on the basis of that
consideration. In addition, brokers may suggest a level of business they would
like to receive in order to continue to provide such services. The actual
brokerage business received by a broker may be more or less than the suggested
allocations, depending upon HGI's evaluation of all applicable considerations,
including HGI's obligation to use its best efforts to obtain the best available
price and most favorable execution for all Fund transactions.
Some securities considered for investment by the Fund may also be
appropriate for other clients served by the investment adviser. If purchase or
sale of securities consistent with the investment policies of the Fund and one
or more of these other clients served by the investment adviser is considered at
or about the same time, transactions in such securities will be allocated among
the Fund and clients in a manner deemed fair and reasonable by the investment
adviser. Although there is no specified formula for allocating such
transactions, the various allocation methods used by the investment adviser, and
the results of such allocations, are subject to periodic review by the Fund's
Board of Trustees.
During the years ended December 31, 1997, 1998, and 1999 the Fund paid
$2,431,609, $1,467,221, and $1,379,000, respectively, in brokerage commissions.
COMPARATIVE INDEXES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or any
of the member funds of The Vanguard Group of Investment Companies.
Vanguard Trustees' Equity Fund may use one or more, of the following
unmanaged indexes for comparative performance purposes:
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX--includes stocks selected
by Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.
STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized
domestic stocks.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the
S&P SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the
S&P SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 TOTAL MARKET INDEX--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 COMPLETION INDEX--consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard and Poor's 500 Index.
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RUSSELL 3000 STOCK INDEX--a diversified portfolio of approximately 3,000
common stocks accounting for over 90% of the market value of publicly-traded
stocks in the U.S.
RUSSELL 2000 STOCK INDEX--composed of the 2,000 smallest stocks contained
in the Russell 3000 representing approximately 7% of the Russell 3000 total
market capitalization.
RUSSELL 2000(R) VALUE INDEX--contains stocks from the Russell 2000 Index
with a less-than-average growth orientation.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australasia, and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and
29 preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly
issued, non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or greater.
LEHMAN BROTHERS LONG-TERM TREASURY BOND INDEX--is a market weighted index
that contains individually priced U.S. Treasury securities with maturities of 10
years or greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500
U.S. Treasury, Agency and investment grade corporate bonds.
LEHMAN BROTHERS CORPORATE (BAA) BOND INDEX--all publicly offered
fixed-rate, nonconvertible domestic corporate bonds rated Baa by Moody's, with a
maturity longer than 1 year and with more than $100 million outstanding. This
index includes over 1,500 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX--is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rated,
nonconvertible U.S. debt issues rated at least Baa, with at least $100 million
principal outstanding and maturity greater than 10 years.
BOND BUYER MUNICIPAL BOND INDEX--is a yield index on current coupon
high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average
yield of four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not
include income.
COMPOSITE INDEX--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX--65% Lehman Long-Term Corporate AA or Better Bond Index and
a 35% weighting of a blended equity composite (75% Standard & Poor's/BARRA Value
Index, 12.5% Standard and Poor's Utilities Index, and 12.5% Standard & Poor's
Telephone Index).
COMPOSITE INDEX--65% Standard and Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
LEHMAN BROTHERS LONG-TERM CORPORATE AA OR BETTER BOND INDEX--consists of
all publicly issued, fixed rate, nonconvertible investment grade,
dollar-denominated, SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market weighted index that
contains individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated BBB- or better. The Index has a market
value of over $5 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX--is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.6 trillion.
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LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE
INDEX--is a market weighted index that contains individually priced U.S.
Treasury, agency, and corporate securities rated BBB- or better with maturities
between 5 and 10 years. The index has a market value of over $800 billion.
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX--is a market weighted
index that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB- or better with maturities greater than 10 years. The index
has a market value of over $1.1 trillion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE--the average performance of small
company growth funds as defined by Lipper Inc. Lipper defines a small company
growth fund as a fund that by prospectus or portfolio practice, limits its
investments to companies on the basis of the size of the company.
From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)
LIPPER BALANCED FUND AVERAGE--an industry benchmark of average balanced
funds with similar investment objectives and policies, as measured by Lipper
Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of
average government money market funds with similar investment objectives and
policies, as measured by Lipper Inc.
FINANCIAL STATEMENTS
The Fund's financial statements as of and for the year ended December 31, 1999
appearing in the Fund's 1999 Annual Reports to Shareholders, and the reports
thereon of PricewaterhouseCoopers LLP, independent accountants, also appearing
therein, are incorporated by reference into this Statement of Additional
Information. For a more complete discussion of the performance, please see the
Fund's Annual Report to Shareholders, which may be obtained without charge.
SAI046 102000
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