<PAGE> 1
VANGUARD
U.S. GROWTH
PORTFOLIO
INTERNATIONAL
GROWTH
PORTFOLIO
ANNUAL REPORT 1994
THE VANGUARD VOYAGE ... STAYING THE COURSE
<PAGE> 2
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations on
June 30, 1929. Its first fifteen years were a struggle for survival in an
industry that was shaken to its roots by the Great Crash of 1929-1933. From an
initial base of $100,000, Wellington's assets had grown to but $27 million by
the end of World War II. The Vanguard Group was founded on September 24, 1974.
Soon thereafter, we assumed responsibility for the management of Wellington
Fund and ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were marked
by exceptional growth. Today, Wellington Fund, with assets of nearly $9
billion, remains one of the largest mutual funds in the nation. And Vanguard,
now managing 85 mutual fund portfolios, is entrusted with assets of $134
billion, and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio, at a time when
holding individual securities was the conventional strategy. It incurred no
debt, in an era of high leverage that would soon come back to haunt less
cautious investors. And it was a "balanced" fund--in fact, Wellington is
America's oldest balanced fund--with holdings from each of the three basic
financial asset classes: cash reserves, bonds, and common stocks. In short,
Wellington Fund was a staid investment in an era of stock speculation that was
to become, almost within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still
our watchword, because the three basic financial asset classes have
different--and usually countervailing--investment characteristics. When it
began, Wellington Fund provided a balanced program in a single investment; in
1994, such a balance is often achieved by a combination of Vanguard money
market, bond, and stock funds.
"Conservatism," too, remains our standard. Over the years, we have
tried to maintain the discipline to eschew offering funds that lack sound
financial principles, often based on marketplace fads that could not--and did
not--endure. Our conservatism applies not only to the funds we offer, but to
the instruments in which they invest. For example, we have steered clear of
exotic derivative securities with unpredictable investment characteristics. Too
many fund managers have been taken in by these highly risky instruments, and
their shareholders have paid a heavy price--except in cases where the manager
has "made the fund whole," when to do otherwise would have shocked investors
and impaired their confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But
the investment principles to which we have adhered since Wellington Fund began
in 1929 remain firm:
* WE OFFER FUNDS WITH SOUND AND DURABLE INVESTMENT OBJECTIVES, DESIGNED
FOR LONG-TERM INVESTORS.
(PLEASE TURN TO INSIDE BACK COVER)
THE VANGUARD U.S. GROWTH PORTFOLIO EMPHASIZES ESTABLISHED U.S. GROWTH STOCKS
WITH PROVEN RECORDS OF ACCOMPLISHMENT. THE INTERNATIONAL GROWTH PORTFOLIO
EMPHASIZES FOREIGN EQUITY MARKETS AND SECURITIES SELECTED FOR THEIR CAPITAL
APPRECIATION POTENTIAL.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
All things considered, both U.S. and international equities fared well on
balance during the year ended August 31, the 1994 fiscal year for Vanguard's
U.S. Growth and International Growth Portfolios. The U.S. Portfolio provided a
return of +7.0%, far better than in fiscal 1993, both on an absolute and
relative basis. The +20.4% return of our International Portfolio was virtually
identical with that of the preceding year.
The total return (capital change plus income) on our U.S. Growth
Portfolio, while modest on an absolute basis, represented a solid and welcome
improvement over the disappointing +1.7% return we achieved in fiscal 1993.
More importantly, after last year's major shortfall relative to our two
measurement standards, we outpaced both norms this year. Our edge, if far from
awesome, was respectable, as we nicely topped the returns of the average growth
mutual fund and the unmanaged Standard & Poor's 500 Composite Stock Price
Index:
<TABLE>
<CAPTION>
- - ------------------------------------------------------
Total Return
-----------------
Fiscal Year Ended
August 31, 1994
- - ------------------------------------------------------
<S> <C>
VANGUARD U.S. GROWTH PORTFOLIO +7.0%
- - ------------------------------------------------------
AVERAGE GROWTH MUTUAL FUND +4.3%
STANDARD & POOR'S 500 STOCK INDEX +5.5
- - ------------------------------------------------------
</TABLE>
While the +20.4% total return of our International Growth Portfolio was closely
akin to fiscal 1993's return of +21.1%, it was substantially better relative to
the returns achieved in international stock markets. We solidly outpaced the
results achieved by the average international equity mutual fund, and surpassed
by an even larger margin the return of the unmanaged Morgan Stanley Capital
International Europe, Australia, and Far East ("EAFE") Index.
<TABLE>
<CAPTION>
- - ------------------------------------------------------
Total Return
-----------------
Fiscal Year Ended
August 31, 1994
- - ------------------------------------------------------
<S> <C>
Vanguard International Growth Portfolio +20.4%
- - ------------------------------------------------------
Average International Mutual Fund +16.0%
EAFE International Index +11.1
- - ------------------------------------------------------
</TABLE>
The total return for the U.S. Growth Portfolio is based on net asset
values of $14.71 per share on August 31, 1993, and $15.52 on August 31, 1994,
with the latter figure adjusted to take into account our annual dividend of
$.21 per share paid from net investment income earned during calendar 1993. For
the International Growth Portfolio, the respective net asset values were $12.02
and $14.36, and our annual income dividend was $.11 per share.
THE U.S. GROWTH PORTFOLIO
A year ago, I described fiscal 1993 as "a distinctly bad year" for the U.S.
Growth Portfolio. Happily, we enjoyed a solid turnaround in fiscal 1994. A
major reason for the difference is the market environment in which we operate.
Last year, the return of the Value Stock Index strongly surpassed the return of
the Growth Stock Index (+23.9% versus +6.4%), clearly a disadvantage for this
Portfolio, which emphasizes stocks of large companies with proven records of
earnings growth. If "the tables" didn't fully turn during the past year, they
were surely better balanced. The Growth Stock Index earned a return of +6.8%;
the Value Stock Index lagged slightly, with a return of +4.2%.
(continued)
[PHOTO OF JOHN C. BOGLE -- SEE EDGAR APPENDIX]
1
<PAGE> 4
[CUMULATIVE PERFORMANCE LINE GRAPH -- SEE EDGAR APPENDIX]
As I emphasized in my letter to you in last year's Annual Report, some swings
in investor sentiment between the value and growth stock groups "is hardly
surprising . . . cycles in relative performance are simply part and parcel of
the way securities markets work." On balance, over the longer run, history
shows that these cycles tend to even out. For example, the chart above presents
the cumulative returns of the two Indexes over the past five years. It shows
that the Growth Index (+60%) actually provided a somewhat larger return than
the Value Index (+53%). It is a good lesson on "staying the course," whether
growth stocks or value stocks--or some combination of the two--best meet your
needs. Put another way, a year ago would have been a bad time to "throw in the
towel" on growth stocks.
Our excess return in fiscal 1994 over the Standard & Poor's 500 Stock
Index resulted mostly from the better account that growth stocks gave of
themselves. For example, our heavy weighting in technology stocks (20% of the
U.S. Growth Portfolio's net assets versus 9% of the Index) proved a big plus,
since this group was among the year's performance leaders. By the same token,
the absence of public utility stocks in our Portfolio (compared to a 12%
weighting for the Index) also gave us a big relative edge, since this group was
the worst-performing major sector of the market.
On the other hand, our edge over the average growth mutual fund was
based largely on our emphasis on high-quality "blue chip" growth stocks with
large market capitalizations. (The average market capitalization of the stocks
in our Portfolio is about $21 billion.) Most competitive funds rely more
heavily than we do on mid-cap and small-cap stocks, and as a result have
average market caps of less than $5 billion. This strategy held its own during
the first half of the fiscal year; during the second half it provided a solid
margin in our favor.
We are, of course, pleased with the turn for the better our fortunes
have taken. Nonetheless, we hope that shareholders will keep their eyes on the
longer-term record rather than focus on a single year, be it as bad as fiscal
1993 or as good as fiscal 1994. In this context, it might be appropriate to
review the Portfolio's record since our investment adviser, Lincoln Capital
Management, assumed responsibility on August 31, 1987, seven years ago:
<TABLE>
<CAPTION>
- - --------------------------------------------------------
Total Return
---------------------------------
Seven Years Ended August 31, 1994
- - --------------------------------------------------------
Cumulative Annual Rate
- - --------------------------------------------------------
<S> <C> <C>
U.S. GROWTH PORTFOLIO +84% +9.1%
- - --------------------------------------------------------
AVERAGE GROWTH FUND +72% +8.1%
STANDARD & POOR'S 500 INDEX +80 +8.8
STANDARD & POOR'S/BARRA
GROWTH INDEX +75 +8.3
- - --------------------------------------------------------
</TABLE>
To be sure, the Portfolio's future returns, whether on an absolute or relative
basis, may be better or worse than those shown above. Nonetheless, our past
record under Lincoln's aegis, even if not a dramatic success, is workmanlike,
particularly taking into account that the period covered by the table coincided
with the highest point in 1987's frothy and speculative market, which
culminated in the Great Crash of October 19, 1987.
2
<PAGE> 5
INTERNATIONAL GROWTH PORTFOLIO
It is a curious coincidence that, measured on a local currency basis, the
return of the EAFE International Index was +5.9%, virtually identical with the
+5.5% return on the Standard & Poor's 500 Index. However, the global weakness
of the U.S. dollar nearly doubled the return of the International Index when
measured in U.S. dollar terms, resulting in a return of +11.1%.
This table shows the returns on the International Index and its two
major segments (Europe and the Pacific basin), both in local currency and U.S.
dollar terms. The table reflects the added rewards investors receive when the
dollar is weak; a year earlier, it reflected the added risks investors assume
when the dollar is strong. (In fiscal 1993, the dollar was strong in Europe and
weak in Japan; on average, it reduced returns on the International Index by
- - -6.7%.)
<TABLE>
<CAPTION>
- - --------------------------------------------------------------
Total Return
-------------------------------------------
Twelve Months Ended August 31, 1994
-----------------------------------------------------
Based on Currency Based on
Stock Market Local Currency Effect U.S. Dollars
- - --------------------------------------------------------------
<S> <C> <C> <C>
INTERNATIONAL +5.9% +5.2% +11.1%
- - --------------------------------------------------------------
EUROPE +9.4% +6.3% +15.7%
PACIFIC +3.1 +4.4 + 7.5
- - --------------------------------------------------------------
U.S. +5.5% -- + 5.5%
- - --------------------------------------------------------------
</TABLE>
The International Portfolio outpaced the International (EAFE) Index by nearly a
two-to-one margin (+20.4% versus +11.1%). This margin was largely accounted for
by three factors: (1) our significant position (9% of net assets) in the stocks
of the emerging markets of the Pacific basin, such as Malaysia and Korea (some
of these markets are not represented in the International Index); (2) a
position in Japanese stocks that was far smaller than that of the Index (31% of
our assets versus 46% for the Index) during a period in which the Tokyo market
sharply lagged the returns of its European cousins; and (3) almost
paradoxically, our outstanding selection of individual stocks in Japan, where
both our emphasis on stocks of strong companies (balance sheets, market share,
etc.) and our avoidance of bank stocks added substantial value to the
International Portfolio's performance.
Our lead over the average international fund is less easy to calculate
with precision. Our position in the emerging markets of the Pacific basin was
similar to that of the average international fund, but ours was reduced before
the sharp 1994 decline in these markets. A negative for our Fund was our
relatively small weighting in the equity markets of Latin America (4% of assets
versus 12%), which turned in strong results. Finally, even though our
competitors had a smaller position (24% of assets) in Japan, our larger
position actually proved beneficial because of our canny stock selection. I
want to express our special pleasure with our investment adviser, Richard R.
Foulkes, of Schroder Capital Management International, not only for his
competitive excellence in fiscal 1994, but for the past decade (as shown in the
chart on page 5), and indeed since the Portfolio's inception in September 1981.
His record of longevity in managing an international mutual fund portfolio has
few, if any, parallels.
This table presents the International Portfolio's diversification at
year-end:
<TABLE>
<CAPTION>
- - -----------------------------------------------------
Percent of Net Assets
---------------------
Country August 31, 1994
- - -----------------------------------------------------
<S> <C>
JAPAN 30.8%
UNITED KINGDOM 15.3
EMERGING MARKETS 13.2
NETHERLANDS 7.7
HONG KONG 5.8
ITALY 5.3
SWITZERLAND 5.0
OTHER 16.9*
- - -----------------------------------------------------
TOTAL 100.0%
- - -----------------------------------------------------
</TABLE>
* Includes cash reserves of 2.1%.
The report from our portfolio manager is provided on page 9 of this Report, and
provides more detailed information.
LOOKING AHEAD
Investors, the media, and the fund evaluation services place heavy emphasis on
the "year-to-date" records of mutual funds. So far in calendar 1994, the
world's equity markets have been volatile, and have, in general, made limited
advances. Thus, the fact that this Annual
3
<PAGE> 6
Report covers a twelve-month fiscal period ending August 31--a distinctly
better period for equities--may give a rosier perspective than you might have
expected. So, I would raise a word of caution once again, as I did in our
Semi-Annual Report dated February 28, 1994: "The slowdown in the long upward
march of U.S. stock prices is probably overdue . . . and world markets too may
slow their upward pace."
It is also worth emphasizing that investing in stocks is risky. This is,
in essence, why stocks offer higher reward potential than bonds and short-term
reserves. The greatest risk is faced by short-term investors who look for quick
market returns or transitory market trends. The lowest risk and the highest
reward--at least in the past--have been achieved by investors who have "stayed
the course" with a sound investment approach that is consistent with their own
financial objectives.
We too intend to stay the course with the consistent objectives and
policies that we have established for Vanguard's U.S. Growth and International
Growth Portfolios. Both Portfolios provide sound participation in the discrete
market segments they emphasize. As part of a diversified portfolio of mutual
funds--balanced among stocks, bonds, and reserves--they enable you to establish
the investment course you wish to follow.
Sincerely,
/s/ JOHN C. BOGLE
- - ---------------------
John C. Bogle
Chairman of the Board
September 26, 1994
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE
PORTFOLIOS (PERIODS ENDED JUNE 30, 1994) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
10 YEARS
---------------------------------
INCEPTION TOTAL CAPITAL INCOME
PORTFOLIO DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
- - ------------------------------ --------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
INTERNATIONAL GROWTH PORTFOLIO 9/30/81 +25.46% + 9.30% +17.31% +15.69% +1.62%
U.S. GROWTH PORTFOLIO 1/6/59 + 1.53 +12.10 +12.83 +10.82 +2.01
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
4
<PAGE> 7
CUMULATIVE PERFORMANCE
[U.S. GROWTH PORTFOLIO LINE GRAPH AUGUST 31, 1984, TO AUGUST 31, 1994 -- SEE
EDGAR APPENDIX]
Note: Past performance is not predictive of future performance.
[INTERNATIONAL GROWTH PORTFOLIO LINE GRAPH AUGUST 31, 1984, TO AUGUST 31, 1994
- - -- SEE EDGAR APPENDIX]
Note: Past performance is not predictive of future performance.
5
<PAGE> 8
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single share
investment in the U.S. GROWTH PORTFOLIO for the 25-year period
ended August 31, 1994. During the period illustrated, stock
prices fluctuated and were higher at the end than at the
beginning. These results should not be considered a
representation of the dividend income or capital gain or loss
that may be realized from an investment made in the Portfolio
today.
<TABLE>
<CAPTION>
U.S. GROWTH PORTFOLIO
- - -----------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA* TOTAL INVESTMENT RETURN
- - -----------------------------------------------------------------------------------------------------------------
Annual Percentage Change**
Value with Income -----------------------------
August 31 Net Asset Capital Gains Income Dividends & Capital U.S. Growth S&P 500
Fiscal Year Value Distributions Dividends Gains Reinvested Portfolio Index
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1970 $5.53 -- $.065 $ 5.58 - 14.5% - 11.4%
- - -----------------------------------------------------------------------------------------------------------------
1971 7.13 -- .065 7.28 + 30.6 + 25.4
- - -----------------------------------------------------------------------------------------------------------------
1972 8.14 -- .095 8.42 + 15.7 + 15.5
- - -----------------------------------------------------------------------------------------------------------------
1973 6.43 $ .133 .072 6.83 - 19.0 - 3.3
- - -----------------------------------------------------------------------------------------------------------------
1974 3.60 -- .098 3.88 - 43.2 - 28.0
- - -----------------------------------------------------------------------------------------------------------------
1975 4.61 -- .039 5.03 + 29.8 + 26.1
- - -----------------------------------------------------------------------------------------------------------------
1976 5.22 -- .059 5.78 + 14.8 + 23.1
- - -----------------------------------------------------------------------------------------------------------------
1977 5.18 -- .091 5.83 + 1.0 - 1.8
- - -----------------------------------------------------------------------------------------------------------------
1978 6.22 -- .104 7.14 + 22.4 + 12.4
- - -----------------------------------------------------------------------------------------------------------------
1979 6.87 -- .15 8.09 + 13.2 + 11.6
- - -----------------------------------------------------------------------------------------------------------------
1980 7.69 -- .221 9.35 + 15.6 + 18.2
- - -----------------------------------------------------------------------------------------------------------------
1981 8.35 -- .234 10.45 + 11.7 + 5.4
- - -----------------------------------------------------------------------------------------------------------------
1982 7.94 -- .28 10.31 - 1.3 + 3.2
- - -----------------------------------------------------------------------------------------------------------------
1983 12.02 -- .224 16.03 + 55.5 + 44.0
- - -----------------------------------------------------------------------------------------------------------------
1984 10.29 1.861 .241 16.49 + 2.8 + 6.1
- - -----------------------------------------------------------------------------------------------------------------
1985 11.57 .332 .312 19.80 + 20.1 + 18.2
- - -----------------------------------------------------------------------------------------------------------------
1986 13.21 .82 .26 25.06 + 26.6 + 38.9
- - -----------------------------------------------------------------------------------------------------------------
1987 12.74 1.94 .28 29.52 + 17.8 + 34.4
- - -----------------------------------------------------------------------------------------------------------------
1988 7.17 3.26 .31 23.14 - 21.6 - 17.8
- - -----------------------------------------------------------------------------------------------------------------
1989 10.01 -- .06 32.56 + 40.7 + 39.1
- - -----------------------------------------------------------------------------------------------------------------
1990 10.38 -- .13 34.20 + 5.0 - 5.0
- - -----------------------------------------------------------------------------------------------------------------
1991 13.69 -- .19 45.93 + 34.3 + 26.9
- - -----------------------------------------------------------------------------------------------------------------
1992 14.71 -- .19 49.98 + 8.8 + 7.9
- - -----------------------------------------------------------------------------------------------------------------
1993 14.71 .08 .18 50.83 + 1.7 + 15.2
- - -----------------------------------------------------------------------------------------------------------------
1994 15.52 -- .21 54.37 + 7.0 + 5.5
- - -----------------------------------------------------------------------------------------------------------------
TOTAL +733.7% +1,240.9%
- - -----------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN + 8.9% + 10.9%
- - -----------------------------------------------------------------------------------------------------------------
</TABLE>
*Adjusted for stock splits of 3 for 2 in April 1972, and 1.537 for 1 upon the
restructuring of the Portfolio on September 30, 1985.
**Adjusted to include reinvestment of income dividends and any capital gains
distributions for both the Portfolio and the Index.
Note: The net asset value was $6.52 on August 31, 1969, the beginning of the
period illustrated. No adjustment has been made for income taxes payable by
shareholders on reinvested income dividends and capital gains distributions.
6
<PAGE> 9
The following table illustrates the results of a single share
investment in the INTERNATIONAL GROWTH PORTFOLIO since
inception through August 31, 1994. During the period
illustrated, stock prices fluctuated and were higher at the
end than at the beginning. These results should not be
considered a representation of the dividend income or capital
gain or loss that may be realized from an investment made in
the Portfolio today.
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH PORTFOLIO
- - --------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA* TOTAL INVESTMENT RETURN
- - --------------------------------------------------------------------------------------------------------------
Annual Percentage Change**
Value with Income ---------------------------
August 31 Net Asset Capital Gains Income Dividends & Capital International EAFE
Fiscal Year Value Distributions Dividends Gains Reinvested Growth Portfolio Index
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INITIAL (9/81) $ 3.95 -- -- $ 3.95 -- --
- - --------------------------------------------------------------------------------------------------------------
1982 3.73 -- -- 3.73 - 5.7% - 4.7%
- - --------------------------------------------------------------------------------------------------------------
1983 5.86 -- $.10 6.02 + 61.4 + 31.0
- - --------------------------------------------------------------------------------------------------------------
1984 6.07 $ .12 .09 6.46 + 7.3 + 14.7
- - --------------------------------------------------------------------------------------------------------------
1985 6.57 .38 .11 7.61 + 17.8 + 32.3
- - --------------------------------------------------------------------------------------------------------------
1986 11.67 .65 .09 15.14 + 98.9 +103.7
- - --------------------------------------------------------------------------------------------------------------
1987 14.21 .80 .07 19.99 + 32.0 + 46.0
- - --------------------------------------------------------------------------------------------------------------
1988 10.45 2.43 .13 18.01 - 9.9 - 6.3
- - --------------------------------------------------------------------------------------------------------------
1989 11.61 1.07 .16 22.42 + 24.5 + 22.4
- - --------------------------------------------------------------------------------------------------------------
1990 11.81 .28 .15 23.60 + 5.2 - 11.8
- - --------------------------------------------------------------------------------------------------------------
1991 10.31 .68 .20 22.39 - 5.1 - 0.4
- - --------------------------------------------------------------------------------------------------------------
1992 10.15 .12 .19 22.72 + 1.5 + 0.5
- - --------------------------------------------------------------------------------------------------------------
1993 12.02 -- .21 27.50 + 21.1 + 27.2
- - --------------------------------------------------------------------------------------------------------------
1994 14.36 -- .11 33.08 + 20.4 + 11.1
- - --------------------------------------------------------------------------------------------------------------
LIFETIME +737.5% +706.5%
- - --------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN + 17.9% + 17.5%
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
*Adjusted for a stock split of 2.908 for 1 on September 30, 1985.
**Adjusted to include reinvestment of income dividends and any capital gains
distributions for both the Portfolio and the Index.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
7
<PAGE> 10
REPORT FROM LINCOLN CAPITAL MANAGEMENT COMPANY
During Vanguard U.S. Growth Portfolio's 1994 fiscal year, the domestic equity
market generated a total return of +5.5%, most of which was telescoped in the
last month. Seasoned growth stock indexes performed slightly ahead of the
market averages after lagging during the prior fiscal year. Your Portfolio did
a smidgen better than the various standards commented upon by Chairman Bogle.
During the period in which Lincoln Capital has been adviser to your
Portfolio, investment returns have exceeded the unmanaged S&P Growth Index for
six of seven years and the average growth mutual fund and S&P 500 Index for
five of seven years. We still have a way to go to make up for the material
shortfall in fiscal 1993, but cumulative seven-year returns continue to be
ahead of our three performance standards.
Since the semi-annual report there has been one
addition--Coca-Cola--to the ten major holdings in the Fund. One stock dropped
out of the top ten: PepsiCo. The largest purchases during the past twelve
months were Coca-Cola, Intel, AT&T, Hewlett Packard, and Cisco Systems. Major
sales included Microsoft, WMX Technologies, General Mills, Baxter
International, and Freddie Mac, which is still held. The number of holdings
increased during the year from 49 to 50 issues.
From these transactions you can surmise some of the shifts in industry
diversification. Our technology/communication holdings rose a material thirteen
percentage points, to 24% of total net assets. Our weightings in the health
care and finance and insurance sectors were each reduced by three percentage
points. The Portfolio was 92% invested in equities at fiscal year-end compared
with 86% a year ago. The level of short-term reserves didn't matter much during
this particular twelve-month period. The table that follows summarizes our top
ten holdings at August 31, 1994.
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------
Consecutive
Years
Company Business Held
- - ---------------------------------------------------------------------
<S> <C> <C>
1. General Electric #1 diversified manufacturer 6
2. Fannie Mae #1 mortgage financing
agency 3
3. Coca-Cola #1 soft drinks 1
4. Wal-Mart Stores #1 general merchandise
chain 7
5. Automatic Data #1 payroll service 6
6. Freddie Mac #2 mortgage financing
company 6
7. American
International Group #1 U.S. overseas insurer 7
8. Procter & Gamble #1 household products
company 4
9. McDonald's #1 fast food chain 6
10. Gillette #1 razor blade manufacturer 2
- - ---------------------------------------------------------------------
</TABLE>
Looking ahead to the next twelve months, we expect security market
returns to be more gratifying. Bond market yields are higher than one year ago:
the ten-year U.S. Treasury note yields 7.2% compared to 5.4%. Similarly, stock
price-earnings multiples are now about 16 times next year's consensus estimated
earnings, compared with 17 times a year ago (cash dividend yields are about the
same).
The price-earnings multiples on the stocks in the U.S. Growth
Portfolio, both the largest commitments and the entire Portfolio, are at a
discount to the market. So, as an investor in the Fund, we believe you enjoy
the attributes of a high-quality growth stock portfolio at quite atypical
valuations. A nice anomaly.
Respectfully,
Dave Fowler and Parker Hall, Co-managers
Lincoln Capital Management Company
September 7, 1994
8
<PAGE> 11
REPORT FROM SCHRODER CAPITAL MANAGEMENT INTERNATIONAL
Vanguard International Growth Portfolio earned a total return of +20.4% during
the fiscal year ended August 31, 1994. This result compares to a +11.1% rise in
the MSCI-EAFE Index over the same period. (See Chairman's letter for details.)
Our year ended fittingly with the net asset value at an all-time high,
marginally above the level of $14.33 per share first reached on February 1. The
intervening seven months have all the characteristics of a "healthy" period of
consolidation following the very sharp rise in international equity markets
that started in November 1992. Returns have also been boosted by the strength
of foreign currencies against the U.S. dollar.
During the past twelve months, markets have clearly made the
transition from what I call "Stage One" bull market to "Stage Two." Stage One,
usually the more powerful, is driven by falling interest rates. Stage Two is
driven by corporate profit increases. Also, Stage Two is riskier because the
strong economic growth associated with a recovery in profits often leads to
inflation fears and a "tight" monetary policy. In essence, good news sows the
seeds of its own destruction.
Fortunately, the economies of many countries in which the Portfolio is
invested are at different stages in their cycles. It does not follow that the
stock markets in different countries are equally independent of each other, but
the diversity does provide some risk reduction. Japan's economy is finally
showing signs of a modest but broad recovery. Consumers have seen their
disposable income boosted by tax cuts in the past two months; car sales have
risen sharply; exports are strengthening; and even machinery orders are picking
up, which is a sign that industry is becoming confident enough to start
investing again. Over the past two years, the Japanese market has risen by 49%
in U.S. dollar terms. We have 31% of the Portfolio invested there because we
believe it has further to go.
Another 15% of the Portfolio is invested in the smaller Asian
countries, whose fast economic growth has been one of the most dramatic
features of the world economy during the past ten years. These countries have
been beneficiaries of the remorseless rise in the foreign value of the Japanese
currency, as Japanese companies have increasingly shifted manufacturing to
neighboring countries with lower labor costs. Inflationary pressures are an
ever-present risk in such countries but the underlying growth in corporate
profits is, in our opinion, sufficient to outweigh such risks over the medium-
and long term.
Forty-four percent of the Portfolio is invested in Europe, with the
largest portion, 15%, in the United Kingdom. The UK stock market has been a
notable laggard over the past two years, up just 21% in dollar terms, and we
have built up substantially larger holdings during the past twelve months in
anticipation of higher stock prices. UK industry, like U.S. industry, has
benefited recently from a weak currency, which has boosted exports and profit
margins. Meantime, consumers are reticent about spending, which is holding back
inflationary fears. The outlook for the UK economy is clearer than usual, and
it is this visibility which we believe will encourage investors.
With UK stocks cheaper than many of their European counterparts, we
continue to be highly selective in the rest of Europe, emphasizing a small
number of companies whose prospects look particularly strong. Two such
companies are ING, a Dutch banking and insurance company, and Heineken, the
internationally renowned brewer. Another investment is represented by our
exposure to the Italian telecommunications utilities, Telecom Italy, and its
parent company, STET; together, these stocks have boosted the Portfolio's
performance again this year--after more than doubling in price last year--yet
they remain among the cheapest such companies in the world.
The investment outlook is riskier than it has been in recent years,
but the probability is high that the uptrend in most international stock
markets is still intact. I look forward to reporting to you again six months
hence.
Respectfully,
Richard R. Foulkes
Schroder Capital Management International
September 6, 1994
9
<PAGE> 12
FINANCIAL STATEMENTS
August 31, 1994
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
U.S. GROWTH PORTFOLIO Shares (000)+
- - ----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (92.3%)
- - ----------------------------------------------------------------------------------
BASIC MATERIALS (1.9%)
Mallinckrodt Group, Inc. 192,000 $ 6,192
Morton International, Inc. 1,041,000 30,840
----------
GROUP TOTAL 37,032
----------
- - ----------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (5.0%)
General Electric Co. 1,986,000 98,804
----------
- - ----------------------------------------------------------------------------------
CONSUMER CYCLICAL (15.9%)
Carnival Cruise Lines, Inc. 400,000 17,750
Home Depot, Inc. 761,000 34,435
Lowes Cos., Inc. 603,000 21,783
May Department Stores Co. 189,000 7,749
McDonald's Corp. 2,517,000 71,105
* Toys R Us, Inc. 1,060,000 39,088
Wal-Mart Stores, Inc. 3,378,000 83,183
Walgreen Co. 212,000 7,977
The Walt Disney Co. 720,000 29,610
----------
GROUP TOTAL 312,680
----------
- - ----------------------------------------------------------------------------------
CONSUMER STAPLES (15.8%)
The Coca-Cola Co. 1,903,000 87,538
Colgate-Palmolive Co. 178,000 10,190
Gillette Co. 966,000 69,914
Kellogg Co. 85,000 4,813
PepsiCo, Inc. 1,526,000 50,549
Procter & Gamble Co. 1,250,000 76,094
Unilever NV 94,000 10,728
----------
GROUP TOTAL 309,826
----------
- - ----------------------------------------------------------------------------------
DIVERSIFIED (2.5%)
Alco Standard Corp. 10,000 653
Minnesota Mining &
Manufacturing Co. 872,000 48,069
----------
GROUP TOTAL 48,722
----------
- - ----------------------------------------------------------------------------------
ENERGY (2.1%)
* Renaissance Energy Ltd. 783,000 15,757
* Talisman Energy, Inc. 898,000 19,626
* Tarragon Oil & Gas 400,000 5,172
----------
GROUP TOTAL 40,555
----------
- - ----------------------------------------------------------------------------------
FINANCIAL (17.0%)
AMBAC, Inc. 123,000 5,012
American International Group, Inc. 831,000 78,114
Chemical Banking Corp. 1,375,000 53,281
Federal Home Loan
Mortgage Corp. 1,320,000 82,005
Federal National Mortgage Assn. 1,023,000 90,919
First Financial Management 192,000 11,664
Norwest Corp. 510,000 13,579
----------
GROUP TOTAL 334,574
----------
- - ----------------------------------------------------------------------------------
HEALTH CARE (8.1%)
Abbott Laboratories, Inc. 1,066,000 31,980
Johnson & Johnson 397,000 19,900
Medtronic, Inc. 135,000 13,331
Merck & Co., Inc. 681,000 23,239
Pfizer, Inc. 959,000 65,452
Warner-Lambert Co. 72,000 6,021
----------
GROUP TOTAL 159,923
----------
- - ----------------------------------------------------------------------------------
TECHNOLOGY (19.5%)
AMP, Inc. 574,000 41,687
Automatic Data Processing, Inc. 1,530,000 82,811
Cisco Systems, Inc. 1,258,000 31,135
Duracell International, Inc. 646,000 29,716
General Motors Corp. Class E 1,575,000 57,291
Hewlett-Packard Co. 501,000 45,027
Intel Corp. 875,000 57,312
Molex, Inc. Class A 10,000 390
* Oracle Systems Corp. 339,000 14,450
Reuters Holdings PLC ADR 509,000 23,796
----------
GROUP TOTAL 383,615
----------
- - ----------------------------------------------------------------------------------
UTILITIES-COMMUNICATIONS (4.5%)
* Airtouch Communications 421,000 11,893
AT&T Corp. 912,000 49,932
MCI Communications Corp. 1,051,000 25,487
----------
GROUP TOTAL 87,312
----------
- - ----------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $1,513,090) 1,813,043
- - ----------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (9.5%)
- - ----------------------------------------------------------------------------------
<CAPTION>
Face
Amount
(000)
-----------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 4.81%, 9/1/94
(Cost $185,948) $185,948 185,948
- - ----------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.8%)
(Cost $1,699,038) 1,998,991
- - ----------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Market
Value
(000)+
- - ----------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (-1.8%)
- - ----------------------------------------------------------------------------------
Other Assets--Note C $ 30,987
Liabilities (66,547)
----------
(35,560)
- - ----------------------------------------------------------------------------------
NET ASSETS (100%)
- - ----------------------------------------------------------------------------------
Applicable to 126,504,950 outstanding
$1.00 par value shares
(authorized 200,000,000 shares) $1,963,431
- - ----------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $15.52
==================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------
AT AUGUST 31, 1994,
NET ASSETS CONSISTED OF:
- - ----------------------------------------------------------------------------------
Amount Per
(000) Share
----------- ----------
<S> <C> <C>
Paid in Capital $1,664,484 $13.16
Undistributed Net
Investment Income 15,870 .12
Accumulated Net
Realized Losses (16,876) (.13)
Unrealized Appreciation
of Investments--Note E 299,953 2.37
- - ----------------------------------------------------------------------------------
NET ASSETS $1,963,431 $15.52
- - ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
INTERNATIONAL GROWTH PORTFOLIO Shares (000)+
- - ----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.8%)
- - ----------------------------------------------------------------------------------
ARGENTINA (.1%)
YPF Sociedad ADR 162,500 $ 4,205
----------
- - ----------------------------------------------------------------------------------
AUSTRALIA (3.9%)
Australia National Industries 4,200,000 5,906
Broken Hill Proprietary Co. Ltd. 1,310,000 19,981
CRA Ltd. 874,000 12,850
CSR Ltd. 850,000 2,985
Fairfax (John) 3,801,700 8,203
GIO Australia Holding 437,700 801
Mayne Nickless Ltd. 1,274,289 7,822
National Australia Bank Ltd. 770,000 6,291
National Foods 3,150,000 4,945
News Corp. Ltd. 2,375,000 16,116
Normandy Poseidon Ltd. 3,726,315 6,488
Pacific Dunlop Ltd. 1,525,100 5,163
Western Mining Corp. 1,524,937 9,122
* Western Mining Corp. Rights
Exp. 9/16/94 190,618 304
Westpac Banking Ltd. 3,269,672 10,826
----------
GROUP TOTAL 117,803
----------
- - ----------------------------------------------------------------------------------
BELGIUM (.9%)
* Cimenteries Cbr Belgium Npv 61,000 23,545
* Cbr Heidelberger Warrants
Exp. 12/20/96 55,000 345
Sibeka 11,000 2,281
----------
GROUP TOTAL 26,171
----------
- - ----------------------------------------------------------------------------------
BRAZIL (1.9%)
Banco Itau Pfd. 9,432,000 2,903
Brazilian Distriburda
de Petrobras Pfd. 70,551,000 3,380
Electrobras Pfd. 25,744,000 10,942
Energetica Minas Pfd. 16,520,400 1,937
Ipiranga Pfd. 211,040,000 3,094
Panamerican Beverage Inc. 60,000 1,973
Sadia Concordia Pfd. 2,008,000 2,762
Siderugica Nacional (CSN) 84,400,000 3,283
Telebras 100,460,000 4,644
Telebras Pfd. 366,520,000 21,610
----------
GROUP TOTAL 56,528
----------
- - ----------------------------------------------------------------------------------
CHILE (.4%)
Compania de Telefonos de
Chile ADR 108,000 9,855
Sociedad Quimica 60,000 1,673
----------
GROUP TOTAL 11,528
----------
- - ----------------------------------------------------------------------------------
FINLAND (.9%)
Kone Corp. B 43,000 4,653
Kymmene Corp. 330,000 9,056
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- - ----------------------------------------------------------------------------------
<S> <C> <C>
Repola Oy 370,000 $ 7,978
Unitas A 1,600,000 4,234
----------
GROUP TOTAL 25,921
----------
- - ----------------------------------------------------------------------------------
FRANCE (3.7%)
Cardif 59,222 9,857
Docks de France 49,500 7,122
Eaux (Cie Generale) 120,255 12,454
Michelin Class B (Registered) 653,870 28,694
Paribas Compagnie Financiere A 97,103 6,653
Primagaz 24,938 4,298
* Primagaz Warrants Exp. 6/30/95 1,438 27
Societe Centrale des Assurances
Generales de France 389,376 16,425
Thomson-C.S.F. 170,000 5,083
Total SA B 317,828 18,955
----------
GROUP TOTAL 109,568
----------
- - ----------------------------------------------------------------------------------
GERMANY (2.0%)
Frederick Grohe AG Pfd. 18,747 5,632
Muenchener Ruckversich 7,000 12,631
Sap AG Pfd. 36,000 16,343
Signalbau Huber AG Pfd. 7,500 1,520
Veba AG 70,000 24,713
----------
GROUP TOTAL 60,839
----------
- - ----------------------------------------------------------------------------------
HONG KONG (5.8%)
Amoy Properties 5,500,000 6,744
Cheung Kong Holdings Ltd. 4,300,000 21,757
Hong Kong Electric Holdings 5,000,000 17,697
HSBC Holding PLC 1,972,943 23,234
Hutchison Whampoa Ltd. 3,400,000 17,028
Mandarin Oriental
International Ltd. 4,545,369 6,323
Sun Hung Kai Properties Ltd. 3,500,400 25,820
Swire Pacific Ltd. A 4,084,000 34,353
Wharf Holdings Ltd. 5,000,000 21,482
----------
GROUP TOTAL 174,438
----------
- - ----------------------------------------------------------------------------------
INDONESIA (.7%)
Bank Bali (Foreign) 1,500,000 3,796
Indocement (Foreign) 1,222,000 4,976
Kalbe Farma (Foreign) 1,874,000 7,761
Unilever Indonesia (Foreign) 287,551 5,094
----------
GROUP TOTAL 21,627
----------
- - ----------------------------------------------------------------------------------
ITALY (5.3%)
Edison SPA 3,000,000 13,676
Parmalat SPA 15,681,600 19,409
* Parmalat SPA Warrants
Exp. 7/17/99 1,810,200 1,729
STET-Societa Finanziaria
Tele-Fonica 14,452,600 46,292
Telecom Italia 26,712,190 77,812
----------
GROUP TOTAL 158,918
----------
- - ----------------------------------------------------------------------------------
JAPAN (30.8%)
Alps Electric Co., Ltd. 500,000 6,941
Anritsu Corp. 1,000,000 15,081
Bridgestone Corp. 2,100,000 33,558
Casio Computer Co. 2,100,000 26,007
Daini Den Den Corp. 11,000 11,316
Dai-Nippon Printing Co. Ltd. 1,500,000 28,464
Daiwa House Industries 750,000 11,461
East Japan Railway 651,000 34,070
Eisai Co., Ltd. 350,000 6,152
Fanuc Co. Ltd. 60,000 2,763
Hirose Electronics Co. Ltd. 240,000 15,509
Hitachi Ltd. 4,300,000 42,603
Hoya Corp. 300,000 6,502
Ito-Yokado Co. 1,500,000 79,401
Japan Air Terminal Co. Ltd. 160,000 2,189
* Kao Corp. Warrants
Exp. 11/16/94 2,600 650
Keyence Inc. 50,000 5,543
Kuraray 2,250,000 26,742
Kyocera Corp. 245,000 18,156
Mabuchi Motors 400,000 29,683
Makita Corp. 700,000 14,052
Matsushita Electric
Industrial Co. Ltd. 3,000,000 52,734
Mitsubishi Corp. 1,500,000 18,876
Mitsui & Co., Ltd. 3,480,000 29,960
Murata Manufacturing Co. Ltd. 720,000 31,209
Nippon Television Network 39,300 9,538
Nissei Sangyo 100,000 1,448
Nomura Securities Co. Ltd. 2,200,000 48,559
Orix Corp. 150,000 6,142
Sankyo Co., Ltd. 850,000 20,544
Seino Transportation Co. Ltd. 425,000 7,895
Sekisui House Ltd. 3,750,000 46,067
Sharp Corp. 800,000 14,542
Shin-Etsu Chemical Co. Ltd. 1,500,000 31,011
Showa Shell Sekiyu 2,400,000 33,798
Skylark Co., Ltd. 225,000 5,079
Tokio Marine & Fire
Insurance Ltd. 700,000 8,669
Tokyo Electron Inc. 600,000 18,457
Tokyo Ohka Kogyo Co. Ltd. 202,000 7,666
Toshiba Corp. 7,000,000 53,064
Toyota Motor Corp. 2,000,000 43,146
Yamazaki Banking Co., Ltd. 400,000 8,390
Yaohan Department Store 217,000 2,557
Yokohama Reito 211,000 3,035
----------
GROUP TOTAL 919,229
----------
- - ----------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- - ----------------------------------------------------------------------------------
<S> <C> <C>
KOREA (1.6%)
Daewoo Corp. 80,563 $ 1,419
Daewoo Securities 247,200 7,628
* Dong-Ah Construction Industry Co. 45,391 1,769
Hanil Bank 309,000 4,014
Hanshin Securities 127,500 2,803
Hyundai Engineering and
Construction 185,640 8,743
Korea Electric Power Co. 223,000 7,912
Samsung Electronics Co. Ltd. 90,043 7,068
Shinhan Bank 393,000 7,413
----------
GROUP TOTAL 48,769
----------
- - ----------------------------------------------------------------------------------
MALAYSIA (2.8%)
Genting Bhd. 4,047,000 37,955
Malayan Banking Bhd. 3,933,000 25,206
Malaysian Helicopter Services 280,000 689
Tan Chong Motor Holdings Bhd. 2,242,000 2,891
Technology Resources Industries 700,000 2,949
Telekom Malaysian Bhd. 1,713,000 14,325
----------
GROUP TOTAL 84,015
----------
- - ----------------------------------------------------------------------------------
MEXICO (1.8%)
Apasco 'A' 1,066,000 10,482
Cifra 'C' SA de CV C 4,309,000 11,630
* Grupo Carso A 340,000 3,895
* Grupo Carso ADS 162,000 3,712
Grupo Financiero Banamex B 1,618,300 10,131
Grupo Financiero Banamex L 80,915 610
Tolmex SA de CV B2 904,000 12,560
----------
GROUP TOTAL 53,020
----------
- - ----------------------------------------------------------------------------------
NETHERLANDS (7.7%)
Borsumij Wehry 385,710 5,942
* Borsumij Wehry Warrants
Exp. 12/21/98 14,287 286
* Ceteco Holdings NV 120,540 3,040
Getronics NV 557,196 16,947
Heineken NV 502,000 68,380
International Nederlanden Groep 1,751,296 80,045
Koninklijke PTT Nederland NV 267,000 8,166
Oce Van Der Grinten 200,000 8,611
Otra NV 78,950 13,097
Sphinx (Kon) NV 396,046 11,889
Unilever NV 120,000 13,854
----------
GROUP TOTAL 230,257
----------
- - ----------------------------------------------------------------------------------
PHILIPPINES (1.0%)
Ayala Land Inc. 'B' 3,756,750 4,847
Meralco GDR 202,875 13,998
Philippine Long Distance
Telephone 102,000 6,794
Philippine National Bank Class B 242,550 4,418
----------
GROUP TOTAL 30,057
----------
- - ----------------------------------------------------------------------------------
SINGAPORE (2.0%)
Development Bank of
Singapore (Foreign) 1,575,000 16,278
Keppel Corp. 2,086,000 15,439
Overseas Chinese
Banking Corp. (Foreign) 1,193,500 11,858
Singapore International Airlines
Ltd. (Foreign) 628,000 5,904
Singapore Press
Holdings Ltd. (Foreign) 663,600 11,682
----------
GROUP TOTAL 61,161
----------
- - ----------------------------------------------------------------------------------
SWEDEN (3.4%)
Astra AB Series B 931,000 21,058
Electrolux Series B Free 360,000 18,101
SKF AB Series B Free 1,070,000 19,224
Stora Kopparberg Class A 420,000 23,560
Volvo AB Series B 1,050,000 19,814
----------
GROUP TOTAL 101,757
----------
- - ----------------------------------------------------------------------------------
SWITZERLAND (4.9%)
Alusuisse-Lonza Holding AG
(Registered) 27,000 14,032
BBC Brown Boveri (Bearer) 15,000 13,597
Ciba Geigy AG (Bearer) 38,000 23,003
CS Holding (Bearer) 50,000 20,729
Nestle SA (Registered) 30,000 27,646
Sandoz AG (Registered) 50,000 25,948
Swiss Bank Corp. (Bearer) 72,058 20,565
* Swiss Bank Corp. (Bearer) Warrants
Exp. 6/30/98 2,058 34
----------
GROUP TOTAL 145,554
----------
- - ----------------------------------------------------------------------------------
TAIWAN (.1%)
President Enterprises Corp. 100,449 1,457
----------
- - ----------------------------------------------------------------------------------
THAILAND (.8%)
International Cosmetics
Corp. (Foreign) 700 15
Land & House Co. Ltd. (Foreign) 249,000 5,352
Siam Cement Co., Ltd. (Foreign) 125,000 7,421
Thai Farmers Bank Ltd. (Foreign) 1,490,000 12,025
----------
GROUP TOTAL 24,813
----------
- - ----------------------------------------------------------------------------------
UNITED KINGDOM (15.3%)
Allied-Lyons PLC 1,730,768 16,635
Asda Group PLC 20,000,000 20,421
Barclays PLC 1,560,000 14,012
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- - ----------------------------------------------------------------------------------
<S> <C> <C>
Blue Circle Industries 2,000,000 $ 9,888
BOC Group 2,650,000 30,272
Bowater PLC 1,000,000 7,201
British Aerospace 2,700,000 20,894
British Airways PLC 1,850,000 11,873
British Land Co., PLC 4,200,000 25,988
British Petroleum Co. 2,555,000 16,241
British Steel 3,000,000 7,462
Burton Group 15,400,000 15,251
Cable and Wireless PLC 4,588,000 32,897
Camas PLC 1,400,000 1,698
Courtaulds PLC 500,000 4,015
English China Clays 1,400,000 8,362
Fison 4,000,000 9,274
Glaxo Holdings PLC 1,400,000 13,843
Grand Metropolitan PLC 2,500,000 17,081
Legal & General Group PLC 2,500,000 18,617
National Power 2,300,000 18,293
National Westminster Bank PLC 1,320,000 10,073
Peninsular & Orient Steam
Navigation Co. 1,957,704 20,620
Rank Organisation PLC 4,215,000 27,407
Rolls Royce PLC 7,437,500 21,468
Smith (David S.) 1,400,400 11,998
Suter PLC 1,050,000 3,369
* Suter PLC Warrants
Exp. 1996/98 105,000 97
* Suter PLC Warrants
Exp. 1999/2004 105,000 68
United Newspapers 1,000,000 8,184
Vodafone Group PLC 4,600,000 14,761
Wellcome PLC 1,700,000 18,767
----------
GROUP TOTAL 457,030
----------
- - ----------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $2,348,094) 2,924,665
- - ----------------------------------------------------------------------------------
BOND (.1%)
- - ----------------------------------------------------------------------------------
<CAPTION>
Face
Amount
(000)
----------
<S> <C> <C>
SWITZERLAND
Global Mark International Ltd.
3.50%, 4/6/97
(Cost $2,400) SF 2,400 2,580
----------
- - ----------------------------------------------------------------------------------
<CAPTION>
Market
Value
Shares (000)+
- - ----------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (3.6%)
- - ----------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 4.81%, 9/1/94
(Cost $106,387) $106,387 $ 106,387
- - ----------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.5%)
(Cost $2,456,881) 3,033,632
- - ----------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.5%)
- - ----------------------------------------------------------------------------------
Other Assets--Notes C and F 237,893
Liabilities--Note F (282,367)
-----------
(44,474)
- - ----------------------------------------------------------------------------------
NET ASSETS (100%)
- - ----------------------------------------------------------------------------------
Applicable to 208,190,907 outstanding
$1.00 par value shares
(authorized 250,000,000 shares) $ 2,989,158
- - ----------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $14.36
==================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
ADR--American Depository Receipt
ADS--American Depository Share
SF--Swiss Francs
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------
AT AUGUST 31, 1994,
NET ASSETS CONSISTED OF:
- - ----------------------------------------------------------------------------------
Amount Per
(000) Share
----------- -----------
<S> <C> <C>
Paid in Capital $2,403,110 $11.54
Undistributed Net
Investment Income 28,464 .14
Accumulated Net
Realized Losses (12,380) (.06)
Unrealized Appreciation
of Investments--Note E 569,964 2.74
- - ----------------------------------------------------------------------------------
NET ASSETS $2,989,158 $14.36
- - ----------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
U.S. GROWTH INTERNATIONAL
PORTFOLIO GROWTH PORTFOLIO
- - -------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
August 31, 1994 August 31, 1994
(000) (000)
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends(1) . . . . . . . . . . . . . . $ 27,499 $ 39,143
Interest . . . . . . . . . . . . . . 6,254 3,178
- - -------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . 33,753 42,321
- - -------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee . . . . . . . . . . . . . . $3,688 $3,577
Performance Adjustment . . . . . . . . . -- 3,688 195 3,772
------ ------
The Vanguard Group--Note C
Management & Administrative . . . . . . 5,217 4,559
Marketing and Distribution . . . . . . . 450 5,667 372 4,931
------ ------
Taxes (other than income taxes)--Note A . . 144 187
Custodians' Fees . . . . . . . . . . . . . 11 1,493
Auditing Fees . . . . . . . . . . . . . . 9 10
Shareholders' Reports . . . . . . . . . . . 78 208
Annual Meeting and Proxy Costs . . . . . . 43 22
Directors' Fees and Expenses . . . . . . . 10 12
- - -------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . 9,650 10,635
- - -------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . 24,103 31,686
- - -------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . 4,709 55,980
Forward Currency Contracts . . . . . . . . -- (20,516)
- - -------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . 4,709 35,464
- - -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . 99,469 328,541
Forward Currency Contracts . . . . . . . . -- (5,619)
- - -------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation) . . . . . . . 99,469 322,922
- - -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . $128,281 $390,072
===================================================================================================================
</TABLE>
(1) Dividends for the International Growth Portfolio are net of foreign
withholding taxes of $6,715,000.
15
<PAGE> 18
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
U.S. GROWTH INTERNATIONAL
PORTFOLIO GROWTH PORTFOLIO
- - --------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
AUGUST 31, 1994 August 31, 1993 AUGUST 31, 1994 August 31, 1993
(000) (000) (000) (000)
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . $ 24,103 $ 27,024 $ 31,686 $ 13,008
Realized Net Gain (Loss) . . . . . . . 4,709 (20,430) 35,464 (1,105)
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . 99,469 10,429 322,922 210,657
- - --------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . 128,281 17,023 390,072 222,560
- - --------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . (25,703) (20,757) (16,917) (19,292)
Realized Net Gain . . . . . . . . . . . -- (9,225) -- --
- - --------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . (25,703) (29,982) (16,917) (19,292)
- - --------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . 380,823 706,280 804,345 304,728
--In Lieu of Cash
Distributions . . . . 21,905 28,688 15,892 17,834
--Exchange . . . . . . . . 128,844 365,093 992,770 386,667
Redeemed --Regular . . . . . . . . . (332,474) (196,210) (264,837) (201,879)
--Exchange . . . . . . . . (292,386) (377,448) (409,381) (152,286)
- - --------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions (93,288) 526,403 1,138,789 355,064
- - --------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . 9,290 513,444 1,511,944 558,332
NET ASSETS
Beginning of Year . . . . . . . . . . . 1,954,141 1,440,697 1,477,214 918,882
- - --------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . $1,963,431 $1,954,141 $2,989,158 $1,477,214
==============================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . $.21 $.18 $.11 $.21
Realized Net Gain . . . . . . -- $.08 -- --
- - --------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . 34,159 71,904 134,746 65,055
Issued in Lieu of Cash
Distributions . . . . . . . 1,453 1,860 1,180 1,889
Redeemed . . . . . . . . . . . (41,944) (38,898) (50,592) (34,621)
- - --------------------------------------------------------------------------------------------------------------
(6,332) 34,866 85,334 32,323
- - --------------------------------------------------------------------------------------------------------------
(3) Undistributed Net
Investment Income . . . . . $ 15,870 $ 17,470 $ 28,464 $ 13,695
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
U.S. GROWTH PORTFOLIO
- - -----------------------------------------------------------------------------------------------------------
Year Ended August 31,
--------------------------------------------------------
For a Share Outstanding Throughout Each Year 1994 1993 1992 1991 1990
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . $14.71 $14.71 $13.69 $10.38 $10.01
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . .20 .21 .19 .20 .14
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . .82 .05 1.02 3.30 .36
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . 1.02 .26 1.21 3.50 .50
- - -----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . (.21) (.18) (.19) (.19) (.13)
Distributions from Realized Capital Gains . -- (.08) -- -- --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . (.21) (.26) (.19) (.19) (.13)
- - -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . $15.52 $14.71 $14.71 $13.69 $10.38
===========================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . +6.98% +1.69% +8.83% +34.28% +5.03%
- - -----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- - ------------------------
Net Assets, End of Year (Millions) . . . . . . $1,963 $1,954 $1,441 $747 $339
Ratio of Expenses to Average Net Assets . . . . .52% .49% .49% .56% .74%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . 1.30% 1.50% 1.52% 1.82% 1.77%
Portfolio Turnover Rate . . . . . . . . . . . . 47% 37% 24% 30% 49%
- - -----------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH PORTFOLIO
- - -----------------------------------------------------------------------------------------------------------
Year Ended August 31,
--------------------------------------------------------
For a Share Outstanding Throughout Each Year 1994 1993 1992 1991 1990
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . $12.02 $10.15 $10.31 $11.81 $11.61
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . .14 .12 .20 .18 .32
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . 2.31 1.96 (.05) (.80) .31
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . 2.45 2.08 .15 (.62) .63
- - -----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . (.11) (.21) (.19) (.20) (.15)
Distributions from Realized Capital Gains . -- -- (.12) (.68) (.28)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . (.11) (.21) (.31) (.88) (.43)
- - -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . $14.36 $12.02 $10.15 $10.31 $11.81
===========================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . +20.44% +21.06% +1.49% -5.11% +5.25%
- - -----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- - ------------------------
Net Assets, End of Year (Millions) . . . . . . $2,989 $1,477 $919 $846 $796
Ratio of Expenses to Average Net Assets . . . . .46% .59% .58% .67% .68%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . 1.37% 1.27% 2.04% 1.80% 3.01%
Portfolio Turnover Rate . . . . . . . . . . . . 28% 51% 58% 49% 45%
- - -----------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
Vanguard World Fund is registered under the Investment Company
Act of 1940 as a diversified open-end investment company and
consists of the U.S. Growth and International Growth
Portfolios. The International Growth Portfolio invests in
securities of foreign issuers which may subject the Portfolio
to investment risks not normally associated with investing in
securities of United States corporations.
A. The following significant accounting policies are in
conformity with generally accepted accounting principles for
investment companies. Such policies are consistently followed
by the Fund in the preparation of financial statements.
1. SECURITY VALUATION: Market values for securities listed on
the New York Stock Exchange or other U.S. exchanges are
based upon the latest quoted sales prices for such
securities on the appropriate exchange at 4:00 PM 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. Securities listed on foreign
exchanges are valued at the latest quoted sales prices.
Securities not listed are valued at the latest quoted bid
prices. Temporary cash investments are valued at cost
which approximates market value. Foreign currency amounts
are translated into U.S. dollars at the bid prices of such
currencies against U.S. dollars quoted by major banks as
of 4:00 PM Central Europe Time.
2. FORWARD CURRENCY CONTRACTS: The International Growth
Portfolio may enter into forward foreign currency
contracts to protect securities and related receivables
and payables against changes in future foreign exchange
rates. Risks associated with such contracts include
movement in the value of the foreign currency relative to
the U.S. dollar and the ability of the counterparty to
perform. Fluctuations in the value of such contracts are
recorded as unrealized appreciation (depreciation) until
terminated, at which time realized gains (losses) are
recognized.
3. FEDERAL INCOME TAXES: Each Portfolio of 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.
4. REPURCHASE AGREEMENTS: Each Portfolio of the Fund, along
with other members of The Vanguard Group of Investment
Companies, transfers uninvested cash balances into a
Pooled Cash Account, the daily aggregate of which is
invested in repurchase agreements secured by U.S.
Government obligations. Securities pledged as collateral
for repurchase agreements are held by the Portfolios'
custodian banks until maturity of the repurchase
agreements. Provisions of each agreement ensure that the
market value of the collateral is sufficient in the event
of default; however, in the event of default or bankruptcy
by the other party to the agreement, realization and/or
retention of the collateral may be subject to legal
proceedings.
5. OTHER: Security transactions are accounted for on the date
the securities are purchased or sold. Costs used in
determining realized gains (losses) on the sale of
investment securities are those of specific securities
sold. Dividend income and distributions to shareholders
are recorded on the ex-dividend date.
19
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. U.S. GROWTH PORTFOLIO: Under the terms of a contract which
expires March 31, 1995, the Portfolio pays Lincoln Capital
Management Co. an investment advisory fee calculated at an
annual percentage rate of average net assets. For the year
ended August 31, 1994, the investment advisory fee represented
an effective annual rate of .20 of 1% of the Portfolio's
average net assets.
INTERNATIONAL GROWTH PORTFOLIO: Under the terms of a contract
which expires March 31, 1995, the Portfolio pays Schroder
Capital Management International an investment advisory fee
calculated at an annual percentage rate of average net assets.
The basic fee thus computed is subject to quarterly
adjustments based on performance relative to the Morgan
Stanley Capital International Europe, Australia, and Far East
Index. For the year ended August 31, 1994, the investment
advisory fee represented an effective annual base rate of .15
of 1% of the Portfolio's average net assets before an increase
of $195,000 (.01 of 1%) based on performance.
C. The Vanguard Group, Inc. 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 Directors. At August
31, 1994, the Fund had contributed capital of $728,000 to
Vanguard (included in Other Assets), representing 3.6% of
Vanguard's capitalization. The Fund's directors and officers
are also directors and officers of Vanguard.
Vanguard has requested the Fund's investment advisers to
direct certain portfolio trades, subject to obtaining the best
price and execution, to brokers who have agreed to rebate or
credit the Fund for a portion of the commissions generated.
Such rebates or credits are used solely to reduce the Fund's
administrative expenses. For the year ended August 31, 1994,
directed brokerage arrangements reduced the expenses of the
U.S. Growth and International Growth Portfolios by $284,000
(.02 of 1% of average net assets) and $214,000 (.01 of 1% of
average net assets), respectively.
D. During the year ended August 31, 1994, purchases and sales
of investment securities other than U.S. Government
securities and temporary cash investments were:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------
(000)
-------------------------------------
Portfolio Purchases Sales
- - ---------------------------------------------------------------------------
<S> <C> <C>
U.S. GROWTH $ 810,245 $790,490
INTERNATIONAL GROWTH 1,774,637 629,080
- - ---------------------------------------------------------------------------
</TABLE>
At August 31, 1994, the Fund had available capital loss
carryforwards to offset future net capital gains through the
following fiscal year ends:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------
Expiration
Fiscal Year(s) Ending Amount
Portfolio August 31, (000)
- - ---------------------------------------------------------------------------
<S> <C> <C>
U.S. GROWTH 2001-2002 $15,721
INTERNATIONAL GROWTH 2001 20,227
- - ---------------------------------------------------------------------------
</TABLE>
E. At August 31, 1994, unrealized appreciation of investment
securities for financial reporting and Federal income tax
purposes was:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------
(000)
------------------------------------------------
Net
Appreciated Depreciated Unrealized
Portfolio Securities Securities Appreciation
- - ---------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GROWTH $312,787 ($12,834) $299,953
INTERNATIONAL GROWTH 611,756 (35,005) 576,751
- - ---------------------------------------------------------------------------
</TABLE>
20
<PAGE> 23
Under the terms of open forward currency exchange contracts at
August 31, 1994, the International Growth Portfolio was
obligated to deliver foreign currencies in exchange for U.S.
dollars as follows:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------
(000)
Contract ------------------------------------
Settlement Foreign U.S.
Date Currency Dollars
- - ---------------------------------------------------------------------------
<S> <C> <C>
12/8/94 NETHERLAND GUILDERS 200,000 $112,950
12/9/94 FRENCH FRANCS 650,000 120,148
- - ---------------------------------------------------------------------------
</TABLE>
Net unrealized depreciation related to open forward currency
exchange contracts of the International Growth Portfolio at
August 31, 1994 was $6,787,000; unrealized depreciation of
$8,368,000 is required to be treated as realized loss for
Federal income tax purposes.
F. The market value of International Growth Portfolio
securities on loan to broker/dealers at August 31, 1994 was
$180,922,000 for which the Portfolio had received cash
collateral of $194,719,000.
21
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard World Fund
In our opinion, the accompanying statements 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
the U.S. Growth Portfolio and the International Growth Portfolio of Vanguard
World Fund ("the Fund") at August 31, 1994, the results of each of their
operations, the changes in each of their net assets and the financial
highlights for each of the respective periods presented, in conformity with
generally accepted accounting principles. 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 generally accepted
auditing standards 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 by correspondence with
the custodians and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE L.L.P.
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
October 11, 1994
22
<PAGE> 25
SPECIAL TAX INFORMATION
SPECIAL 1994 TAX INFORMATION (UNAUDITED)
FOR VANGUARD U.S. GROWTH PORTFOLIO
Corporate shareholders should note that for the fiscal year ended August 31,
1994, 100% of the dividend income qualifies for the intercorporate dividends
received deduction.
SPECIAL 1994 TAX INFORMATION (UNAUDITED)
FOR VANGUARD INTERNATIONAL GROWTH PORTFOLIO
The Portfolio has elected to pass through the credit for taxes paid in foreign
countries during its fiscal year ended August 31, 1994. In accordance with
current tax laws, the Foreign Income and Foreign Tax per share (for a share
outstanding on 8/31/94) is as follows:
<TABLE>
<CAPTION>
FOREIGN
COUNTRY DIVIDENDS TAX
- - --------------------------------------------------------------------
<S> <C> <C>
Australia .0096 .0014
Belgium .0024 .0004
Brazil .0020 .0000
Chile .0010 .0002
Finland .0010 .0001
France .0055 .0000
Germany .0018 .0002
Hong Kong .0226 .0000
Indonesia .0014 .0002
Italy .0155 .0050
Japan .0223 .0033
Korea .0031 .0005
Malaysia .0043 .0015
Mexico .0051 .0008
Netherlands .0324 .0051
Philippines .0004 .0001
Singapore .0035 .0005
Sweden .0035 .0005
Switzerland .0153 .0023
Thailand .0022 .0003
United Kingdom .0652 .0098
</TABLE>
The pass-through of Foreign Tax Credit will affect only those shareholders of
the Portfolio who are holders on the dividend record date in December 1994.
Accordingly, shareholders will receive more detailed information along with
their Form 1099-DIV in January 1995.
23
<PAGE> 26
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc Rorer
Inc.; Director of Sun Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight- Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd., The St. Paul Companies, Inc., and Scott Paper Company.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Company.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company,
Reliance Electric Company, and The Standard Products Company.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Company
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas
Company; Director of Cummins Engine Company; Trustee of Vanderbilt University
and the Culver Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD VINCENT S. MCCORMACK
Senior Vice President Senior Vice President
Planning & Development Operations
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Institutional Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
24
<PAGE> 27
* WE SET SPECIFIC STANDARDS FOR EACH FUND'S INVESTMENT POLICIES AND
PRINCIPLES.
* WE ADHERE TO THE HIGHEST STANDARDS OF INVESTMENT QUALITY, CONSISTENT
WITH EACH FUND'S OBJECTIVES.
* WE OFFER CANDOR IN OUR FUND DESCRIPTIONS (INCLUDING FULL DISCLOSURE OF
RISK) TO PROSPECTIVE INVESTORS, AND IN OUR DESCRIPTION TO SHAREHOLDERS
OF EACH FUND'S SUCCESS (OR, SOMETIMES, LACK OF THE SAME).
These principles make at least as much sense today as they did in 1929, perhaps
even more. For we live in an era when many fund organizations have become
asset-gathering machines, capitalizing on past performance that is unrepeatable
and investment fads that today, as yesterday, will come and go. The new
marketing policy is too often "if investors want it, we'll sell it to them."
But our principle remains "if it makes sound investment sense, we'll offer it,
even if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values was
brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of
the benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for
its low costs, which we believe are just as essential a consideration in
investing in mutual funds as risk potential and total return. We call this
relationship between risk, return, and cost the "eternal triangle" of mutual
fund investing.
We take special pride in our position as (by far) the lowest-cost
provider of financial services in the world. Under our "no-load" offering
structure, shareholders begin their Vanguard investment program with $1,000 of
assets (not, say, $950) for each $1,000 investment. Then, under our "at-cost"
operating structure, each $1,000 is managed for only about $3 per year; our
competitors may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with
sound and durable goals to investors with long-term time horizons, and doing so
at the fairest financial terms available. We believe that the unique Vanguard
structure "promotes a healthy and viable mutual fund complex within which each
Fund can better prosper; enables the Funds to realize substantial savings from
advisory fee reductions; promotes savings from economies of scale; and provides
the Funds with direct and conflict-free control over distribution functions."
We are not alone in this belief. Indeed, the quotation is taken verbatim from
the unanimous decision of the U.S. Securities and Exchange Commission when, in
1981, it approved our application for the structure under which we operate
today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The
Vanguard Group have come to represent, and we are grateful for the success and
growth with which we have been blessed. We are an industry leader, and, as a
competitor observed a few years ago, we are "the standard by which all fund
organizations are judged."
In battle terms, "the vanguard" is the first wave of troops or ships,
and Vanguard surely is in the first wave of the battle for investment survival.
As we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
<PAGE> 28
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
<TABLE>
<S> <C>
TAXABLE MONEY MARKET FUNDS TAX EXEMPT INCOME FUNDS
Vanguard Admiral Funds Vanguard Municipal Bond Fund
U.S. Treasury Money Market Portfolio Vanguard State Tax-Free Funds
Vanguard Money Market Reserves Insured Longer-Term Portfolios
TAX-EXEMPT MONEY MARKET FUNDS (CA, FL, NJ, NY, OH, PA)
Vanguard Municipal Bond Fund TAXABLE INCOME FUNDS
Money Market Portfolio Vanguard Admiral Funds
Vanguard State Tax-Free Funds Vanguard Fixed Income Securities Fund
Money Market Portfolios (CA, NJ, OH, PA) Vanguard Preferred Stock Fund
</TABLE>
EQUITY AND BALANCED FUNDS
<TABLE>
<S> <C>
GROWTH AND INCOME FUNDS GROWTH FUNDS
Vanguard Convertible Securities Fund Vanguard/Morgan Growth Fund
Vanguard Equty Income Fund Vanguard/PRIMECAP Fund
Vanguard Quantitative Portfolios Vanguard U.S. Growth Portfolio
Vanguard/Trustees' Equity Fund AGGRESSIVE GROWTH FUNDS
U.S. Portfolio Vanguard Explorer Fund
Vanguard/Windsor Fund Vanguard Specialized Portfolios
Vanguard/Windsor II INTERNATIONAL FUNDS
BALANCED FUNDS Vanguard International Growth Portfolio
Vanguard Asset Allocation Fund Vanguard/Trustees' Equity Fund
Vanguard STAR Fund INTERNATIONAL PORTFOLIOS
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
</TABLE>
INDEX FUNDS
<TABLE>
<S> <C>
Vanguard Index Trust Vanguard International Equity Index Fund
Total Stock Market Portfolio European Portfolio
500 Portfolio Pacific Portfolio
Extended Market Portfolio Emerging Markets Portfolio
Growth Portfolio Vanguard Bond Index Fund
Value Portfolio Vanguard Tax-Managed Fund
Small Capitalization Stock Portfolio Vanguard Balanced Index Fund
</TABLE>
[VANGUARD GROUP LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q230-8/94
<PAGE> 29
EDGAR APPENDIX
This appendix describes the components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features the Vanguard ship
in the crashing sea.
A running head featuring a sextant appears at the top of pages one through
four.
A photograph of John C. Bogle appears at the lower-right of page one.
A line chart of the Indexed Value (Standard & Poor's Growth Index,
Standard & Poor's 500 Index and Standard & Poor's Value Index) of the World
Fund for the fiscal years 1990 through 1994 appears at the upper-left of page
two.
Line charts illustrating cumulative performance between U.S. Growth
Portfolio, Standard & Poor's 500 Index & Average Growth Fund, average Annual
Total Returns for the period August 31, 1984 to August 31, 1994 appear at the
top of page 5.
Line charts illustrating cumulative performance between International
Growth Portfolio, MSCI-EAFE Index and Average International Fund, average
Annual Total Returns for the period August 31, 1984 to August 31, 1994 appear
at the bottom of page 5.
A running head featuring a lantern appears at the top of pages five
through seven.
A running head featuring a map & magnifying glass appears at the top of
pages eight and nine.
A running head featuring a book & pen appears on pages ten through twenty
three.
A running head featuring a compass appears on page 24.
A running head featuring a bird flying appears on the back cover.
