VANGUARD(R) INTERNATIONAL
VALUE FUND
June 30, 2000
SEMIANNUAL
[SHIP]
[A MEMBER OF
THE VANGUARD GROUP LOGO]
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HAVE THE PRINCIPLES OF INVESTING CHANGED?
In a world of frenetic change in business, technology, and the financial
markets, it is natural to wonder whether the basic principles of investing have
changed.
We don't think so.
The most successful investors over the coming decade will be those who
began the new century with a fundamental understanding of risk and who had the
discipline to stick with long-term investment programs.
Certainly, investors today confront a challenging, even unprecedented,
environment.Valuations of market indexes are at or near historic highs. The
strength and duration of the bull market in U.S. stocks have inflated people's
expectations and diminished their recognition of the market's considerable
risks. And the incredible divergence in stock returns--many technology-related
stocks gained 100% or more in 1999, yet prices fell for more than half of all
stocks--has made some investors question the idea of diversification.
And then there is the Internet. Undeniably, it is a powerful medium for
communications and transacting business. For investors, the Internet is a vast
source of information about investments, and online trading has made it
inexpensive and convenient to trade stocks and invest in mutual funds.
However, new tools do not guarantee good workmanship. Information is not
the same as wisdom. Indeed, much of the information, opinion, and rumor that
swirl about financial markets each day amounts to "noise" of no lasting
significance. And the fact that rapid-fire trading is easy does not make it
beneficial. Frequent trading is almost always counterpro-ductive because
costs--even at low commission rates--and taxes detract from the returns that the
markets provide. Sadly, many investors jump into a "hot" mutual fund just in
time to see it cool off. Meanwhile, long-term fund investors are hurt by
speculative trading activity because they bear part of the costs involved in
accommodating purchases and redemptions.
Vanguard believes that intelligent investors should resist short-term
thinking and focus instead on a few time-tested principles:
o Invest for the long term. Pursuing your long-term investment goals is more
like a marathon than a sprint.
o Diversify your investments with holdings in stocks, bonds, and cash
investments. Remember that, at any moment, some part of a diversified
portfolio will lag other parts, and be wary of taking on more risk by
"piling onto" the best-performing part of your holdings.
Today's leader could well be tomorrow's laggard.
o Step back from the daily frenzy of the markets; focus on your overall asset
allocation.
o Capture as much of the market's return as possible by minimizing costs and
taxes. Costs and taxes diminish long-term returns while doing nothing to
reduce the risks you incur as an investor.
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CONTENTS
Report From The Chairman............1 Fund Profile............10
The Markets In Perspective..........6 Performance Summary.....13
Report From The Adviser.............8 Financial Statements....14
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All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
Frank Russell Company is the owner of trademarks and copyrights relating to the
Russell Indexes.
"Wilshire 5000(R)" and "Wilshire 4500" are trademarks of Wilshire Associates
Incorporated.
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REPORT FROM THE CHAIRMAN
[PHOTO JOHN J. BRENNAN]
Vanguard International Value Fund recorded a 0.2% total return during the six
months ended June 30. This was a scant gain, but it was well ahead of the
returns of our average peer fund and our benchmark index in a difficult period
for foreign markets.
The adjacent table presents the six-month total return (capital change plus
reinvested dividends) for the fund and its comparative standards--the average
international stock fund and the unmanaged Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. The fund's return was 4.8 percentage
points better than that of its peers and 4.2 percentage points higher than that
of the index.
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TOTAL RETURNS
SIX MONTHS ENDED
June 30, 2000
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Vanguard International Value Fund 0.2%
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Average International Fund* -4.6%
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MSCI EAFE Index -4.0%
MSCI EAFE Value Index -0.4
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*Derived from data provided by Lipper Inc.
Our total return is based on a decrease in net asset value from $29.13 per
share on December 31, 1999, to $28.95 per share on June 30, 2000, and is
adjusted for a dividend of $0.03 per share paid from net investment income and a
distribution of $0.19 per share paid from net realized capital gains.
In July, the fund's board decided to appoint a new investment adviser,
Hansberger Global Investors, Inc., effective August 1. You'll find more
information on this change in the notice on pages 4 and 5.
THE PERIOD IN REVIEW
The first half of 2000 was a tumultuous time in global financial markets, which
were buffeted by complex crosscurrents. Economic growth was still
extraordinarily strong in the United States and was accelerating in many other
countries and regions. Corporate acquisitions across borders were on the rise,
particularly in Europe.
But growth also brought signs of accelerating inflation, which is bad news
for stocks and bonds. Higher energy use and slim inventories caused a steep rise
in oil prices, which in turn pushed up inflation gauges. To counter these
pressures, the U.S. Federal Reserve Board and the European Central Bank raised
interest rates several times during the half-year. Further complicating matters
were growing worries among investors that the high valuations of many technology
stocks could not be sustained. These worries led to a sharp springtime drop in
prices for many tech-related stocks.
The overall climate for stocks during the first six months of 2000 was
dramatically different from that in 1999, when foreign equity markets made
powerful gains and outpaced the U.S. market. For the first half of 2000, the 20
developed markets in Europe and the Pacific region that constitute the EAFE
Index had mixed returns. For the overall market, this resulted in a 0.4% total
return in local currencies. However, a strong U.S. dollar turned that small gain
into a -4.0% decline for U.S. investors. The dollar gained in value relative to
all the currencies used in the 20 markets of the index. (A stronger dollar
diminishes returns for U.S. investors because foreign currencies can be
exchanged for
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fewer dollars. Conversely, a weaker dollar bolsters returns from foreign
securities for U.S. investors.) The weaker euro, for example, meant that the
German market's -3.0% return was further reduced to a -7.3% return for U.S.
investors.
Within the EAFE Index, growth stocks--whose prices reflect high
expectations for future profitability--fared worse than value stocks, whose low
prices in relation to earnings, book value, and dividends reflect lower
expectations. The return from EAFE's growth stocks was -7.9% in dollars, versus
a -0.4% return for its value stocks.
Pacific markets in general did worse than those in Europe. Japanese stocks,
which constitute more than one-quarter of the EAFE Index, declined -2.1% in yen
and -5.3% in dollars--a sharp contrast to 1999 when rising prices and a stronger
yen gave U.S. investors a 61.8% return. Declines in much of the Pacific Rim were
steeper.
Emerging markets, which skyrocketed in value last year, generally lost
altitude in the half-year. The Select Emerging Markets Free Index returned -3.5%
in local currencies, but the strong dollar worsened this decline to -9.6% for
U.S. investors. Stocks in Colombia, Indonesia, the Philippines, and Thailand
lost more than a third of their value.
The table below presents the impact of currency fluctuations on returns
during the six months. Clearly, changes in currency values are an added risk
that U.S. investors in foreign markets must bear, on top of the price volatility
that all common stocks exhibit. Of course, the U.S. dollar's value doesn't
always rise, and a falling dollar would boost returns for U.S.-based investors.
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TOTAL RETURNS
SIX MONTHS ENDED JUNE 30, 2000
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LOCAL
CURRENCY CURRENCY U.S. DOLLAR
STOCK MARKET INDEX RETURNS IMPACT RETURNS
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MSCI EAFE 0.4% -4.4% -4.0%
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MSCI Europe 1.7% -4.7% -3.0%
MSCI Pacific Free -2.6 -3.3 -5.9
Select Emerging
Markets Free* -3.5 -6.1 -9.6
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Wilshire 5000 Total
Market Index -0.7% -- -0.7%
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*Consists of stocks that can be bought free of restrictions in 14 emerging
markets of Europe, Asia, Africa, and Latin America.
To a certain degree, foreign markets mirrored what was going on in the
United States. The U.S. stock market, as measured by the Wilshire 5000 Total
Market Index, posted a -0.7% return for the half-year.
PERFORMANCE OVERVIEW
Your fund's emphasis on value-oriented shares was helpful during the half-year
in relation to many competing funds. The fund's relative lack of technology and
telecommunication stocks cushioned the impact of a severe drop in their
valuations in the first half of 2000. Of course, when tech and telecom shares
were soaring in 1999, our relatively light stake in these sectors caused our
performance to trail both the average international stock fund and the EAFE
Index.
Another plus for the International Value Fund during the first half of 2000
was its overweighting versus the EAFE Index in several strongly performing
markets (Australia, Denmark, and the Netherlands) and underweightings in some of
the poorer performers (notably Germany and Japan). In addition, the fund
benefited from its Canadian stock holdings, which equaled some 3% of assets as
of June 30. The Canadian market, which is not part of the EAFE Index, advanced
23.4% in U.S. dollars during the six months.
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IN SUMMARY
During the first half of 2000, we witnessed sharp day-to-day price fluctuations
in the world's stock and currency markets, significant swings in investor
sentiment, and sudden shifts in market leadership. All of this volatility,
squeezed into a mere six months, underscored the fact that unpredictability is
par for the course in financial markets. The timing, extent, and duration of
such episodes are impossible to foretell with precision, but investors must be
willing to endure them to reap the long-term rewards of investing.
At Vanguard, we reiterate our long-standing recommendation for navigating
stormy seas toward long-term financial goals. First, create an investment plan
with a balance of domestic and international stock funds, bond funds, and money
market funds suited to your time horizon, investment objectives, and tolerance
for market fluctuations. Once you have such a diversified plan in place, stick
with it. Avoid the impulse to alter it based on short-term events--whether those
be unsettling turbulence in the market or glittery returns from some particular
corner of the market. "Stay the course" is timeless investment wisdom.
/s/
John J. Brennan
Chairman and Chief Executive Officer
July 24, 2000
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IN MEMORY
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It is with great sadness that I report the death of John C. Sawhill, an
independent trustee of the fund and a member of The Vanguard Group's board of
directors since 1991. John, an economist who was president and chief executive
officer of The Nature Conservancy, died on May 18 at age 63. He was a senior
lecturer at the Harvard Business School and had formerly served as president of
New York University and as deputy secretary of the U.S. Department of Energy
under President Jimmy Carter. John was a remarkable man who was full of energy,
vigor, and life. His experience and wisdom added a great deal to Vanguard, and
his death is a blow to everyone who knew and loved him. Though John's work on
behalf of our funds was often carried on behind the scenes, he was a dedicated
advocate for the best interests of our shareholders. He will be missed.
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NOTICE TO SHAREHOLDERS
APPOINTMENT OF A NEW INVESTMENT ADVISER FOR
INTERNATIONAL VALUE FUND
The board of trustees of Vanguard International Value Fund has approved the
appointment of Hansberger Global Investors, Inc. (HGI) as the fund's investment
adviser. HGI replaces Phillips & Drew (formerly UBS International Investment
London Limited), the fund's investment adviser since April 1996. The new adviser
appointment will take effect on August 1, 2000. The change will affect the
fund's investment strategies, but not its objective or policies. The
International Value Fund remains committed to seeking long-term capital growth
and some income by focusing on value-oriented stocks of companies based outside
the United States.
As part of its oversight responsibilities, the fund's board considers
numerous factors in evaluating advisers. These factors include continuity of the
investment team, consistency of the investment process, and absolute and
relative performance. After careful consideration, the board concluded that the
long-term interests of the fund's shareholders would be better served by
appointing HGI as adviser to the International Value Fund.
HGI is a respected investment advisory firm whose 24 investment
professionals have considerable experience in value-oriented international stock
investing. HGI's investment process integrates proprietary valuation screens,
external investment research, and intensive fundamental analysis of such factors
as price/earnings ratios, cash flow, and net asset value to identify
attractively valued investment opportunities. Under HGI's management, the fund
is expected to invest across a broader spectrum of market capitalizations, hold
fewer securities (90-120 stocks), and experience somewhat less portfolio
turnover, once initial changes to the portfolio are complete. Also, the fund's
exposure to emerging markets will probably increase from its current 3% position
to a level that will often exceed 10% of fund assets.
ARRANGEMENT WITH PHILLIPS & DREW
Vanguard International Value Fund employed Phillips & Drew as its investment
adviser under an investment advisory agreement dated March 31, 1996. For these
services, the fund paid Phillips & Drew a basic fee at the end of each quarter,
which was calculated by applying an annual percentage rate to the fund's average
month-end assets for each quarter. The annual percentage rate was 0.475% for the
first $50 million in assets, 0.15% for the next $450 million, 0.12% for the next
$500 million, and 0.11% for assets in excess of $1 billion. In addition,
Phillips & Drew's advisory fee was subject to an increase or decrease based on
the fund's cumulative investment performance over a trailing 36-month period,
compared with the cumulative total return of the Morgan Stanley Capital
International Europe, Australasia, Far East (EAFE) Index over the same period.
In 1999, the fund paid $1,045,563 in advisory fees to Phillips & Drew. The
fee represented an effective annual rate of 0.15% of the fund's average net
assets before a decrease of $341,189 (0.04% of average net assets) based on
investment performance.
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ARRANGEMENT WITH HANSBERGER GLOBAL INVESTORS
Under its investment advisory agreement with HGI, the fund will pay HGI
according to the same fee schedule that applied to Phillips & Drew, except that
performance adjustments to HGI's fees will be phased in over a 36-month period.
HGI serves as an adviser or subadviser for three mutual funds that have
investment objectives similar to that of International Value Fund. The advisory
fees paid to HGI by those funds range from 0.35% to 0.75% of fund assets.
The new investment advisory agreement will continue for two years from the
effective date (expected to be August 1, 2000) and will be renewable after that
for successive one-year periods. Each renewal must be approved by the fund's
board of trustees, including a majority of the trustees who are not "interested
persons" of either the fund or its advisers as defined in federal securities
laws. The agreement would be terminated automatically if the adviser were to be
acquired, but could be reinstated by the fund's board. In addition, the
agreement can be terminated without penalty at any time by a vote of either the
board or the fund's shareholders, upon 30 days' written notice to HGI. In turn,
HGI can terminate its agreement upon 90 days' written notice to the fund.
BACKGROUND ON HANSBERGER GLOBAL INVESTORS
HGI is a wholly owned subsidiary of Hansberger Group, Inc., with its principal
offices at 515 East Las Olas Boulevard, Fort Lauderdale, Florida. HGI also has
offices in Bombay, Toronto, Hong Kong, and Moscow. HGI provides portfolio
management services to clients in the United States and abroad. Founded in 1994,
HGI currently manages nearly $3 billion in assets. The firm is organized as a
Delaware corporation. The directors of HGI are Thomas Hansberger, chairman;
Wesley Freeman;J. Christopher Jackson; and Kimberley Scott. The HGI investment
management team that will advise the International Value Fund will be led by
Ajit Dayal, deputy chief investment officer. Assisting Mr. Dayal will be Thomas
Hansberger, chief investment officer, Ronald Holt, vice president-research, and
Aureole L.W. Foong, managing director-Asian research.
ADDITIONAL INFORMATION
In 1993, the fund received permission from shareholders and the U.S. Securities
and Exchange Commission to enter into new investment advisory agreements without
the delay and expense of a shareholder vote. This special permission was made
subject to several conditions, including the requirement that shareholders be
notified of the details of any changes to the fund's investment advisory
agreements.
Your fund receives corporate management, administrative, and distribution
services on an at-cost basis from The Vanguard Group, Inc., P.O. Box 2600,
Valley Forge, PA 19482-2600.
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THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 2000
The perpetual tug-of-war in the financial markets ended in a near stalemate
during the first half of 2000, despite lots of back-and-forth movement. On
average, neither stock nor bond prices ended the period far from where they
began it. However, bonds, thanks to their superior income, outpaced stocks in
total return.
Economic signals were conflicting. Growth continued at a rapid pace, and
corporate profits rose smartly. On the other hand, stock prices as the year
began already reflected high levels of optimism, and the market administered
severe punishment to companies that failed to live up to earnings expectations.
Also weighing on the market were concerns that the economy's vigor at a time of
low unemployment would inevitably push labor costs and other prices higher.
Indeed, higher costs for oil and natural gas pushed broad gauges of inflation
higher (the Consumer Price Index gained 2.4% for the six months and 3.7% for the
twelve months ended June 30). Yet core inflation, which excludes energy and food
items, registered a moderate 2.4% gain during the 12 months ended June 30.
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TOTAL RETURNS
PERIODS ENDED JUNE 30, 2000
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6 MONTHS 1 YEAR 5 YEARS*
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STOCKS
S&P 500 Index -0.4% 7.2% 23.8%
Russell 2000 Index 3.0 14.3 14.3
Wilshire 5000 Index -0.7 10.0 22.6
MSCI EAFE Index -4.0 17.4 11.6
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BONDS
Lehman Aggregate Bond Index 4.0% 4.6% 6.3%
Lehman 10 Year Municipal Bond Index 4.0 4.5 6.0
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.8 5.3 5.2
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OTHER
Consumer Price Index 2.4% 3.7% 2.5%
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*Annualized.
The Federal Reserve Board raised short-term interest rates by 0.25
percentage point in February and again in March, before adding a half-point
boost in May. These steps, which followed three quarter-percentage-point
increases in 1999, took the Fed's target for short-term rates to 6.5%.
Thereafter, signs of a slowing in economic activity cropped up, although it was
not certain that the Fed was done trying to throttle down the economic engine.
U.S. STOCK MARKETS
Stock prices were quite volatile during the half-year, and large day-to-day
price fluctuations in market averages were commonplace. There also were two
swift shifts in market leadership. The year began with a continuance in the
rapid rise for the "TMT" stocks (technology, media, telecommunications) that
were the market's darlings during 1999. Through mid-March, the surge in these
"new economy" groups left "old economy" stocks far behind. For example, the
Nasdaq Composite Index, which is dominated by tech-related stocks, gained 15.6%
and the Russell 1000 Value Index fell -10.4% during January and February. But in
mid-March, value stocks took charge and TMT stocks slumped. The Russell 1000
Value Index returned 12.1% while the Nasdaq plummeted to a -27.4% return in the
March-May period. But June brought another flip-flop: The value index declined
-4.6%, while the Nasdaq rebounded with a 14.5% return.
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When the half-year was over, most broad market indexes had modest declines.
The all-market Wilshire 5000 Index returned -0.7%, the large-capitalization S&P
500 Index slipped -0.4%, and the Nasdaq fell -3.9%. Small- and mid-cap stocks
did better: The small-cap Russell 2000 Index gained 3.0% and the Wilshire 4500
Completion Index, comprising virtually all the U.S. stocks outside of the S&P
500, eked out a 0.3% return.
U.S. BOND MARKETS
The Federal Reserve most directly influences interest rates of short-term
securities. The Fed pushed up its target federal funds rate (charged on
overnight loans between banks) by 1 percentage point to 6.5%. But yields of
3-month U.S. Treasury bills rose only half as far (0.52 percentage point, or 52
basis points to 5.85%). And yields actually declined on long-term Treasury
securities, whose prices rose. Big federal budget surpluses are causing a
shrinking supply of Treasury bonds. The 10-year Treasury note's yield fell 41
basis points to 6.03% as of June 30, and the yield of the 30-year Treasury
declined 58 basis points--from 6.48% to 5.90%--during the half-year.
The upshot was an unusual "inversion" in the yield curve. Instead of
sloping upward--with yields increasing along with the maturity of Treasury
securities--the curve descended. The 5.90% yield of 30-year Treasuries on June
30 was 49 basis points below the 6.39% yield on 3-year Treasury notes.
Corporate bonds did not perform as well as Treasuries for two main reasons:
a record level of new offerings and investors' concern that credit quality might
be declining. The rise in yields (and fall in prices) was slight for
higher-quality corporate bonds but more severe for high-yield "junk" bonds.
Investors grew wary of riskier bonds due to an increase in defaults. The Lehman
High Yield Bond Index saw a price decline of -5.7% during the first half of
2000, more than offsetting its six-month income of 4.5%. Tax-exempt municipal
bonds generally outperformed corporates but did not do as well as Treasury
securities. The overall taxable bond market, as measured by the Lehman Aggregate
Bond Index, returned 4.0%, as a price gain of 0.4% augmented a 3.6% income
return.
INTERNATIONAL STOCK MARKETS
International stock markets were generally unprofitable for U.S. investors due
to lack-luster local market performances and a stronger U.S. dollar during the
half-year. Although economic growth in most of Europe appeared to be
strengthening, stocks were hurt by continued economic weakness in Japan and from
expectations of higher interest rates. On the other hand, European stock prices
got some support from an increase in corporate takeovers.
In local currencies, European stocks posted a 1.7% return in the aggregate
and stocks from the Pacific region recorded a modest decline of -2.6%. However,
the dollar's strength diminished those results for U.S. investors, for whom the
Morgan Stanley Capital International (MSCI) Europe Index returned -3.0% and the
MSCI Pacific Free Index returned -5.9%. The MSCI Europe, Australasia, Far East
(EAFE) Index of developed foreign markets registered a -4.0% return for U.S.
investors.
The Select Emerging Markets Free Index fell -9.6% in U.S. dollars, having
declined -3.5% in local currencies. The index was hit by weakness in South
Africa (-15%) and several emerging Asian markets, including Indonesia (-44%),
Thailand (-36%), and the Philippines (-36%). The biggest gains among emerging
markets were in Israel (+27%) and Venezuela (+19%).
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REPORT FROM THE ADVISER
Vanguard International Value Fund's 0.2% return during the first half of 2000
exceeded the -4.0% return recorded by the MSCI EAFE Index and the -4.6% decline
for the average international stock fund.
We entered 2000 with a significantly lighter stake than the index or many
peer funds in technology, telecommunications, and Internet-related companies.
Although we are firm believers that significant changes will come about as a
consequence of the Internet and other new technology, we will participate in
these sectors only at what we consider to be a realistic price. At the moment,
we believe that many of these companies are selling at prices well above their
intrinsic worth.
Although when building the portfolio we focus primarily on selecting
individual companies instead of on geographic allocations, there was a marked
shift during the half-year in the proportion of equity assets invested in United
Kingdom-based companies (from 19.2% to 26.5%). Our stake in continental Europe
declined modestly (from 41.0% to 34.7%), particularly our positions in France
and Germany. A few years ago, when valuations in France were depressed due to
investor skepticism about the French approach to shareholder value, the fund's
allocation to French stocks was almost 10 percentage points above the EAFE
Index's weighting. Today, the fund is slightly underweighted in France (10.9% of
assets versus an index weighting of 11.4%).
The additions to our U.K. holdings included banks and pharmaceuticals, two
sectors in which we have been underrepresented in recent periods. An example is
Glaxo Wellcome, which announced a merger with SmithKline Beecham to form the
world's largest pharmaceutical company. We believe that synergy from the merger
will be substantial, and that the company's growth will outpace that of the
overall stock market. Despite its good prospects, the stock sold at only a
modest premium to the market when we purchased it. Similarly, concern over
increased competition from new entrants caused U.K. bank stocks to fall almost
-30%, which provided an opportunity for us to add to our stake in National
Westminster Bank which later was taken over by the Royal Bank of Scotland.
The fund's position in Japan remained slightly below that of the index
during the half-year. Many smaller domestic cyclicals such as Kajima
(construction) and Toray Industries (textiles) have recovered strongly, giving
us the opportunity to sell these positions. We eliminated our holdings in Toray
and significantly reduced our position in Kajima. Sentiment toward many Japanese
companies has improved, partly owing to the notion that Japan is poised to
embark on a wave of shareholder value creation like that seen in continental
Europe in recent years. Despite some signs of this happening, the indicators are
few and far between: The pace of announcements has slowed, and we expect many
disappointments. We are also slightly skeptical of the more optimistic views on
prospects for Japan's economic growth.
However, we added to our holdings of some quality names in Japan, including
NTT (the telephone
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INVESTMENT PHILOSOPHY
The fund reflects a belief that superior long-term investment results can be
achieved by investing in a diversified portfolio of international stocks that
are generally out of favor or undervalued by fundamental measures such as
price/earnings ratio or dividend yield.
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company) and Fujitsu (the computer technology company), both among the cheapest
global competitors in their industry sectors.
Hong Kong stocks have suffered recently due to negative views of the banks
and telecom companies that constitute a large part of that market. We recently
bought a position in one of the large conglomerates, Cheung Kong. When we bought
our shares, Cheung Kong's total market value was equivalent to the value of its
holding in Hutchison Whampoa alone, so we effectively acquired its other
valuable assets for free.
Most of the fund's sales in continental Europe were of stocks that had
performed well. An exception to this was E.ON (the German electricity
conglomerate formerly known as Veba). A disappointing pace of asset disposals
from this asset-rich company and declines of 35% or more in electricity prices
led us to believe that the money would be better invested elsewhere.
The fund reduced two of its largest positions-- TotalFinaElf and Alcatel.
The former had benefited from higher oil prices and wider margins in its
refining business, factors that are unlikely to improve from here on. We still
own some TotalFinaElf, as it is by far the cheapest integrated oils company in
the world, but we are now underweight in oil companies as a group. We purchased
our Alcatel, and many of our other French positions, when the general perception
was that French companies would not embrace the concept of enhancing shareholder
value. But at Alcatel, asset disposals and improvement in profitability have
resulted in a fivefold increase in the company's share price in the last three
years.
Markets have begun to question the financial viability of some of the
dot-coms, from Amazon.com to the European boo.com, the latter consuming $135
million in capital before going bankrupt. Hikari Tsushin, a Japanese telecom
subscription agency and Internet company, saw its market value decline from $70
billion in February to $1 billion today. Not owning such stocks when the
Internet bubble was inflating hurt the fund's performance relative to peers, but
that has started to change as such excesses unwind.
Current valuations of the "TMT" (technology, media, and telecom) sectors
imply that the market expects these firms to grow at around 15% annually, after
adjusting for inflation, for the next ten years. We still believe that this is
too optimistic and, as we said six months ago, we continue to be underweighted
in these sectors. Meanwhile, in sectors overshadowed by the spotlight on the TMT
groups, we continue to find good companies that are selling at prices little
changed from a year ago.
Wilson Phillips, Portfolio Manager
Phillips & Drew
July 12, 2000
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FUND PROFILE
INTERNATIONAL VALUE FUND
This Profile provides a snapshot of the fund's characteristics as of June 30,
2000, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 11.
PORTFOLIO CHARACTERISTICS
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INTERNATIONAL
VALUE MSCI EAFE
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Number of Stocks 133 953
Turnover Rate 38%* --
Expense Ratio 0.50%* --
Cash Investments 3.1% --
*Annualized.
ALLOCATION BY REGION
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North America 3%
Emerging Markets 2%
Pacific 34%
Europe 61%
VOLATILITY MEASURES
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INTERNATIONAL
VALUE MSCI EAFE
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R-Squared 0.75 1.00
Beta 0.94 1.00
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
------------------------------------------------------
TotalFinaElf 3.4%
Ente Nazionale Idrocarburi SpA 2.7
Nippon Telegraph and Telephone Corp. 2.6
Alcatel 2.6
Matsushita Electric Industrial Co., Ltd. 2.4
Nestle SA (Registered) 2.1
BNP Paribas 1.9
Hitachi Ltd. 1.9
Akzo Nobel NV 1.8
Tokyo Gas Co., Ltd. 1.7
------------------------------------------------------
Top Ten 23.1%
Country Diversification (% of Common Stocks) can be found on page 12.
10
<PAGE>
ALLOCATION BY REGION. This chart shows the geographic distribution of a fund's
holdings.
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
COUNTRY DIVERSIFICATION. The percentages of a fund's common stock invested in
securities of various countries.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,
the more diversified it is and the more likely to perform in line with the
overall stock market.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 35%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
11
<PAGE>
FUND PROFILE (continued)
COUNTRY DIVERSIFICATION (% OF COMMON STOCKS)
--------------------------------------------------------------------------------
JUNE 30, 1999 JUNE 30, 2000
--------------------------------------------
INTERNATIONAL INTERNATIONAL
VALUE VALUE MSCI EAFE
-----------------------------------------------------------
Australia............ 4.4% 4.6% 2.8%
Austria.............. 0.0 0.0 0.2
Belgium.............. 0.0 0.0 0.8
Canada............... 0.0 3.0 0.0
Denmark.............. 1.0 1.1 0.8
Finland.............. 1.0 0.4 3.1
France............... 14.3 10.9 11.4
Germany.............. 7.6 3.7 8.6
Greece............... 0.1 0.0 0.0
Hong Kong............ 1.9 2.0 2.1
Indonesia............ 0.6 0.2 0.0
Ireland.............. 0.0 0.5 0.4
Italy................ 1.9 3.4 4.4
Japan................ 24.9 25.0 26.7
Netherlands.......... 5.2 5.6 5.4
New Zealand.......... 0.3 0.3 0.1
Norway............... 0.0 0.0 0.4
Philippines.......... 0.4 0.4 0.0
Portugal............. 0.2 1.6 0.5
Singapore............ 2.9 1.9 1.0
South Korea.......... 0.9 0.6 0.0
Spain................ 0.9 0.2 2.7
Sweden............... 3.1 3.1 3.3
Switzerland.......... 5.0 4.2 5.8
Thailand............. 1.5 0.8 0.0
United Kingdom....... 21.9 26.5 19.5
--------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
12
<PAGE>
PERFORMANCE SUMMARY
INTERNATIONAL VALUE FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: MAY 16, 1983-JUNE 30, 2000
--------------------------------------------------------------------------------
INTERNATIONAL VALUE FUND MSCI EAFE
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
--------------------------------------------------------------------------------
1983 4.0% 1.8% 5.8% 11.0%
1984 -4.9 4.1 -0.8 7.9
1985 36.1 4.2 40.3 56.7
1986 46.8 3.9 50.7 69.9
1987 22.1 1.8 23.9 24.9
1988 14.8 4.0 18.8 28.6
1989 22.8 3.2 26.0 10.8
1990 -15.1 2.8 -12.3 -23.2
1991 6.9 3.1 10.0 12.5
1992 -11.0% 2.3% -8.7% -11.8%
1993 27.0 3.5 30.5 32.9
1994 3.5 1.8 5.3 8.1
1995 7.0 2.6 9.6 11.6
1996 7.5 2.7 10.2 6.4
1997 -7.2 2.6 -4.6 2.1
1998 14.7 4.8 19.5 20.3
1999 19.1 2.7 21.8 27.3
2000* 0.1 0.1 0.2 -4.0
--------------------------------------------------------------------------------
*Six months ended June 30, 2000.
See Financial Highlights table on page19 for dividend and capital gains
information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
--------------------------------------------------------------------------------
International Value Fund 5/16/1983 9.33% 10.21% 4.28% 2.75% 7.03%
--------------------------------------------------------------------------------
13
<PAGE>
FINANCIAL STATEMENTS
JUNE 30, 2000 (UNAUDITED)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
country. Other assets are added to, and liabilities are subtracted from, the
value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested by
shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date, but may differ because certain investments or
transactions may be treated differently for financial statement and tax
purposes. Any Accumulated Net Realized Losses, and any cumulative excess of
distributions over net income or net realized gains, will appear as negative
balances. Unrealized Appreciation (Depreciation) is the difference between the
market value of the fund's investments and their cost, and reflects the gains
(losses) that would be realized if the fund were to sell all of its investments
at their statement-date values.
--------------------------------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL VALUE FUND SHARES (000)
--------------------------------------------------------------------------------
COMMON STOCKS (96.8%)
--------------------------------------------------------------------------------
AUSTRALIA (4.4%)
AMP Ltd. 963,000 $ 9,829
Australia & New Zealand
Bank Group Ltd. 961,500 7,395
WMC Ltd. 1,440,300 6,463
Goodman Fielder Ltd. 6,029,600 4,489
Orica Ltd. 877,100 3,991
M.I.M. Holdings Ltd. 5,601,490 3,027
Mayne Nickless Ltd. 1,353,249 2,787
o Pasminco Ltd. 4,045,500 2,162
o Burns, Philp & Co., Ltd.
Warrants Exp. 8/14/2003 12,149,882 1,678
Pacific Dunlop Ltd. 1,442,200 1,290
o Burns Philp & Co., Ltd. 2,215,320 559
------
43,670
------
CANADA (2.9%)
Nova Chemicals Corp. 483,550 10,150
Nortel Networks Corp. 141,052 9,777
Clarica Life Insurance Co. 309,600 6,331
BCE INC. 89,820 2,128
------
28,386
------
DENMARK (1.1%)
Novo Nordisk A/S B Shares 62,260 10,640
------
FINLAND (0.4%)
Stora Enso Oyj R Shares 456,981 4,183
-----
FRANCE (10.6%)
TotalFinaElf 215,252 33,138
Alcatel 382,745 25,206
BNP Paribas 196,677 19,004
AXA 79,014 12,497
Lafarge SA 89,549 6,987
o Cie de St. Gobain SA 49,598 6,732
Esso SA 7,360 455
-------
104,019
-------
GERMANY (3.6%)
Bayerische Hypo-und
Vereinsbank AG 143,885 9,332
Bayer AG 220,894 8,656
Linde AG 144,900 5,848
Volkswagen AG 145,156 5,523
Volkswagen AG Pfd. 178,000 4,189
Varta AG 163,680 1,616
-------
35,164
-------
HONG KONG (2.0%)
Hong Kong Electric Holdings Ltd. 2,256,027 7,264
Hong Kong Land Holdings Ltd. 4,007,100 6,411
Cheung Kong Holdings Ltd. 500,000 5,532
-------
19,207
-------
INDONESIA (0.2%)
PT Timah Tbk 1,850,000 550
o PT Pabrik Kertas Tjiwi Kimia 3,053,751 506
o PT Bank Internasional
Indonesia (Local) 28,089,600 321
o PT Kalbe Farma 3,395,000 252
PT Unilever Indonesia 9,900 122
o PT Inti Indorayon Utama 545,000 23
o PT Indah Kiat Pulp & Paper
Corp. Warrants Exp. 7/11/2002 96,504 9
o PT Bank Dagang Nasional
Indonesia (Foreign) 3,100,998 0
-------
1,783
-------
14
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
IRELAND (0.5%)
Jefferson Smurfit Group PLC 2,999,000 $ 5,108
------
ITALY (3.2%)
Ente Nazionale Idrocarburi SpA 4,577,110 26,545
Telecom Italia SpA 385,400 5,320
------
31,865
------
JAPAN (24.2%)
Nippon Telegraph and
Telephone Corp. 1,951 26,001
Matsushita Electric Industrial
Co., Ltd. 896,000 23,289
Hitachi Ltd. 1,283,000 18,554
Tokyo Gas Co., Ltd. 6,000,000 16,900
Mitsubishi Estate Co., Ltd. 1,201,000 14,167
Sumitomo Marine & Fire
Insurance Co. 2,222,000 12,958
Yamaha Motor Co., Ltd. 1,294,000 11,864
Canon, Inc. 233,000 11,628
Nippon Yusen Kabushiki
Kaisha Co. 2,289,000 11,034
Toyo Seikan Kaisha Ltd. 567,000 10,611
West Japan Railway Co. 2,602 10,575
Fuji Photo Film Co., Ltd. 247,000 10,132
Fuji Heavy Industries Ltd. 1,052,000 7,656
Sankyo Co., Ltd. 292,000 6,610
Nisshinbo Industries, Inc. 1,234,000 6,531
The Bank of Tokyo -
Mitsubishi Ltd. 507,000 6,139
Uny Co., Ltd. 425,000 5,885
Kansai Paint Co., Ltd. 1,756,000 5,394
Koito Manufacturing Co., Ltd. 926,000 5,295
Kajima Corp. 1,194,000 3,814
o Sanwa International Trust
1.25% Cvt. Pfd. 132 3,705
Nissan Fire & Marine
Insurance Co., Ltd. 1,164,000 3,355
Taiheiyo Cement Corp 1,456,800 3,057
Fujitsu Ltd. 80,000 2,775
-------
237,929
-------
NETHERLANDS (5.4%)
Akzo Nobel NV 409,075 17,450
ING Groep NV 213,654 14,500
Wolters Kluwer NV 418,576 11,195
Koninklijke (Royal) Philips
Electronics NV 114,232 5,409
Buhrmann NV 150,770 4,329
-------
52,883
-------
NEW ZEALAND (0.3%)
Fletcher Challenge Ltd. Paper 1,879,000 2,158
Brierley Investments Ltd. 2,630,900 409
o Fletcher Challenge Ltd. Forest 17,468 6
-------
2,573
-------
PHILIPPINES (0.4%)
Philippine Long Distance
Telephone Co. 215,700 3,867
JG Summit Holdings Inc. Class B 3,102,000 230
o EEI Corp. 4,264,000 35
o Philex Mining Corp. Class B 5,490,500 33
-------
4,165
-------
PORTUGAL (1.6%)
Portugal Telecom SA
(Registered) 1,205,600 13,591
Electricidade de Portugal SA 91,300 1,665
-------
15,256
-------
SINGAPORE (1.9%)
DBS Group Holdings Ltd. 871,701 11,193
Keppel Corp., Ltd. 2,127,250 4,601
Jardine Strategic
Holdings Limited 626,000 1,872
Dairy Farm International
Holdings Ltd. 1,372,266 823
-------
18,489
-------
SOUTH KOREA (0.6%)
SK Telecom Co., Ltd. 18,070 5,915
-------
SPAIN (0.2%)
Altadis SA 144,704 2,219
-------
SWEDEN (3.0%)
Nordic Baltic Holding AB 1,702,082 12,905
Electrolux AB Series B 614,005 9,556
ForeningsSparbanken AB 490,430 7,213
-------
29,674
-------
SWITZERLAND (4.0%)
Nestle SA (Registered) 10,387 20,856
Novartis AG (Registered) 6,727 10,690
Schindler Holding AG (Ptg. Ctf.) 5,294 7,944
-------
39,490
-------
THAILAND (0.8%)
o Shin Corporations PLC (Foreign) 679,000 3,566
o Thai Farmers Bank PLC
(Foreign) 2,884,400 2,427
o Bangkok Bank PLC (Foreign) 1,249,900 1,530
Thai Plastic & Chemical PLC
(Foreign) 180,650 447
o TPI Polene PLC (Foreign) 88,375 29
-------
7,999
-------
UNITED KINGDOM (25.5%)
Glaxo Wellcome PLC 534,100 15,581
Invensys PLC 3,571,372 13,409
British Telecommunications
PLC 927,720 11,994
Scottish Power PLC 1,315,400 11,152
MEPC PLC 1,320,962 10,879
British American Tobacco PLC 1,533,171 10,236
Allied Zurich PLC 855,252 10,119
Scottish & Newcastle PLC 1,212,935 9,907
BG PLC 1,456,416 9,415
o Allied Domecq PLC 1,746,500 9,254
Tesco PLC 2,959,000 9,206
Unilever PLC 1,497,000 9,065
Royal & Sun Alliance
Insurance Group PLC 1,379,250 8,958
Thames Water PLC 672,000 8,698
Great Universal Stores PLC 1,307,810 8,415
Trinity Mirror PLC 923,000 8,286
AstraZeneca Group PLC 162,533 7,591
Royal Bank of Scotland Group PLC 442,224 7,404
Pennon Group PLC 691,000 6,857
15
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL VALUE FUND SHARES (000)
--------------------------------------------------------------------------------
RMC Group PLC 462,900 $ 6,027
BOC Group PLC 415,444 5,975
Smith & Nephew PLC 1,498,450 5,535
United Utilities PLC 533,180 5,279
Reed International PLC 579,000 5,040
IMI PLC 1,167,300 5,001
Great Portland Estates 1,405,630 4,964
Wolseley PLC 801,000 4,305
Liberty International PLC 468,000 3,755
The Peninsular & Oriental
Steam Navigation Co. 436,597 3,741
Railtrack Group PLC 219,322 3,408
Slough Estates PLC 586,500 3,250
BPB PLC 678,006 3,213
Rank Group PLC 699,800 1,621
Coats Viyella PLC 1,667,700 1,389
Bass PLC 117,276 1,319
-------
250,248
-------
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $854,310) 950,865
--------------------------------------------------------------------------------
FACE
AMOUNT
(000)
--------------------------------------------------------------------------------
CONVERTIBLE BOND (0.1%)
--------------------------------------------------------------------------------
Burns, Philp & Co., Ltd.
7.50%, 8/10/2003
(Cost $1,455) AUD 12,150 1,240
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTs (8.2%)
--------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.71%, 7/3/2000 $24,654 24,654
6.71%, 7/3/2000--Note F 55,442 55,442
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $80,096) 80,096
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (105.1%)
(Cost $935,861) 1,032,201
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-5.1%)
Other Assets--Note C 10,222
Security Lending Collateral
Payable to Brokers--Note F (55,442)
Other Liabilities (4,739)
-------
(49,959)
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 33,926,690 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $982,242
================================================================================
NET ASSET VALUE PER SHARE $28.95
================================================================================
*See Note A in Notes to Financial Statements.
o Non-income-producing security.
AUD--Australian Dollar.
(Ptg. Ctf.)--Participating Certificate.
--------------------------------------------------------------------------------
Amount Per
(000) Share
--------------------------------------------------------------------------------
AT JUNE 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Paid in Capital $865,026 $25.50
Undistributed Net Investment
Income--Note D 2,881 .08
Accumulated Net Realized
Gains--Note D 18,065 .53
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 96,340 2.84
Foreign Currencies (70) --
--------------------------------------------------------------------------------
NET ASSETS $982,242 $28.95
================================================================================
16
<PAGE>
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period--these
amounts include the effect of foreign currency movements on the value of the
fund's securities. Currency gains (losses) on the translation of other assets
and liabilities, combined with the results of any investments in forward
currency contracts during the period, are shown separately.
--------------------------------------------------------------------------------
INTERNATIONAL VALUE FUND
SIX MONTHS ENDED JUNE 30, 2000
(000)
--------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* $12,818
Interest 471
Security Lending 167
-------
Total Income 13,456
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 731
Performance Adjustment (344)
The Vanguard Group--Note C
Management and Administrative 1,618
Marketing and Distribution 88
Custodian Fees 282
Auditing Fees 4
Shareholders' Reports 24
Trustees' Fees and Expenses 1
-------
Total Expenses 2,404
--------------------------------------------------------------------------------
NET INVESTMENT INCOME 11,052
--------------------------------------------------------------------------------
REALIZED NET GAIN (loss)
Investment Securities Sold 18,221
Foreign Currencies (88)
--------------------------------------------------------------------------------
REALIZED NET GAIN 18,133
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (32,059)
Foreign Currencies (24)
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (32,083)
--------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,898)
================================================================================
*Dividends are net of foreign withholding taxes of $1,016,000.
17
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
INTERNATIONAL VALUE FUND
-----------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN.30,2000 DEC.31,1999
(000) (000)
---------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income 11,052 22,757
Realized Net Gain 18,133 42,427
Change in Unrealized Appreciation (Depreciation) (32,083) 115,124
-------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations (2,898) 180,308
-------------------------------
DISTRIBUTIONS
Net Investment Income (1,058) (22,865)
Realized Capital Gain (6,684) (25,324)
-------------------------------
Total Distributions (7,742) (48,189)
-------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 365,049 577,871
Issued in Lieu of Cash Distributions 7,199 44,683
Redeemed (424,022) (516,320)
-------------------------------
Net Increase (Decrease) from Capital Share Transactions (51,774) 106,234
---------------------------------------------------------------------------------------------
Total Increase (Decrease) (62,414) 238,353
---------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 1,044,656 806,303
-------------------------------
End of Period $982,242 $1,044,656
=============================================================================================
1Shares Issued (Redeemed)
Issued 13,451 20,872
Issued in Lieu of Cash Distributions 270 1,580
Redeemed (15,662) (18,723)
Net Increase (Decrease) in Shares Outstanding (1,941) 3,729
=============================================================================================
</TABLE>
18
<PAGE>
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
INTERNATIONAL VALUE FUND
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -----------------------
THROUGHOUT EACH PERIOD 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%
Portfolio Turnover Rate 38%* 41% 39% 37% 82% 47%
============================================================================================================
</TABLE>
Annualized.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Vanguard International Value Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company, or mutual fund. The fund
invests in securities of foreign issuers, which may subject it to investment
risks not normally associated with investing in securities of United States
corporations.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments are valued at cost, which approximates market
value. Securities for which market quotations are not readily available are
valued by methods deemed by the board of trustees to represent fair value.
2. FOREIGN CURRENCY: Securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the
exchange rate on the valuation date as employed by Morgan Stanley Capital
International in the calculation of its indexes.
Realized gains (losses) and unrealized appreciation (depreciation) on
investment securities include the effects of changes in exchange rates since the
securities were purchased, combined with the effects of changes in security
prices. Fluctuations in the value of other assets and liabilities resulting from
changes in exchange rates are recorded as unrealized foreign currency gains
(losses) until the asset or liability is settled in cash, when they are recorded
as realized foreign currency gains (losses).
3. FORWARD CURRENCY CONTRACTS: The fund enters into forward currency
contracts to protect the value of securities and related receivables and
payables against changes in future foreign exchange rates. The fund's risks in
using these contracts include movement in the values of the foreign currencies
relative to the U.S. dollar and the ability of the counterparties to fulfill
their obligations under the contracts.
Forward currency contracts are valued at their quoted daily settlement
prices. The aggregate principal amounts of the contracts are not recorded in the
financial statements. Fluctuations in the value of the contracts are recorded in
the Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized forward currency contract gains
(losses).
4. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
5. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a pooled cash account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
6. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
7. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
20
<PAGE>
B. Phillips & Drew provides investment advisory services to the fund for a fee
calculated at an annual percentage rate of average net assets. The basic
advisory fee is subject to quarterly adjustments based on performance for the
preceding three years relative to the Morgan Stanley Capital International
Europe, Australasia, Far East Index. For the six months ended June 30, 2000, the
advisory fee represented an effective annual basic rate of 0.15% of the fund's
average net assets, before a decrease of $344,000 (0.07%) based on performance.
On July 21, 2000, the board of trustees approved a change in the fund's
investment adviser. Effective August 1, 2000, Phillips & Drew will cease to
serve as investment adviser to the find, and will be replaced by Hansberger
Global Investors, Inc.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing,and distribution services. The costs of such services are allocated to
the fund under methods approved by the board of trustees. The fund has committed
to provide up to 0.40% of its net assets in capital contributions to Vanguard.
At June 30, 2000, the fund had contributed capital of $181,000 to Vanguard
(included in Other Assets), representing 0.02% of the fund's net assets and 0.2%
of Vanguard's capitalization. The fund's trustees and officers are also
directors and officers of Vanguard.
D. During the six moths ended June 30, 2000, the fund purchased $178,654,000 of
investment securities and sold $263,124,000 of investment securities, other than
temporary cash investments.
During the six months ended June 30, 2000, the fund realized net foreign
currency losses of $88,000, which decreased distributable net income for tax
purposes; accordingly, such losses have been reclassified from accumulated net
realized gains to undistributed net investment income.
During 1999, the fund received securities in a corporate spinoff that
increased taxable income and the tax basis cost of investments, creating a
difference between undistributed net investment income and the cost of
investments for financial statement and tax purposes. A difference of $6,469,000
remained at December 31, 1999, and June 30, 2000, which is reflected in the
balance of undistributed net investment income; the corresponding difference
between the securities' cost for financial statement and tax purposes is
reflected in unrealized appreciation.
E. At June 30, 2000, net unrealized appreciation of investment securities for
federal income tax purposes was $89,871,000 consisting of unrealized gains of
$190,725,000 on securities that had risen in value since their purchase and
$100,854,000 in unrealized losses on securities that had fallen in value since
their purchase. (See Note D.)
The fund had net unrealized foreign currency losses of $70,000 resulting
from the translation of other assets and liabilities at June 30, 2000.
F. The market value of securities on loan to broker/dealers at June 30, 2000,
was $53,419,000, for which the fund held cash collateral of $55,442,000. Cash
collateral received is invested in repurchase agreements.
21
<PAGE>
THE VANGUARD(R)FAMILY OF FUNDS
STOCK FUNDS
---------------------------------------
500 Index Fund
Aggressive Growth Fund
Capital Opportunity Fund
Convertible Securities Fund
Emerging Markets Stock
Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer(TM) Fund
Extended Market Index Fund*
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Index Fund*
Health Care Fund
Institutional Index Fund*
International Growth Fund
International Value Fund
Mid-Cap Index Fund*
Morgan(TM) Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund*
Small-Cap Index Fund*
Small-Cap Value Index Fund*
Tax-Managed Capital Appreciation Fund*
Tax-Managed Growth and Income Fund*
Tax-Managed International Fund*
Tax-Managed Small-Cap Fund*
Total International Stock
Index Fund
Total Stock Market Index Fund*
U.S. Growth Fund
Utilities Income Fund
Value Index Fund*
Windsor(TM) Fund
Windsor(TM) II Fund
BALANCED FUNDS
---------------------------------------
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy(R) Conservative
Growth Fund
LifeStrategy(R) Growth Fund
LifeStrategy(R) Income Fund
LifeStrategy(R) Moderate
Growth Fund
STAR(TM) Fund
Tax-Managed Balanced Fund
Wellesley(R) Income Fund
Wellington(TM) Fund
BOND FUNDS
---------------------------------------
Admiral(TM) Intermediate-Term
Treasury Fund
Admiral(TM)Long-Term Treasury Fund
Admiral(TM)Short-Term Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Insured Long-Term Tax-Exempt Fund
Intermediate-Term Bond Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund*
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds
(California, Florida,
Massachusetts, New Jersey,
New York, Ohio, Pennsylvania)
Total Bond Market Index Fund*
MONEY MARKET FUNDS
---------------------------------------
Admiral(TM) Treasury Money
Market Fund
Federal Money Market Fund
Prime Money Market Fund*
State Tax-Exempt Money Market Funds
(California, New Jersey, New York
Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
---------------------------------------
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
*Offers Institutional Shares.
For information about Vanguard funds and our variable annuity plan, including
charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box
2600, Valley Forge, PA 19482-2600.
Read it carefully before you invest or send money.
22
<PAGE>
--------------------------------------------------------------------------------
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's eight board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's
professional affiliations. Noted in parentheses is the year in which the Trustee
joined the Vanguard Board.
TRUSTEES
JOHN J. BRENNAN (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Gestinova, Baker Fentress & Co., The Jeffrey Co., and Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JAMES O. WELCH, JR. (1971) Retired Chairman of Nabisco Brands, Inc.; retired
Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc., and
Kmart Corp.
J. LAWRENCE WILSON (1985) Retired Chairman of Rohm & Haas Co.; Director of
AmeriSource Health Corporation, Cummins Engine Co., and The Mead Corp.; Trustee
of Vanderbilt University.
--------------------------------------------------------------------------------
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY Secretary; Managing Director and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
THOMAS J. HIGGINS Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of
each of the investment companies in The Vanguard Group.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON Legal Department.
ROBERT A. DISTEFANO Information Technology.
JAMES H. GATELY Individual Investor Group.
KATHLEEN C. GUBANICH Human Resources.
IAN A. MACKINNON Fixed Income Group.
F. WILLIAM MCNABB, III Institutional Investor Group.
MICHAEL S. MILLER Planning and Development.
RALPH K. PACKARD Chief Financial Officer.
GEORGE U. SAUTER Quantitative Equity Group.
<PAGE>
[SHIP]
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a
reproduction of Leading the Way, a 1984 work created
and copyrighted by noted naval artist Tom Freeman,
of Forest Hill, Maryland.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's
shareholders. It may not be distributed
to prospective investors unless it
is preceded or accompanied by the
current fund prospectus.
Q462 082000
(C)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
