<PAGE>
VANGUARD(R)
INTERNATIONAL VALUE
FUND
ANNUAL REPORT
DECEMBER 31, 1999
[SHIP GRAPHIC]
[A MEMBER OF THE VANGUARD GROUP LOGO]
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[PHOTO OF JOHN C. BOGLE]
JOHN C. BOGLE
FELLOW SHAREHOLDERS:
TWO ROADS DIVERGED IN A WOOD, AND I--I TOOK THE ONE LESS TRAVELED BY, AND THAT
HAS MADE ALL THE DIFFERENCE.
I can think of no better words than those of Robert Frost to begin this special
letter to our shareholders, who have placed such extraordinary trust in me and
in Vanguard over the past quarter century. When the firm was founded 25 years
ago, we deliberately took a new road to managing a mutual fund enterprise.
Instead of having the funds controlled by an outside management company with its
own financial interests, the Vanguard funds--there were only 11 of them
then--would be controlled by their own shareholders and operate solely in their
financial interests. The outcome of our unprecedented decision was by no means
certain. We described it then as "The Vanguard Experiment."
Well, I guess it's fair to say it's an experiment no more. During the
past 25 years, the assets we hold in stewardship for investors have grown from
$1 billion to more than $500 billion, and I believe that our reputation for
integrity, fair-dealing, and sound investment principles is second to none in
this industry. Our staggering growth--which I never sought--has come in
important part as a result of the simple investment ideas and basic human values
that are the foundation of my personal philosophy. I have every confidence that
they will long endure at Vanguard, for they are the right ideas and right
values, unshakable and eternal.
While Emerson believed that "an institution is the lengthened shadow of
one man," Vanguard today is far greater than any individual. The Vanguard crew
has splendidly implemented and enthusiastically supported our founding ideas and
values, and deserves the credit for a vital role in forging our success over the
years. It is a dedicated crew of fine human beings, working together in an
organization that is well prepared to press on regardless long after I am gone.
Creating and leading this enterprise has been an exhilarating run. Through it
all, I've taken the kudos and the blows alike, enjoying every moment to the
fullest, and even getting a second chance at life with a heart transplant nearly
four years ago. What more could a man ask?
While I shall no longer be serving on the Vanguard Board, I want to
assure you that I will remain vigorous and active in a newly created Vanguard
unit, researching the financial markets, writing, and speaking. I'll continue to
focus whatever intellectual power and ethical strength I possess on my mission
to assure that mutual fund investors everywhere receive a fair shake. In the
spirit of Robert Frost:
BUT I HAVE PROMISES TO KEEP, AND MILES TO GO BEFORE I SLEEP, AND MILES
TO GO BEFORE I SLEEP.
You have given me your loyalty and friendship over these long years,
and I deeply appreciate your thousands of letters of support. For my part, I
will continue to keep an eagle eye on your interests, for you deserve no less.
May God bless you all, always.
/s/
JCB
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CONTENTS
REPORT FROM THE CHAIRMAN 1
AFTER-TAX RETURNS REPORT 5
THE MARKETS IN PERSPECTIVE 6
REPORT FROM THE ADVISER 8
PERFORMANCE SUMMARY 10
FUND PROFILE 11
FINANCIAL STATEMENTS 14
REPORT OF INDEPENDENT ACCOUNTANTS 22
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REPORT FROM THE CHAIRMAN
[PHOTO OF JOHN J. BRENNAN]
JOHN J. BRENNAN
Vanguard International Value Fund provided a generous absolute total return of
21.8% in 1999, as stock markets around the world posted impressive gains. Our
result was disappointing compared with competitive benchmarks, however.
The table at right presents the 12-month total returns (capital change
plus reinvested dividends) for the fund and its benchmarks--the average
international stock fund and the unmanaged Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. It trailed the EAFE Index by 5.5
percentage points and was less than half the gain of the average international
stock fund.
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TOTAL RETURNS
YEAR ENDED
DECEMBER 31, 1999
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Vanguard International Value Fund 21.8%
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Average International Fund* 44.3%
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MSCI EAFE Index 27.3%
MSCI EAFE Value Index 24.5
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*Derived from data provided by Lipper Inc.
The fund's return is based on an increase in net asset value from
$25.09 per share on December 31, 1998, to $29.13 per share on December 31, 1999,
and is adjusted for dividends of $0.66 per share paid from net investment income
and a distribution of $0.73 per share paid from net realized capital gains.
FINANCIAL MARKETS IN REVIEW
The fervor for technology, telecommunications, and other growth stocks that has
driven the U.S. stock market in recent years rubbed off on international markets
during 1999. The MSCI EAFE Index, which tracks 20 developed markets in Europe
and the Pacific, rose 27.3% in U.S.-dollar terms in 1999, marking the first year
since 1994 that international markets outpaced the U.S. market. The global
uptrend in stock prices came amid rising interest rates worldwide and the
recovery of foreign markets from the currency crises of 1997-1998. By mid-1999,
fears of a global economic slump were supplanted by worries that
growth--especially in the United States--was so strong that it would cause
inflation to surge. In an effort to restrain the U.S. economy, the Federal
Reserve Board boosted its target for short-term interest rates three times by a
total of 0.75 percentage point. The European Central Bank lowered rates in the
spring, but reversed course in the fall. In Japan, interest rates remained near
zero.
On European bourses, corporate merger activity contributed to a second
consecutive year of robust advances. European stocks--as measured by the MSCI
Europe Index--rose 30.3% in local-currency terms in 1999. The gain was nearly
halved for U.S. investors, however, as the euro--the common currency of 11
nations--declined about 15% against the dollar in its first year. (When the U.S.
dollar rises in value against another currency, each unit of currency can be
exchanged for fewer dollars, thereby lowering returns for U.S. investors. Of
course, a weaker dollar bolsters returns from foreign securities for U.S.
investors.) Stocks in Germany, the region's largest economy, returned 20.5% in
dollars. France and the United Kingdom gained 29.7% and 12.5%, respectively.
Investors in Asia seemed confident that the economic crises of 1997 and
1998 were safely in the past. Pacific-region stocks rebounded from a weak 2.6%
gain in 1998 to post
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a total return of 56.4% in 1999 (both in dollar terms). Signs of a potential
recovery in Japan--and government efforts to shore up its banking system--buoyed
the world's second-largest stock market and the nation's currency. Japanese
stocks leapt 46.8% in local-currency terms. The strengthening yen--which rose to
a four-year high versus the dollar--boosted the gain to 61.8% for U.S.-based
investors. Elsewhere in the Pacific, Hong Kong jumped 60.1% and Singapore
rocketed 101.3% in local terms; returns for U.S. investors in those markets were
about the same, since their currencies are pegged to the U.S. dollar.
Returns from most of the world's emerging markets were even more
impressive. On balance, the Select Emerging Markets Free Index gained a
staggering 156.5% in local-currency terms during 1999. However, the U.S. dollar
generally gained against the currencies of developing nations, cutting the
return for dollar-based investors to a "mere" 60.9%. Brazil rocketed nearly 150%
higher in local currency, although the relative strength of the dollar reduced
the gain to 67.2% for U.S. investors. Stocks in Indonesia delivered an amazing
dollar-based return of about 93%. Markets in Thailand and Greece were also
exuberant, rising nearly 50% for U.S. investors.
The table below presents the impact of currency shifts on returns
during 1999. As the past year's returns demonstrate, share-price fluctuations
that result from changing currency values can be a significant risk for U.S.
investors who own international stocks. This risk is in addition to the market
risk that accompanies ownership in any equity security.
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TOTAL RETURNS
YEAR ENDED DECEMBER 31, 1999
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LOCAL
CURRENCY CURRENCY U.S. DOLLAR
INDEX RETURNS IMPACT RETURNS
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MSCI EAFE 33.8% -6.5% 27.3%
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MSCI Europe 30.3% -14.5% 15.8%
MSCI Pacific Free 43.9 +12.5 56.4
Select Emerging
Markets Free* 156.5 -95.6 60.9
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Wilshire 5000 Total
Market Index 23.8% -- 23.8%
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*Consists of stocks that can be bought free of
restrictions in 13 emerging markets of Europe, Asia,
Africa, and Latin America and two developed markets
(Hong Kong and Singapore).
1999 PERFORMANCE OVERVIEW
On the strength of a worldwide rally in stocks, Vanguard International Value
Fund turned in an excellent total return of 21.8%, its best performance since
1993. Our shortfall against both the EAFE Index and our average peer can be
explained in large part by the exceptional performance of technology and
telecommunications stocks and by investors' infatuation with "mega cap" stocks.
As in the United States, developed foreign markets were carried higher
in 1999 by a narrow group of stocks. In fact, 69% of the companies in the EAFE
Index underperformed the benchmark's return for the year. The fund's investment
adviser, Phillips & Drew, stuck with its value approach to investing--favoring
stocks that appeared to be undervalued based on their price/earnings ratios or
other measures. During 1999, this disciplined approach crimped our relative
returns, as the growth stocks in the EAFE Index had a 29.7% return (in dollars),
while the benchmark's value stocks gained 24.5%. Many funds in our competitive
group invest at least some of their assets in growth stocks.
Stocks with market capitalizations of more than $15 billion easily
posted the largest gains in Europe and Japan and were among the leaders in the
rest of the developed Pacific Rim markets. Our average peer benefited from this
trend, investing more heavily in these
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mega-cap stocks. At around $13 billion, the International Value Fund's median
market capitalization was large, but your fund's adviser found most of the
mega-caps excessively pricey and therefore avoided them. The fund's
fourth-quarter results in Japan were a case in point. Despite that market's
strength--Japanese stocks in the EAFE Index climbed 15.5%--the fund's Japanese
stake gained just 2.7% in the period because we lacked holdings in the
top-performing technology and banking sectors. Good stock selection in Korea and
Thailand helped to offset some of those weak returns.
As they did in 1999, our returns will differ from those of the overall
market from time to time. That is an unavoidable by-product of maintaining a
disciplined investment strategy. We remain confident that the fund's value
orientation will benefit shareholders over longer periods.
LONG-TERM PERFORMANCE OVERVIEW
A single year's results--good or bad--are, of course, insufficient for judging a
mutual fund's merits. Vanguard International Value Fund's aim is to provide
superior long-term performance.
The adjacent table displays the ten-year results for the fund, our
average peer, and the unmanaged EAFE Index. It also shows how hypothetical
$10,000 investments in each would have grown since 1989, assuming that income
dividends and capital gain distributions had been reinvested. As you can see,
our return of 7.3% a year meant that a $10,000 investment would have grown to
$20,297. A $10,000 investment in the index would have resulted in a virtually
identical ending value, although an additional $7,037 would have accumulated in
our average peer.
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TOTAL RETURNS
TEN YEARS ENDED DECEMBER 31, 1999
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AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
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Vanguard International
Value Fund 7.3% $20,297
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Average International Fund 10.6% $27,334
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MSCI EAFE Index 7.3% $20,296
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The prolonged weakness of the Japanese stock market--which declined by
an average -0.7% per year in the 1990s, even after the reinvestment of dividend
income--weighs down the long-term record of the International Value Fund versus
its average peer. During the period, the fund's investments in Japan were
typically only slightly smaller than that country's weighting in the EAFE Index,
while the average international fund staked about half as much there. As of
December 31, the fund held nearly 24% of its assets in Japan, just below the
country's 27% weighting in the index.
Over time, we expect our return to surpass that of the average
international stock fund. Our confidence flows, in part, from our significant
cost advantage. The International Value Fund's expense ratio (annual expenses as
a percentage of average net assets) was 0.59% in 1999, far less than the 1.66%
charged by the average international stock fund. The difference of 1.07
percentage points ($10.70 per $1,000 invested) reflects additional gross return
that the average competing fund must earn from its investments--perhaps by
taking greater risks--to deliver the same net return as your fund. Such a margin
is tough to achieve, especially over longer time periods.
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IN SUMMARY
The strong performance of foreign stocks in 1999--particularly the powerful
resurgence of many emerging markets and of long-suffering Japan--offers a
valuable lesson for investors. No one can ever be sure when the mood of a market
will shift. A sector or region that is out of favor today can lead tomorrow, and
vice versa.
At Vanguard, we continue to believe that investors should hold balanced
portfolios of stock funds, bond funds, and short-term reserves. International
funds can play a role for those who have carefully considered their investment
goals, time horizon, and tolerance for increased risk. With such a plan in
place, investors are well advised to "stay the course."
/s/
John J. Brennan
Chairman and Chief Executive Officer
January 21, 2000
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A NOTE OF THANKS TO OUR FOUNDER
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As you may have read on the inside cover of our report, our founder, John C.
Bogle, retired on December 31, 1999, as Senior Chairman of our Board after
nearly 25 years of devoted service to Vanguard and our shareholders. Vanguard
investors have Jack to thank for creating a truly mutual mutual fund company
that operates solely in the interest of its fund shareholders. And mutual fund
investors everywhere have benefited from his energetic efforts to improve this
industry. Finally, on a personal note, I am forever grateful to Jack for giving
me the opportunity to join this great company in 1982.
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A REPORT ON YOUR FUND'S AFTER-TAX RETURNS
Beginning with this annual report, Vanguard is pleased to provide a review of
the International Value Fund's after-tax performance. The figures on this page
demonstrate the considerable impact that federal income taxes can have on a
fund's return--an important consideration for investors who own mutual funds in
taxable accounts. While the pretax return is most often used to tally a fund's
performance, the fund's after-tax return, which accounts for taxes on
distributions of capital gains and income dividends, is a better representation
of the return that many investors actually received. If you own the
International Value Fund in a tax-deferred account such as an individual
retirement account or a 401(k), this information does not apply to you. Such
accounts are not subject to current taxes.
The table below presents the pretax and after-tax returns for your fund
and an appropriate peer group of mutual funds. Two things to keep in mind:
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AVERAGE ANNUAL RETURNS: PRETAX AND AFTER-TAX
PERIODS ENDED DECEMBER 31, 1999
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1 YEAR 5 YEARS 10 YEARS
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PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX
<S> <C> <C> <C> <C> <C> <C>
Vanguard International
Value Fund 21.8% 19.9% 10.9% 7.0% 7.3% 4.7%
Average Foreign
Stock Fund* 44.3 42.1 15.1 13.4 10.2 8.7
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*Based on data from Morningstar, Inc.
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o The after-tax return calculations use the top federal income tax
rates in effect at the time of each distribution. The tax burden, therefore,
would be somewhat less, and the after-tax return somewhat more, for those in
lower tax brackets.
o The peer funds' returns are provided by Morningstar, Inc. (Elsewhere
in this report, returns for comparable mutual funds are derived from data
provided by Lipper Inc., which differ somewhat.)
As you can see, the International Value Fund's pretax total return of
21.8% for 1999 was reduced by taxes to 19.9%. In other words, for investors in
the highest bracket, taxes cut the fund's pretax return by 1.9 percentage
points. Though our average peer lost 2.2 percentage points to taxes, it was
actually more tax efficient than the International Value Fund. That is, it
retained a higher proportion of its pretax return, which was more than twice
that of our fund. Over the one-, five-, and ten-year periods ended December 31,
1999, our fund has not been particularly tax efficient. It provided lower
pre-tax returns than its peer-group average and lost a larger proportion of its
return to taxes.
We stress that because many interrelated factors affect how
tax-friendly a fund may be, it's very difficult to predict tax efficiency. A
fund's tax efficiency can be influenced by its turnover rate, the types of
securities it holds, the accounting practices it uses when selling shares, and
the net cash flow it receives.
Finally, it's important to understand that our calculation does not
reflect the effect of your own investment activities. Specifically, you may
incur additional capital gains taxes--thereby lowering your after-tax return--if
you decide to sell all or some of your shares.
A NOTE ABOUT OUR CALCULATIONS: Pretax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. The calculation does not account for state and local income
taxes, nor does it take into consideration any tax adjustments that a
shareholder may claim for foreign taxes paid by the fund. The competitive group
returns provided by Morningstar are calculated in a manner consistent with that
used for Vanguard funds.
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THE MARKETS IN PERSPECTIVE
YEAR ENDED DECEMBER 31, 1999
A global expansion in economic activity bolstered stocks at home and abroad
during 1999. The muscular U.S. economy provided a good bit of the oomph, but it
got an assist from solid growth in Asian, European, and Latin American economies
that had slumped in 1997 and 1998.
Interest rates increased significantly--causing bond prices to fall--as
both investors and monetary policymakers grew concerned that economic growth was
so vigorous that it would cause inflation to accelerate.
U.S. STOCK MARKETS
The booming economy and growing corporate profits provided plenty of fuel for
stock prices during 1999. However, higher interest rates restrained the rise,
especially for financial-services and electric utility stocks regarded as
interest rate sensitive.
U.S. economic output increased at an inflation-adjusted rate of about
4%--a very rapid pace for such a large, mature economy. Analysts estimated that
corporate profits would grow by 14% in 1999 and again in 2000. Consumer
spending, which accounts for roughly two-thirds of economic activity, was
strong. People felt prosperous, thanks to the long bull market, plentiful jobs,
and rising incomes. (After-tax personal income grew by more than 5% in 1999, and
unemployment at year-end was at a three-decade low of 4.1% of the workforce.)
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AVERAGE ANNUAL RETURNS
PERIODS ENDED DECEMBER 31, 1999
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1 YEAR 3 YEARS 5 YEARS
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STOCKS
S&P 500 Index 21.0% 27.6% 28.6%
Russell 2000 Index 21.3 13.1 16.7
Wilshire 5000 Index 23.8 26.1 27.1
MSCI EAFE Index 27.3 16.1 13.2
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BONDS
Lehman Aggregate Bond Index -0.8% 5.7% 7.7%
Lehman 10 Year Municipal Bond Index -1.3 4.8 7.1
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 4.7 5.0 5.2
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OTHER
Consumer Price Index 2.7% 2.0% 2.4%
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The stock market, as measured by the Wilshire 5000 Index, gained 23.8%,
with more than three-quarters of the gain coming in the final quarter of 1999.
For the first time in several years, smaller stocks outpaced
large-capitalization issues. The S&P 500 Index, which is dominated by large-cap
stocks and accounts for more than three-quarters of the U.S. stock market's
total value, gained 21.0% during the year; the rest of the market gained 35.4%.
Hidden in the market averages was an amazing divergence in stock
performance. Prices soared for most technology-related stocks, but performance
was pedestrian, at best, for most other issues. Indeed, three-fifths of stocks
on the New York Stock Exchange fell in 1999. The technology sector of the S&P
500 Index gained 74%, and the producer-durables sector, driven by huge gains for
some makers of telecommunications and technology gear, was up 49%. These results
were in stark contrast to the declines suffered by food and beverage companies
in the consumer-staples sector (-16%) and by many companies in the health-care
group (-10%).
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Investors seemed bedazzled by the prospects for growth in revenue and
profits among tech stocks, but less interested in the actual profits for nontech
companies. Remarkably, the average S&P 500 stock without earnings gained 36.5%
in 1999, while the average stock with earnings rose 11.5%. There is general
agreement that growth in Internet commerce, computers, software, wireless
communications, and other key tech sectors will be stupendous. However, there is
much disagreement about whether profits will grow so impressively, given the
intense competition. During 1999, optimists clearly ruled.
U.S. BOND MARKETS
The pickup in worldwide economic activity buoyed stock prices but depressed bond
prices. Interest rates, which move in the opposite direction from bond prices,
rose sharply. The rate increase stemmed from increased borrowing by corporations
and individuals and from investors' fears that a sizzling economy was bound to
send inflation soaring.
The inflation evidence was ambiguous. Price increases were greater in
1999 than in 1998 at both the wholesale and consumer levels. Wholesale prices
rose 3.0%, the biggest gain since 1990. And the Consumer Price Index advanced
2.7% in 1999 after a gain of just 1.6% in 1998. However, energy prices, which
plunged in 1998 and shot up in 1999, skewed the figures in both periods. At the
consumer level, the "core rate" of inflation, which excludes food and energy
prices, was up just 1.9% in 1999, the smallest increase in 35 years.
At midyear, the Federal Reserve Board, aiming to cool the economy a bit
to head off price pressures, began raising short-term interest rates. In all,
the Fed pushed up rates by 0.75 percentage point in three quarter-point steps.
The bond market anticipated the Fed--interest rates began rising sharply in
February--and at year-end the yield of 30-year U.S. Treasury bonds was up 1.38
percentage points (138 basis points) to 6.48%. The 10-year Treasury note--a
benchmark for mortgage lenders--rose 179 basis points, from 4.65% to 6.44%.
Short-term rates didn't rise as far; 3-month Treasury bill yields were up 88
basis points to 5.33% at year-end.
Price declines, as usual, were greatest for long-term bonds and least
for short-term bonds. The overall market, as measured by the Lehman Aggregate
Bond Index, which has an intermediate-term average maturity, posted a -0.8%
total return in 1999. Short-term bonds generally provided returns of 2% to 3%.
Long-term bonds suffered significant price declines, and the Lehman Long
Government/Corporate Index recorded a -7.7% total return.
INTERNATIONAL STOCK MARKETS
Bullishness among stock investors was an international phenomenon in 1999. The
biggest gains came in Pacific-region and emerging markets that had suffered most
from economic slumps and currency crises during 1997 and 1998.
Overall, the Morgan Stanley Capital International Europe, Australasia,
Far East (EAFE) Index of major developed markets produced a 27.3% return for
U.S. dollar-based investors. The MSCI Pacific Free Index gained an astounding
56.4% for U.S. investors, as a strong rise in the Japanese yen against the U.S.
dollar tacked on about 12.5 percentage points to a 43.9% return in local
currencies. In Europe, currency fluctuations had the opposite effect: European
currencies, including the new 11-nation common currency, the euro, mostly fell
against the dollar, and the 30.3% return in local currencies was nearly halved
to 15.8% in U.S. dollars.
Emerging markets managed a stunning turnaround, as the Select Emerging
Markets Free Index rose 60.9% in U.S.-dollar terms after having plummeted -18.4%
in 1998 and -16.4% in 1997.
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REPORT FROM THE ADVISER
Vanguard International Value Fund provided a return of 21.8% in 1999. This
trailed both the 27.3% return of the MSCI EAFE Index and the 44.3% return of the
average international equity fund.
During 1999, the major theme to our investment activity was a reduction
of holdings in emerging Asian markets and a corresponding addition to the fund's
stake in continental European markets. The fund's exposure to Japanese stocks
rose slightly (from 22% of our stocks to 24%), mainly due to appreciation in
both the yen and the nation's stock market. We also added a few Canadian stocks.
Back in 1998, when the consensus view on Asia was at its bleakest, we
increased the fund's exposure in Asian emerging markets to around 7% of assets.
We bought into many good companies with stable core businesses, good management,
and sound finances that had been given a competitive boost by the devaluation of
their countries' currencies. Since then, the consensus has shifted to an
expectation of painless resumption of growth for the region. This is
overoptimistic, in our view.
Thanks to the market's change in sentiment, many of the fund's holdings
have skyrocketed in a short time, and their valuations have gotten way ahead of
reality. At the same time, many companies that talked of restructuring when they
were under pressure are putting off tough decisions now that their share prices
have rallied. We think this is a mistake. A typical example is Hyundai Motor,
the Korean auto manufacturer. Its stock price has risen 150% since we last
bought shares in 1998. Taking advantage of the optimistic climate, we have sold
our shares and reduced the fund's exposure to Southeast Asia's emerging markets
to 3% of assets.
The International Value Fund started 1999 with a position in Japan that
was nearly the same as that country's proportion in the EAFE Index. Japan then
became one of the year's best-performing markets as investors responded to
improving economic performance (admittedly from a very low base) and continued
signs of a commitment to corporate restructuring. Some of the announced
restructurings will indeed add value for shareholders. But we remain skeptical
that all the plans will come to fruition. Consequently, we have reduced our
position in Japan to 24% of our stock holdings, below the 27% weighting in the
index. The fund remains significantly underweighted in the Japanese banking
sector, where prices rose substantially on the hope of restructuring. We believe
these stock prices are assuming too much improvement.
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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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Turning to Europe: The euro was successfully launched on January 1,
1999, but weakened to a surprising extent during the year. At one point, it was
down about 15% versus the U.S. dollar, reflecting weakness in the German economy
and strains in Italy's finances. The differing economic growth rates among
European nations--with Germany and Italy faltering while Ireland, Spain, and
Portugal are expanding very
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strongly--underscore the problems posed by a "one size fits all" interest rate
policy, as exists under the European Central Bank. During 1999, we benefited
from our overweighted position in France, which powered ahead of Germany.
Taking advantage of the lackluster performance of European markets,
particularly in comparison with Asia, we added to several positions there.
Again, these purchases were focused on France and on medium-sized stocks in the
United Kingdom. Corporate takeover and restructuring activity has been
exceptionally strong in Europe, and hostile takeover bids in Italy and France
benefited some of our holdings. It is particularly interesting to observe the
hostile takeovers in the French banking and oil sectors, something that would
have been unthinkable a few years ago.
Several of the European cyclical stocks we owned, such as Akzo Nobel,
the Dutch chemical and pharmaceutical firm, performed very strongly, so we pared
these holdings during the middle of the year. Corporate activity involving the
likes of Telecom Italia (recipient of an acquisition bid from Olivetti) and
Allied Domecq (which sold its chain of U.K. pubs) led to large rises in their
share prices, after which we reduced our stakes. The proceeds from such sales,
along with new cash, were added to some of our existing holdings and to some new
positions in Scandinavian banks.
As we've explained in previous reports, we focus our European
investments on companies that are undervalued by some measure and that have good
management, capable of taking advantage of the opportunities that the new Europe
offers. On a sector basis, this has kept us overweighted compared with the EAFE
Index in consumer and basic industries and underweighted in banks, insurance,
and pharmaceuticals.
Many Canadian stocks are selling at much cheaper valuations than
comparable companies elsewhere in the world, so we have added shares of Nova
Chemicals, Clarica (a life insurance company), and BCE (the telecom company).
Canada now represents 2.3% of the fund's stock holdings.
The International Value Fund geographic representation is not unlike
that of the EAFE Index, but this fact may obscure some significant differences
between the fund and the index in regard to average market capitalization and
industrial representation. In most markets, the fund has a bias away from
very-large-cap companies and a corresponding bias toward mid- and small-cap
issues that are selling at much lower valuation levels.
The huge surge in prices of technology, Internet, and
telecommunications stocks--all areas where the fund is underrepresented--has
hurt our performance relative to peer funds and the EAFE Index in recent
periods. While many of these companies will show good revenue growth, we believe
that the market's enthusiasm has stretched valuations of some stocks to
ridiculous extremes. Consequently, we remain confident that it is right to be
underweighted in these sectors. Meanwhile, we are taking advantage of the many
opportunities to add to holdings of good-quality companies that, in some cases,
are selling below prices they fetched a year ago.
Wilson Phillips, Portfolio Manager
Phillips & Drew
January 12, 2000
9
<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-DECEMBER 31, 1999
- --------------------------------------------------------
INTERNATIONAL VALUE FUND MSCI EAFE
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------
1983 4.0% 1.8% 5.8% 11.0%
1984 -4.9 4.1 -0.8 7.9
1985 36.1 4.2 40.3 56.7
1986 46.8 3.9 50.7 69.9
1987 22.1 1.8 23.9 24.9
1988 14.8 4.0 18.8 28.6
1989 22.8 3.2 26.0 10.8
1990 -15.1 2.8 -12.3 -23.2
1991 6.9 3.1 10.0 12.5
1992 -11.0% 2.3% -8.7% -11.8%
1993 27.0 3.5 30.5 32.9
1994 3.5 1.8 5.3 8.1
1995 7.0 2.6 9.6 11.6
1996 7.5 2.7 10.2 6.4
1997 -7.2 2.6 -4.6 2.1
1998 14.7 4.8 19.5 20.3
1999 19.1 2.7 21.8 27.3
- --------------------------------------------------------
See Financial Highlights table on page 19 for
dividend and capital gains information for the
past five years.
CUMULATIVE PERFORMANCE: DECEMBER 31, 1989-DECEMBER 31, 1999
- -----------------------------------------------------------
198912 10000 10000 10000
199003 9505 9427 8028
199006 10313 10255 8802
199009 8457 8413 6942
199012 8774 8826 7680
199103 9114 9402 8258
199106 8811 9164 7814
199109 9472 9775 8491
199112 9648 9953 8640
199203 9116 9580 7622
199206 9566 10056 7790
199209 9092 9570 7915
199212 8806 9446 7616
199303 9690 10226 8537
199306 10377 10858 9402
199309 11054 11874 10032
199312 11492 13166 10126
199403 11817 12757 10486
199406 12248 13040 11029
199409 12408 13477 11047
199412 12095 13053 10942
199503 12111 12490 11154
199506 12508 13162 11244
199509 12873 13875 11722
199512 13262 14261 12206
199603 13774 14511 12568
199606 14015 15219 12776
199609 14011 15180 12770
199612 14617 15948 12982
199703 14775 15797 12788
199706 16425 17707 14458
199709 15995 17978 14365
199712 13948 16758 13249
199803 16506 18816 15208
199806 16387 19195 15380
199809 13814 16108 13204
199812 16662 18940 15943
199903 16935 18825 16176
199906 18602 20267 16599
199909 18875 21204 17339
199912 20297 27334 20296
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1999
------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- --------------------------------------------------------------------------------
International Value Fund 21.81% 10.91% 7.34% $20,297
Average International Fund* 44.32 15.93 10.58 27,334
MSCI EAFE Index 27.30 13.15 7.33 20,296
- --------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
10 YEARS
INCEPTION ------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
International Value Fund 5/16/1983 21.81% 10.91% 4.46% 2.88% 7.34%
- --------------------------------------------------------------------------------
10
<PAGE>
FUND PROFILE
INTERNATIONAL VALUE FUND
This Profile provides a snapshot of the fund's characteristics as of December
31, 1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 12.
PORTFOLIO CHARACTERISTICS
- -------------------------------------
INTERNATIONAL
VALUE MSCI EAFE
- -------------------------------------
Number of Stocks 134 967
Turnover Rate 41% --
Expense Ratio 0.59% --
Cash Reserves 2.3% --
ALLOCATION BY REGION
- -------------------------------------
Europe 60%
Pacific 34%
Emerging Markets 4%
North America 2%
VOLATILITY MEASURES
- -------------------------------------
INTERNATIONAL
VALUE MSCI EAFE
- -------------------------------------
R-Squared 0.83 1.00
Beta 0.96 1.00
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
- -----------------------------------------------
Total Fina SA B Shares 4.4%
Nestle SA (Registered) 2.6
Akzo Nobel NV 2.4
Matsushita Electric Industrial Co., Ltd. 2.4
Alcatel 2.3
Nippon Telegraph and Telephone Corp. 2.2
Hitachi Ltd. 2.1
DBS Group Holdings Ltd. 2.1
Bayer AG 1.9
AXA 1.9
- -----------------------------------------------
Top Ten 24.3%
Country Diversification (% of Common Stocks) can be found on page 13.
11
<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 RESERVES. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
COUNTRY DIVERSIFICATION. The percentages of a fund's common stock invested in
securities of various countries.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
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).
12
<PAGE>
FUND PROFILE (CONTINUED)
COUNTRY DIVERSIFICATION (% OF COMMON STOCKS)
- -------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
-------------------------------------------------
INTERNATIONAL INTERNATIONAL
VALUE VALUE MSCI EAFE
-------------------------------------------------
Australia 3.9% 5.3% 2.5%
Austria 0.0 0.0 0.2
Belgium 0.0 0.0 0.9
Canada 0.0 2.3 0.0
Denmark 0.0 0.9 0.8
Finland 0.0 1.4 3.0
France 13.2 13.2 10.3
Germany 8.1 7.0 10.5
Greece 0.3 0.0 0.0
Hong Kong 1.3 1.3 2.3
Indonesia 0.5 0.4 0.0
Ireland 0.0 0.0 0.4
Italy 1.3 2.3 4.2
Japan 22.1 24.1 27.2
Netherlands 5.9 6.4 5.2
New Zealand 0.2 0.2 0.2
Norway 0.0 0.0 0.4
Philippines 0.4 0.6 0.0
Portugal 0.3 1.8 0.5
Singapore 2.0 2.9 1.1
South Korea 2.3 1.2 0.0
Spain 0.6 1.0 2.7
Sweden 5.2 2.2 2.7
Switzerland 7.4 4.8 5.7
Thailand 1.2 1.5 0.0
United Kingdom 23.8 19.2 19.2
- -------------------------------------------------------------
Total 100.0% 100.0% 100.0%
13
<PAGE>
FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 (97.6%)
- --------------------------------------------------------------------------------
AUSTRALIA (5.2%)
AMP Ltd. 963,000 $ 10,605
WMC Ltd. 1,440,300 7,917
Australia & New Zealand
Bank Group Ltd. 961,500 6,972
MIM Holdings Ltd. 5,601,490 5,754
Goodman Fielder Ltd. 6,029,600 5,366
Orica Ltd. 877,100 4,712
o Pasminco Ltd. 4,045,500 4,421
Mayne Nickless Ltd. 1,353,249 3,480
o Burns Philp & Co., Ltd.
Options Exp. 8/14/2003 12,149,881 2,226
Pacific Dunlop Ltd. 1,442,200 2,035
o Burns Philp & Co., Ltd. 2,215,320 652
----------
54,140
----------
CANADA (2.3%)
Nova Chemicals Corp. 483,550 9,412
BCE Inc. 95,470 8,627
Clarica Life Insurance Co. 309,600 5,546
----------
23,585
----------
DENMARK (0.9%)
Unidanmark A/S A Shares 133,980 9,384
----------
FINLAND (1.4%)
Stora Enso Oyj R Shares 825,681 14,325
----------
FRANCE (12.9%)
Total Fina SA B Shares 343,452 45,612
Alcatel 106,549 24,349
AXA 140,290 19,461
Banque Nationale de Paris SA 196,677 18,057
Lafarge SA 89,549 10,376
Cie. de St. Gobain SA 49,598 9,281
Groupe Danone SA 21,480 5,038
Elf Aquitaine SA 14,250 2,185
Esso SA 7,360 557
----------
134,916
----------
GERMANY (6.8%)
Bayer AG 423,394 19,988
RWE AG 444,378 17,282
Bayerische Hypo-und
Vereinsbank AG 143,885 9,807
Veba AG 171,318 8,319
Volkswagen AG 145,156 8,114
Volkswagen AG Pfd. 178,000 5,673
Varta AG 163,680 1,662
----------
70,845
----------
HONG KONG (1.2%)
Hong Kong Electric
Holdings Ltd. 2,256,027 7,052
Hong Kong Land Holdings Ltd. 4,007,100 5,930
----------
12,982
----------
INDONESIA (0.3%)
PT Tambang Timah TBK 1,850,000 1,279
o PT Pabrik Kertas Tjiwi Kimia 3,053,751 985
o PT Bank Internasional
Indonesia (Local) 28,089,600 598
o PT Kalbe Farma 3,395,000 542
PT Unilever Indonesia 9,900 145
o PT Inti Indorayon Utama 545,000 73
o PT Indah Kiat Pulp & Paper
Corp. Warrants Exp. 7/11/2002 96,504 24
14
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARE (000)
- --------------------------------------------------------------------------------
o PT Bank Dagang Nasional
Indonesia (Foreign) 3,100,998 $ 0
----------
3,646
----------
ITALY (2.3%)
Ente Nazionale Idrocarburi SpA 3,337,110 18,263
Telecom Italia SpA 385,400 5,408
----------
23,671
----------
JAPAN (23.6%)
Matsushita Electric Industrial
Co., Ltd. 896,000 24,773
Nippon Telegraph and
Telephone Corp. 1,343 22,962
Hitachi Ltd. 1,398,000 22,400
Mitsubishi Estate Co., Ltd. 1,683,000 16,393
Tokyo Gas Co., Ltd. 6,731,000 16,375
Sumitomo Marine & Fire
Insurance Co. 2,222,000 13,677
Canon, Inc. 337,000 13,367
Nippon Yusen Kabushiki
Kaisha Co. 2,538,000 10,365
West Japan Railway Co. 2,602 9,203
Fuji Photo Film Co., Ltd. 247,000 9,001
Yamaha Motor Co., Ltd. 1,294,000 8,951
Toyo Seikan Kaisha Ltd. 567,000 8,199
Nikko Securities Co., Ltd. 611,000 7,718
Fuji Heavy Industries Ltd. 1,052,000 7,195
Daiichi Pharmaceutical Co., Ltd. 489,000 6,349
Nisshinbo Industries, Inc. 1,234,000 5,570
Taiheiyo Cement Corp 2,900,800 5,526
Koito Manufacturing Co., Ltd. 926,000 5,148
Kajima Corp. 1,694,000 5,048
Sankyo Co., Ltd. 226,000 4,637
Mitsubishi Heavy Industries Ltd. 1,379,000 4,594
Kansai Paint Co., Ltd. 1,756,000 4,289
Uny Co., Ltd. 425,000 4,148
Nissan Fire & Marine
Insurance Co., Ltd. 1,164,000 3,594
Sanwa International Finance
Preference Units 82 2,632
Toray Industries, Inc. 641,000 2,480
Japan Wool Textile Co., Ltd. 284,000 957
o Marudai Food Co., Ltd. 518,000 911
----------
246,462
----------
NETHERLANDS (6.2%)
Akzo Nobel NV 509,075 25,410
Koninklijke KPN NV 171,174 16,625
ING Groep NV 213,654 12,836
Buhrmann NV 334,670 5,015
Philips Electronics NV 28,558 3,864
TNT Post Group NV 50,839 1,450
----------
65,200
----------
NEW ZEALAND (0.2%)
Fletcher Challenge Ltd. Paper 1,879,000 1,313
o Brierley Investments Ltd. 2,630,900 549
o Fletcher Challenge Ltd. Forest 17,468 7
----------
1,869
----------
PHILIPPINES (0.6%)
Philippine Long Distance
Telephone Co. 215,700 5,485
JG Summit Holdings Inc.
Class B 3,102,000 319
o EEI Corp. 4,264,000 74
o Philex Mining Corp. Class B 5,490,500 72
----------
5,950
----------
PORTUGAL (1.7%)
Portugal Telecom SA
(Registered) 1,526,000 16,656
Electricidade de Portugal SA 91,300 1,586
----------
18,242
----------
SINGAPORE (2.8%)
o DBS Group Holdings Ltd. 1,310,701 21,478
Keppel Corp., Ltd. 2,127,250 5,567
Jardine Strategic Holdings Ltd. 626,000 1,246
Dairy Farm International
Holdings Ltd. 1,372,266 1,235
----------
29,526
----------
SOUTH KOREA (1.2%)
SK Telecom Co. Ltd. 3,428 12,316
SPAIN (1.0%)
Endesa SA 402,382 7,949
Altadis SA 144,704 2,060
----------
10,009
----------
SWEDEN (2.2%)
Electrolux AB Series B 614,005 15,381
ForeningsSparbanken AB 490,430 7,17
----------
22,557
----------
SWITZERLAND (4.7%)
Nestle SA (Registered) 14,827 27,019
Novartis AG (Registered) 9,027 13,185
Schindler Holding AG (Ptg. Ctf.) 5,294 8,433
----------
48,637
----------
THAILAND (1.4%)
o Shin Corp. PLC (Foreign) 679,000 6,433
o Thai Farmers Bank PLC
(Foreign) 2,884,400 4,836
o Bangkok Bank PLC (Foreign) 1,249,900 3,160
Thai Plastic & Chemical PLC
(Foreign) 180,650 500
o TPI Polene PLC (Foreign) 88,375 40
----------
14,969
UNITED KINGDOM (18.7%)
Invensys PLC 3,571,372 19,398
BG Group PLC 2,856,416 18,415
Safeway PLC 3,089,620 10,557
Royal & Sun Alliance
Insurance Group PLC 1,379,250 10,481
Scottish Power PLC 1,315,400 9,943
MEPC PLC 1,320,962 9,900
Trinity Mirror PLC 923,000 9,833
BOC Group PLC 415,444 8,905
British American Tobacco PLC 1,533,171 8,692
Allied Domecq PLC 1,746,500 8,613
Scottish & Newcastle PLC 1,212,935 8,421
Thames Water PLC 672,000 8,361
Great Universal Stores PLC 1,307,810 7,630
AstraZeneca Group PLC 162,533 6,727
United Utilities PLC 533,180 5,530
15
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL VALUE FUND SHARES (000)
- --------------------------------------------------------------------------------
IMI PLC 1,167,300 5,042
Smith & Nephew PLC 1,498,450 5,023
Great Portland Estates PLC 1,405,630 4,350
BPB PLC 678,006 3,923
Railtrack Group PLC 216,873 3,635
Pennon Group PLC 411,000 3,504
Liberty International PLC 468,000 3,454
Slough Estates PLC 586,500 3,332
Allied Zurich PLC 205,252 2,413
Rank Group PLC 699,800 2,211
Centrica PLC 766,000 2,167
The Peninsular & Oriental
Steam Navigation Co. 113,597 1,891
Bass PLC 117,276 1,456
Coats Viyella PLC 1,667,700 1,102
Carillion PLC 541,507 984
----------
195,893
----------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $891,195) 1,019,124
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
BOND (0.1%)
- --------------------------------------------------------------------------------
Burns Philp & Co., Ltd.
7.50%, 8/15/2003
(COST $649) AUD 12,150 1,119
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (5.2%)
- --------------------------------------------------------------------------------
MUNICIPAL BOND
Harris County TX Health Fac. Dev.
Corp. Hosp. Rev. VRDO
4.80%, 1/3/2000--Note F $30,000 30,000
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
3.25%, 1/3/2000 21,352 21,352
3.47%, 1/3/2000--Note F 3,680 3,680
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $55,032) 55,032
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (102.9%)
(COST $946,876) 1,075,275
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.9%)
- --------------------------------------------------------------------------------
Other Assets--Note C 12,196
Security Lending Collateral
Payable to Brokers--Note F (33,680)
Other Liabilities (9,135)
----------
(30,619)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 35,867,640 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $1,044,656
================================================================================
NET ASSET VALUE PER SHARE $29.13
================================================================================
*See Note A in Notes to Financial Statements.
oNon-Income-Producing Security.
AUD--Australian Dollar.
(Ptg. Ctf.)--Participating Certificate.
VRDO--Variable Rate Demand Obligation.
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1999, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid in Capital $916,800 $25.56
Overdistributed Net Investment
Income--Note D (7,025) (.19)
Accumulated Net Realized
Gains--Note D 6,528 .18
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 128,399 3.58
Foreign Currencies (46) --
- --------------------------------------------------------------------------------
NET ASSETS $1,044,656 $29.13
================================================================================
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
YEAR ENDED DECEMBER 31, 1999
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* 25,625
Interest 1,966
Security Lending 473
----------
Total Income 28,064
----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 1,387
Performance Adjustment (341)
The Vanguard Group--Note C
Management and Administrative 3,554
Marketing and Distribution 148
Custodian Fees 479
Auditing Fees 8
Shareholders' Reports 71
Trustees' Fees and Expenses 1
----------
Total Expenses 5,307
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 22,757
- --------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 39,954
Foreign Currencies and Forward Currency Contracts 2,473
- --------------------------------------------------------------------------------
REALIZED NET GAIN 42,427
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 113,221
Foreign Currencies and Forward Currency Contracts 1,903
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 115,124
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $180,308
================================================================================
*Dividends are net of foreign withholding taxes of $1,377,000.
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
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998
(000) (000)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 22,757 $ 22,970
Realized Net Gain 42,427 6,900
Change in Unrealized Appreciation (Depreciation) 115,124 112,495
---------------------------
Net Increase in Net Assets Resulting from Operations 180,308 142,365
---------------------------
DISTRIBUTIONS
Net Investment Income (22,865) (32,297)
Realized Capital Gain (25,324) (28,807)
---------------------------
Total Distributions (48,189) (61,104)
---------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 577,871 247,777
Issued in Lieu of Cash Distributions 44,683 56,521
Redeemed (516,320) (356,018)
---------------------------
Net Increase (Decrease) from Capital Share Transactions 106,234 (51,720)
- -----------------------------------------------------------------------------------------------------------
Total Increase 238,353 29,541
- -----------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 806,303 776,762
---------------------------
End of Year $1,044,656 $806,303
===========================================================================================================
1Shares Issued (Redeemed)
Issued 20,872 9,809
Issued in Lieu of Cash Distributions 1,580 2,217
Redeemed (18,723) (14,192)
---------------------------
Net Increase (Decrease) in Shares Outstanding 3,729 (2,166)
===========================================================================================================
</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 THROUGHOUT EACH YEAR 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $25.09 $22.64 $27.54 $31.11 $31.48
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .69 .77 .690 .82 .750
Net Realized and Unrealized Gain (Loss) on Investments 4.74 3.64 (1.945) 2.20 2.185
-------------------------------------------
Total from Investment Operations 5.43 4.41 (1.255) 3.02 2.935
-------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.66) (1.06) (.690) (.82) (.790)
Distributions from Realized Capital Gains (.73) (.90) (2.955) (5.77) (2.515)
-------------------------------------------
Total Distributions (1.39) (1.96) (3.645) (6.59) (3.305)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $29.13 $25.09 $22.64 $27.54 $31.11
===============================================================================================================
TOTAL RETURN 21.81% 19.46% -4.58% 10.22% 9.65%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $1,045 $806 $777 $917 $988
Ratio of Total Expenses to Average Net Assets 0.59% 0.52% 0.49% 0.50% 0.47%
Ratio of Net Investment Income to Average Net Assets 2.54% 2.77% 2.36% 2.50% 2.29%
Portfolio Turnover Rate 41% 39% 37% 82% 47%
===============================================================================================================
</TABLE>
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 year ended December 31, 1999, the
advisory fee represented an effective annual basic rate of 0.15% of the fund's
average net assets, before a decrease of $341,000 (0.04%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the Board of Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At December 31, 1999, the fund had contributed capital of $204,000 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 year ended December 31, 1999, the fund purchased $425,455,000 of
investment securities and sold $351,768,000 of investment securities, other than
temporary cash investments.
During the year ended December 31, 1999, the fund realized net foreign
currency losses of $186,000, which decreased distributable net income for tax
purposes; accordingly, such losses have been reclassified from accumulated net
realized gains to undistributed net investment income. The fund also
reclassified, in the same way, $3,000 of realized losses on the sale of foreign
bonds that are treated as foreign currency gains for tax purposes.
During 1998, the fund received securities with a value of $10,586,000
in a corporate spinoff that increased taxable income and the tax basis cost of
investments, creating a difference between undistributed net investment income
and the cost of investments for financial statement and tax purposes. During the
year ended December 31, 1999, the fund realized gains on the sale of these
securities of $4,117,000 which were included in 1998 distributions from net
investment income for tax purposes; accordingly such gains have been
reclassified from accumulated net realized gains to overdistributed net
investment income. At December 31, 1999, the remaining difference of $6,469,000
is reflected in the balance of overdistributed net investment income; the
corresponding difference between the securities' cost for financial statement
and tax purposes is reflected in unrealized appreciation.
E. At December 31, 1999, net unrealized appreciation of investment securities
for federal income tax purposes was $121,930,000, consisting of unrealized gains
of $244,980,000 on securities that had risen in value since their purchase and
$123,050,000 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 $46,000
resulting from the translation of other assets and liabilities at December 31,
1999.
F. The market value of securities on loan to broker/dealers at December 31,
1999, was $31,086,000, for which the fund held cash collateral of $33,680,000.
Cash collateral received is invested in temporary cash investments.
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
Vanguard International Value Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard International Value Fund (the "Fund") at December 31, 1999, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at December
31, 1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 2, 2000
22
<PAGE>
- --------------------------------------------------------------------------------
SPECIAL 1999 TAX INFORMATION (UNAUDITED) FOR
VANGUARD INTERNATIONAL VALUE FUND
This information for the fiscal year ended December 31, 1999, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $14,744,000 as capital gain dividends (from net
long-term capital gains) to shareholders during the fiscal year ended December
1999, all of which is designated as a 20% rate gain distribution.
The fund has elected to pass through the credit for taxes paid in foreign
countries. Shareholders receive detailed information on foreign income and
foreign tax per share by country along with their 1999 Form 1099-DIV.
- --------------------------------------------------------------------------------
23
<PAGE>
THE VANGUARD 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 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 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 Fund
Windsor II Fund
BALANCED FUNDS
- --------------------------------------------
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy Conservative Growth Fund
LifeStrategy Growth Fund
LifeStrategy Income Fund
LifeStrategy Moderate Growth Fund
STAR Fund
Tax-Managed Balanced Fund
Wellesley Income Fund
Wellington Fund
BOND FUNDS
- --------------------------------------------
Admiral Intermediate-Term Treasury Fund
Admiral Long-Term Treasury Fund
Admiral 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 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.
24
<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 nine 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 C. BOGLE (1967) Founder, Senior Chairman of the Board, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOHN J. BRENNAN (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.
JOHN C. SAWHILL (1991) President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co.,
Procter & Gamble Co., NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR. (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
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 Core Management Group.
<PAGE>
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.
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 4500" and "Wilshire 5000" are trademarks of Wilshire
Associates.
[SHIP]
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q460-2/17/2000
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
