<PAGE> 1
VANGUARD
U.S. GROWTH
PORTFOLIO
--------------
INTERNATIONAL
GROWTH
PORTFOLIO
ANNUAL
REPORT
1993
<PAGE> 2
A BRAVE NEW WORLD FOR INVESTING
With the clarity of hindsight, we can now see that the past two
decades composed one of the great cycles in the history of the
financial markets, as reflected in the chart below.
* During the 1973-1982 decade, the nominal total returns
(capital change plus income) of stocks and bonds averaged only about
+6% per year; cash reserves averaged more than +8% annually. However,
high inflation rates, averaging 8.7% annually, devastated these nominal
results. Real returns (nominal returns less the inflation rate) for each
of these three major asset classes were actually negative.
* During the 1983-1992 decade, quite the opposite situation
prevailed. Nominal returns for stocks and bonds were close to their
highest levels in history and forged well into double-digit territory. To
make a good investment environment even better, inflation was tame
(averaging 3.8% annually), and real returns were solidly positive.
[EDGAR REFERENCE -- A TALE OF TWO DECADES]
This sharp contrast provides us with perspective for the decade
that will end in the year 2002. Some investors will fear a
recurrence of the returns of the first decade, while others will
hope for a recurrence of the second; most will likely anticipate
something in between. Whatever the case, there are two essential
elements involved in considering your investment program in the
light of today's circumstances.
First, the yield of each investment class at the start of a
decade has had an important relationship to its future return.
Yields were low when 1973 began, high when 1983 began, and are
again low today. In fact, current income yields are remarkably
close to the levels of 20 years ago, as shown in the following
table.
<TABLE>
<CAPTION>
INCOME YIELDS (January 1)
1973 1983 1993 (9/30)
<S> <C> <C> <C>
STOCKS 2.7% 4.9% 2.7%
BONDS 5.8 10.7 5.6
RESERVES 3.8 10.5 3.1
</TABLE>
But there is a second important element to consider: inflation.
It got progressively worse during most of the first decade, but
got progressively better in the second.
<TABLE>
<CAPTION>
1973 1981 1993 (8/31)
<S> <C> <C> <C>
INFLATION 3.4% 12.4% 2.8%
</TABLE>
Today's low yield levels suggest that more modest nominal returns
are in prospect for the coming decade than in the 1980s; indeed,
returns could gravitate
- -------------------------------------------------------------------------------
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:
In sharp contrast to their lackluster returns during our preceding fiscal year,
the major equity markets of the world provided vibrant results during our 1993
fiscal year, which ended on August 31. In this investment environment, our U.S.
Growth Portfolio provided a disappointing return, while the return on our
International Growth Portfolio was solidly productive.
The total return (capital change plus income) of our U.S. Growth
Portfolio was a barely positive +1.7%, representing a major shortfall to the
returns of our two comparative standards: the average growth mutual fund and
the unmanaged Standard & Poor's 500 Composite Stock Price Index, a good measure
of the performance of large "blue-chip" stocks.
The total return of our International Growth Portfolio was +21.1%,
fully competitive with the average diversified international mutual fund, if
somewhat behind the unmanaged Morgan Stanley Capital International Europe,
Australia, and Far East ("EAFE") Index. This Index is a good measure of the
performance of international stocks as a group, but is heavily weighted (50%)
in Japanese equities. Here are the comparative figures for our Portfolios:
<TABLE>
<CAPTION>
Total Return
Fiscal Year Ended
August 31, 1993
<S> <C>
VANGUARD U.S. GROWTH PORTFOLIO +1.7%
AVERAGE GROWTH MUTUAL FUND +18.7%
STANDARD & POOR'S 500 STOCK INDEX +15.2
VANGUARD INTERNATIONAL GROWTH PORTFOLIO +21.1%
AVERAGE INTERNATIONAL MUTUAL FUND +21.4%
EAFE INDEX +27.2
</TABLE>
The return for the U.S. Growth Portfolio is based on net asset values of $14.71
per share on August 31, 1992, and $14.71 on August 31, 1993, with the latter
figure adjusted to take into account the reinvestment of our annual dividend of
$.18 per share from net investment income, plus a distribution of $.08 per
share from net realized capital gains. Both payments are the result of our
operations during the 1992 calendar year. For the International Growth
Portfolio, the respective net asset values were $10.15 and $12.02, and our
annual dividend from net investment income was $.21 per share.
(PHOTO)
THE U.S. GROWTH PORTFOLIO
There is no hiding the fact that the U.S. Growth Portfolio had a distinctly bad
year. The principal problems faced by the Portfolio were two-fold. First, it
was a year in which high-grade growth stocks, our stock in trade, provided
returns that fell far short of those provided by value stocks (generally,
stocks with lower ratios of market price to corporate book value, as well as
higher current yields and lower earnings growth rates). The dichotomy was
clearly reflected in the 12-month returns of the two Standard & Poor's/BARRA
market indexes, which we described to you a year ago: the Growth Index
1
<PAGE> 4
[SEE EDGAR APPENDIX - CUMULATIVE PERFORMANCE 1988-1993 CHART : STANDARD & POORS
INDICIES]
was up but +6.4%; the Value Index +23.9%. This spread, while not unprecedented,
is the largest since 1976.
The chart above shows the cumulative results of the two Indexes since
August 31, 1987. When we presented this comparison one year ago, the Growth
Index had a solid lead. Now, after the passage of but one year, the tables have
turned, and the cumulative return of the Value Index (+76%) is well ahead of
that of the Growth Index (+64%).
That the market leadership growth stocks enjoyed in 1989-1991 has shifted
to value stocks is hardly surprising. Cycles in relative performance of one
market segment compared to another are simply part and parcel of the way
securities markets work. That said, there were some very specific fundamental
shortfalls that plagued growth stocks during the past fiscal year, most notably
the price declines in drug stocks (resulting in part from fears about the
Administration's health-care proposals) and in "name-brand" stocks (companies
for which brand loyalty no longer seems to assure ever-ascending earnings).
A second factor made the Portfolio's bad situation worse: the poor
performance of some of our major holdings. While our diversification by
industry had a neutral impact on our relative returns, many of the specific
stock selections made by our investment adviser, Lincoln Capital Management,
experienced sharp declines. Most of the problems were concentrated in
investments in the consumer cyclical, consumer staples, and financial groups.
The regular report from Lincoln on page 8 provides further details.
The unhappy year just ended, of course, follows five years of significant
accomplishment by Lincoln. Our record since Lincoln became the Portfolio's
adviser on August 31, 1987, while not nearly as imposing as a year ago, remains
quite competitive by any standard. Here are the figures:
<TABLE>
<CAPTION>
Total Return
Six Years Ended August 31, 1993
Cumulative Annual Rate
<S> <C> <C>
U.S. GROWTH PORTFOLIO +72% +9.5%
AVERAGE GROWTH FUND +65% +8.7%
STANDARD & POOR'S 500 INDEX +71 +9.4
STANDARD & POOR'S/BARRA
GROWTH INDEX +64 +8.6
</TABLE>
The Portfolio's future results, whether on an absolute or a relative basis, may
be better or worse than those shown in the table above. However, since the time
period begins virtually at the 1987 stock market high (just weeks prior to the
Great Crash of October 19), the absolute returns are not too different from the
historical average annual return of +10.3% earned by stocks since the Standard
& Poor's 500 Index was first calculated in 1926.
THE INTERNATIONAL GROWTH PORTFOLIO
Just as there was an extraordinary dichotomy between growth and value stocks in
the U.S., so there was an extraordinary dichotomy between European and Pacific
stocks. After sharply lagging the world markets during the prior three fiscal
years, the Pacific markets (dominated by Japanese stocks) sprang to life with a
fury during the past
2
<PAGE> 5
twelve months, with a total return of +42.9% for U.S. investors. The European
markets, on the other hand, rose by a more modest +11.2%.
Those comparative figures conceal much more than they reveal. For, as you
know, our Portfolio's returns are measured in U.S. dollars. Thus, international
returns (for U.S. investors) are determined, not only by the results of each
nation's market, but also by whether that nation's currency is strong or weak
relative to the U.S. dollar. If the dollar purchases more French francs,
for example, the return of the French stock market is commensurately reduced
for U.S. investors. By the same token, if the dollar purchases fewer Japanese
yen, the return of the Japanese stock market is commensurately enhanced.
During the past year, as it happens, the dollar strengthened relative to
European currencies and weakened relative to the Japanese yen. As a result, the
huge local currency returns earned in the European markets were slashed and the
very good local currency returns earned in the Pacific basin markets were
greatly enhanced. This table presents the comparison:
<TABLE>
<CAPTION>
Total Return
Twelve Months Ended August 31, 1993
Based on Currency Based on
Stock Market* Local Currency Effect U.S. Dollars
<S> <C> <C> <C>
INTERNATIONAL +33.9% - 6.7% +27.2%
EUROPEAN +43.1% -31.9% +11.2%
PACIFIC +24.9 +18.0 +42.9
U.S. +15.2% -- +15.2%
</TABLE>
* MSCI Indexes for international markets; Standard & Poor's 500 Index for
U.S.
The table above bears careful attention, showing as it does the dramatic role
of currency risk--and currency reward--in international investing. The varying
influence of the U.S. dollar has seldom been so striking. As noted earlier, the
Japanese market dominates the Pacific Index (85% of its total market
capitalization), and is the largest factor by far in the total International
Index (50% of its capitalization).
The International Growth Portfolio was underweighted in Japan, with 27%
of net assets invested there during the year. (The average international fund
was underweighted even further, at 17%.) Our underweighting relative to the
Index caused much of our lag, just as it had engendered much of our superiority
during the four previous years. This negative factor was mitigated by our
significant position in other Far East markets tracked by the Index and a few
emerging international markets (such as Mexico, Korea, and Thailand) that are
not included in the EAFE Index. This table summarizes our major holdings by
country and the return earned in each during the past fiscal year:
<TABLE>
<CAPTION>
Fiscal Year Ended
August 31, 1993
Average Percent Total
Country of Net Assets Return
<S> <C> <C>
JAPAN 26.7% +39.6%
UNITED KINGDOM 14.4 +7.9
FRANCE 8.6 +9.3
HONG KONG 8.0 +25.7
MALAYSIA 5.1 +59.2
EMERGING MARKETS 9.0 +30.1
</TABLE>
Further evaluation of the Portfolio's results is presented by our adviser,
Schroder Capital Management International, on page 9 of this Report.
IN SUMMARY
The charts presented on page 4 show each Portfolio's results for the past
decade, a longer perspective than we focus on in this letter. For the
International Growth Portfolio, our return is comfortably above its competitive
norm; the U.S. Growth Portfolio's return is consistent with that of the average
growth fund.
In both cases, however, we lag unmanaged comparative indexes. While these
indexes have some natural advantages (for example, they ignore operating
expenses and transaction costs), the principal differentiations have been
structural: in the U.S. market, the sub-par performance of growth
(continued on page 5)
3
<PAGE> 6
[SEE EDGAR APPENDIX - CUMULATIVE PERFORMANCE AUG. 31, 1983 TO AUG. 31, 1993
CHART: U.S. GROWTH]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended August 31, 1993
1 Year 5 Years 10 Years
<S> <C> <C> <C>
U.S. GROWTH PORTFOLIO + 1.69% +17.04% +12.23%
AVERAGE GROWTH FUND +18.65 +14.80 +12.47
S&P 500 INDEX +15.18 +15.83 +14.92
</TABLE>
Note: Past performance is not predictive of future performance.
[SEE EDGAR APPENDIX - CUMULATIVE PERFORMANCE AUG. 31, 1983 TO AUG. 31, 1993
CHART: INTERNATIONAL GROWTH]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended August 31, 1993
1 Year 5 Years 10 Years
<S> <C> <C> <C>
INTERNATIONAL GROWTH PORTFOLIO +21.06% + 8.84% +16.40%
AVERAGE INTERNATIONAL FUND +21.39 + 10.46 +14.74
EAFE INDEX +27.16 + 6.86 +19.52
</TABLE>
Note: Past performance is not predictive of future performance.
4
<PAGE> 7
stocks; in the international markets, the dominance of Japan. Despite these
differences, for both Portfolios we intend to stay the course: to maintain the
focus of our U.S. Growth Portfolio on quality growth stocks, and to maintain
the broad diversification in the International Growth Portfolio that we believe
is simply common sense.
As always, we recommend that our Portfolios represent just a portion of
your total investment account, which should be prudently balanced among stocks,
bonds, and cash reserves to fit your own financial circumstances and risk
profile. Assuming you have maintained this balance, we recommend that you too
stay your course, focusing not on annual fluctuations in absolute and relative
performance, but on the long term.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
September 13, 1993
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, 1993) are as follows:
<TABLE>
<CAPTION>
Portfolio (Inception Date) 1 Year 5 Years 10 Years
-------------------------- ------ ------- --------
<S> <C> <C> <C>
International Growth Portfolio (9/30/81) +6.94% + 5.93% +15.45%
U.S. Growth Portfolio (1/6/59) +3.61 +15.45 +11.53
</TABLE>
Each Portfolio's average annual total return for the ten-year period includes a
capital return and an income return. For the International Growth Portfolio,
the capital return is +13.77% and the income return is +1.68%; for the U.S.
Growth Portfolio, the capital return is +9.49% and the income return is +2.04%.
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.
5
<PAGE> 8
TOTAL INVESTMENT RETURN
The following table illustrates the results of a single share investment in the
U.S. Growth Portfolio through August 31, 1993. During the period illustrated,
stock prices fluctuated and were higher at the end than at the beginning. These
results should not be considered as a representation of the dividend income or
capital gain or loss that may be realized from an investment made in the
Portfolio today.
U.S. GROWTH PORTFOLIO
<TABLE>
<CAPTION>
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> <C>
1969 $ 6.52 $ .36 $.039 $ 6.88 - 5.4% - 0.3%
1970 5.53 -- .065 5.88 -14.5 -11.4
1971 7.13 -- .065 7.68 +30.6 +25.4
1972 8.14 -- .095 8.89 +15.7 +15.5
1973 6.43 .133 .072 7.20 -19.0 - 3.3
1974 3.60 -- .098 4.09 -43.2 -28.0
1975 4.61 -- .039 5.31 +29.8 +26.1
1976 5.22 -- .059 6.09 +14.8 +23.1
1977 5.18 -- .091 6.15 + 1.0 - 1.8
1978 6.22 -- .104 7.54 +22.4 +12.4
1979 6.87 -- .15 8.53 +13.2 +11.6
1980 7.69 -- .221 9.86 +15.6 +18.2
1981 8.35 -- .234 11.02 +11.7 + 5.4
1982 7.94 -- .28 10.88 - 1.3 + 3.2
1983 12.02 -- .224 16.91 +55.5 +44.0
1984 10.29 1.861 .241 17.39 + 2.8 + 6.1
1985 11.57 .332 .312 20.88 +20.1 +18.2
1986 13.21 .82 .26 26.43 +26.6 +38.9
1987 12.74 1.94 .28 31.14 +17.8 +34.4
1988 7.17 3.26 .31 24.41 -21.6 -17.8
1989 10.01 -- .06 34.34 +40.7 +39.1
1990 10.38 -- .13 36.07 + 5.0 - 5.0
1991 13.69 -- .19 48.43 +34.3 +26.9
1992 14.71 -- .19 52.71 + 8.8 + 7.9
1993 14.71 .08 .18 53.60 + 1.7 +15.2
------ --------
TOTAL +637.2% +1,166.2%
AVERAGE ANNUAL RATE OF RETURN + 8.3% +10.7%
</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 $7.27 on August 31, 1968, 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 through August 31, 1993. During the period
illustrated, stock prices fluctuated and were higher at the end than at the
beginning. These results should not be considered as a representation of the
dividend income or capital gain or loss that may be realized from an investment
made in the Portfolio today.
INTERNATIONAL GROWTH PORTFOLIO
<TABLE>
<CAPTION>
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> <C>
Initial (9/81) $ 3.95 -- -- $ 3.95 -- --
1982 3.73 -- -- 3.73 - 5.7% - 4.6%
1983 5.86 -- $.10 6.02 + 61.4 + 31.2
1984 6.07 $ .12 .09 6.46 + 7.3 + 14.8
1985 6.57 .38 .11 7.61 + 17.8 + 32.5
1986 11.67 .65 .09 15.14 + 98.9 +104.0
1987 14.21 .80 .07 19.99 + 32.0 + 46.4
1988 10.45 2.43 .13 18.01 - 9.9 - 6.0
1989 11.61 1.07 .16 22.42 + 24.5 + 22.7
1990 11.81 .28 .15 23.60 + 5.2 - 11.6
1991 10.31 .68 .20 22.39 - 5.1 0.0
1992 10.15 .12 .19 22.72 + 1.5 + 0.8
1993 12.02 -- .21 27.50 + 21.1 + 27.2
------ ------
LIFETIME +595.3% +643.0%
AVERAGE ANNUAL RATE OF RETURN + 17.7% + 18.3%
</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
Fiscal 1993 was not a good period for traditional large-capitalization growth
stocks. Even in this dampened context, the U.S. Growth Portfolio lagged the
market average. We entered the year with some large holdings destined to be
bombs, and we under- owned some groups destined to be winners. Historically,
Lincoln has had infrequent poor years of performance (1975 and 1983), and 1993
was another one of them. We apologize to you for this atypical result, and will
do our very best to recoup both your relative returns and your confidence.
Two years ago, after a string of three successive relatively good years, I
commented about the "minor miracle of selectivity, a serendipitous result of
good research, good valuation work, and good luck." After a reasonably good
fiscal 1992 (the fifth consecutive fiscal year with returns better than the S&P
Growth Index), we received an unceremonious jolt in fiscal 1993 with a miracle
of poor selectivity. Three large commitments, Sallie Mae, Philip Morris, and
Merck, materially lagged the market, the first two principally after some
surprising news. Both of these holdings were eliminated, and Merck was
materially reduced.
Of the 15 largest holdings from one year ago, all of the remaining twelve
issues are again among the largest 15 holdings this year and are making
satisfactory earnings and stock market progress. So, there continues to be
strong continuity in the application of our investment philosophy.
The underweighted market sectors that performed well were technology and
communications. While we continue to be particular about the character and
valuations of the companies in which we invest, we are finding a few new ideas
in these areas. Smaller capitalization stocks, in which the U.S. Growth
Portfolio traditionally has no participation, also did well during the past
year.
In only two respects was there a significant change in industry
diversification. Health-care proportions were reduced from 21% of net assets to
12%, a heavier weighting than the S&P 500 but less than several
capitalization-weighted growth indexes. Short-term reserves rose 7%, to 14% of
net assets.
<TABLE>
<CAPTION>
Years
Company Business Held
<S> <C> <C> <C>
1. General Electric #1 diversified
manufacturer 5
2. Freddie Mac #2 mortgage
financing agency 5
3. Wal-Mart Stores #1 general
merchandise chain 6
4. McDonald's #1 fast food chain 5
5. Fannie Mae #1 mortgage
financing agency 2
6. American Int'l #1 U.S. overseas
Group insurer 6
7. PepsiCo #1 snack food,
#2 soft drink company 6
8. Pfizer A leading pharmaceutical
company 2
9. Automatic Data #1 payroll service
Processing company 5
10. Toys "R" Us #1 toy retailer 6
</TABLE>
For the market as a whole, valuations are buttressed by historically low
interest rates and a still unrealized surge in corporate profits. But with the
current dividend yield, a skimpy 2.7%, and price-to-earnings multiples toward
the high side, a modicum of caution is suggested.
To assure you that no decision is obvious, pulling the other way--for us
anyway--are the historically low valuations of growth stocks compared to the
market averages, a 5% to 6% discount for the U.S. Growth Portfolio. This is
amazing to us, especially considering the recent change in income tax
legislation which again favors capital gains as a source of after-tax income.
Should the market generally, or the growth sector specifically, lag moderately
from here, we would likely begin to recommit cash reserves.
Respectfully,
J. Parker Hall III, President
Lincoln Capital Management Company
September 3, 1993
8
<PAGE> 11
REPORT FROM SCHRODER CAPITAL MANAGEMENT INTERNATIONAL
Vanguard International Growth Portfolio earned a total return of +21% over the
past year, in line with the returns of other international funds but below the
MSCI-EAFE Index, which rose +27% over the period. (Please see Chairman's letter
for more details.) The Japanese stock market represents one-half of the EAFE
Index and rose by +45% in U.S. dollar terms over the year. Your Portfolio
held, on average, 27% of net assets in Japanese equities. This underweighting,
which I believe to be correct in the long term, more than explains our
shortfall against the Index.
In six countries, our holdings produced a higher return than that of the
Japanese market, namely in Brazil, Indonesia, Italy, Malaysia, New Zealand, and
Singapore. Together, these countries made up 14% of average net assets
throughout the year. They illustrate the increased diversity of countries in
the Portfolio as more and more governments welcome foreign investment capital
to help regenerate their economies. So-called emerging markets, which might
broadly be defined as markets that have not yet been recognized as sufficiently
developed to be included in international indexes like the EAFE Index, made up
9% of net assets at fiscal year end.
Six months ago, I emphasized how the economies of major regions of the
world were at different stages in their respective economic cycles. Since then,
little has occurred to change this perception. My daily newspaper recently
described the current world situation as "slow-motion economics," an apposite
phrase for the situation both in the United States and in Europe and Japan.
However, it is not a description that covers much of Southeast Asia nor some of
Latin America, where the pace of change is rapid. Malaysia's long-term economic
plan calls for 7% per annum growth through the year 2020. The Chinese economy
may well exceed that growth rate over the next ten years. We have 19% of net
assets invested in Southeast Asia and a further 4% in Latin America.
Japan is one of the engines behind the growth of the Asian economies, as
the strength of the yen forces Japanese companies to shift more and more of
their manufacturing to neighboring countries where labor costs less.
Accordingly, many Japanese companies are becoming Japanese-based
multinationals. (Mabuchi Motor, a maker of electric micro-motors, 80% of which
are now produced outside Japan, is an extreme example in your Portfolio.)
Thirteen percent of the Portfolio's net assets is invested in Japanese
manufacturing companies; these have been hurt by the rise of the yen, but I do
not underestimate both their ability to adjust and their sensitivity to a
recovery in the Japanese economy. This recovery is fervently desired by
politicians all around the world. Indeed, the Japanese government has already
introduced two massive fiscal boosts to the economy and a third package will
follow, if needed, to stimulate the Japanese consumer into spending more. Ten
percent of Portfolio net assets is waiting to benefit directly from these
fiscal measures, including our largest holding, Ito-Yokado, Japan's largest
supermarket chain.
Continental Europe is described by bond investors as the last major
interest rate play in the world. I agree and, of the 17% of the Portfolio that
we have invested in the remnants of the European exchange rate mechanism
(Belgium, France, Germany, and the Netherlands), about one-half is in financial
stocks that will benefit directly from lower interest rates. ING, a Dutch bank
and insurance group, is the largest of these positions. Italy will also benefit
greatly from lower European interest rates, particularly our two largest
holdings there, SIP and STET, which effectively are Italy's telecommunications
companies.
Finally, 19% of net assets is invested in the UK and Switzerland, where
interest rates have already fallen significantly. Our emphasis here is on
seasoned growth stocks, many of which now look attractively valued relative to
the currently fashionable recovery areas of the market.
Respectfully,
Richard R. Foulkes
Schroder Capital Management International
September 6, 1993
9
<PAGE> 12
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS
August 31, 1993
<TABLE>
<CAPTION>
MARKET
VALUE
U.S. GROWTH PORTFOLIO SHARES (000)+
------ ------
<S> <C> <C>
COMMON STOCKS (86.4%)
RETAIL AND DISTRIBUTION (9.2%)
* Toys R Us, Inc. 1,610,000 $ 58,765
Wal-Mart Stores, Inc. 3,766,000 96,504
Walgreen Co. 623,000 24,219
--------
GROUP TOTAL 179,488
--------
CONSUMER (22.1%)
Carnival Cruise Lines, Inc. 331,000 13,861
Circus Circus Enterprises,
Inc. 321,000 13,923
Duracell International, Inc. 957,000 30,504
General Mills, Inc. 548,000 34,250
Gillette Co. 1,064,000 56,791
McDonald's Corp. 1,785,000 95,944
PepsiCo, Inc. 2,244,000 88,357
Procter & Gamble Co. 1,011,000 48,907
Promus Cos. Inc. 134,000 9,397
Rubbermaid, Inc. 500,000 16,375
Unilever NV 224,000 24,192
--------
GROUP TOTAL 432,501
--------
TECHNOLOGY (2.0%)
AMP, Inc. 215,000 13,921
* Microsoft Corp. 186,000 13,950
Novell, Inc. 552,000 10,764
--------
GROUP TOTAL 38,635
--------
HEALTH CARE (12.4%)
Abbott Laboratories, Inc. 1,048,000 27,248
Baxter International, Inc. 1,470,000 39,323
Forest Laboratories, Inc. 157,000 5,397
IMCERA Group, Inc. 666,000 20,063
Medtronic, Inc. 79,000 5,076
Merck & Co., Inc. 590,000 18,806
National Health Laboratories
Inc. 633,000 10,365
Pfizer, Inc. 1,258,000 79,254
Warner-Lambert Co. 289,000 20,302
Wellcome PLC ADR 1,563,000 17,388
--------
GROUP TOTAL 243,222
--------
FINANCE AND INSURANCE (19.3%)
Ambac, Inc. 143,000 6,685
American International Group,
Inc. 916,500 88,786
Chemical Banking Corp. 1,386,000 56,306
Countrywide Credit Industries,
Inc. 470,000 13,747
Federal Home Loan Mortgage
Corp. 1,866,000 98,665
Federal National Mortgage
Assn. 1,198,000 95,690
Norwest Corp. 242,000 6,413
Progressive Corp. of Ohio 166,000 6,101
* TIG Holdings, Inc. 203,000 5,278
--------
GROUP TOTAL 377,671
--------
MEDIA (2.3%)
Knight-Ridder, Inc. 224,000 12,320
Reuters Holdings PLC ADR 469,000 32,654
--------
GROUP TOTAL 44,974
--------
OTHER (19.1%)
Automatic Data Processing,
Inc. 1,603,000 78,146
First Data Corp. 311,000 11,546
First Financial Management 380,000 17,623
General Electric Co. 1,104,000 108,468
General Motors Corp. Class E 986,000 31,429
Illinois Tool Works, Inc. 269,000 10,827
Minnesota Mining &
Manufacturing Co. 180,000 19,733
Morton International, Inc. 253,000 21,695
* Renaissance Energy Ltd. 202,000 5,205
York International Corp. 255,000 9,435
WMX Technologies Inc. 1,780,000 58,518
--------
GROUP TOTAL 372,625
--------
TOTAL COMMON STOCKS
(Cost $1,488,632) 1,689,116
TEMPORARY CASH INVESTMENT (13.7%)
Face
Amount
(000)
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 3.31%, 9/1/93
(Cost $266,558) $266,558 266,558
TOTAL INVESTMENTS (100.1%)
(Cost $1,755,190) 1,955,674
OTHER ASSETS AND LIABILITIES (-.1%)
Other Assets--Notes C and E 54,610
Liabilities--Note E (56,143)
--------
(1,533)
NET ASSETS (100%)
Applicable to 132,837,025 outstanding
$.001 par value shares
(authorized 200,000,000 shares) $1,954,141
----------
NET ASSET VALUE PER SHARE $14.71
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Securities.
10
<PAGE> 13
AT AUGUST 31, 1993 NET ASSETS CONSISTED OF:
<TABLE>
<CAPTION>
Amount Per
(000) Share
---------- -------
<S> <C> <C>
Paid in Capital--Note G $1,757,772 $13.23
Undistributed Net
Investment Income--Note G 17,470 .13
Accumulated Net
Realized Losses--Note G (21,585) (.16)
Unrealized Appreciation
of Investments 200,484 1.51
NET ASSETS $1,954,141 $14.71
</TABLE>
<TABLE>
<CAPTION>
Market
Value
INTERNATIONAL GROWTH PORTFOLIO Shares (000)+
----------- ---------
COMMON STOCKS (94.4%)
<S> <C> <C>
ARGENTINA (.2%)
* YPF Sociedad ADS 125,000 $ 2,984
---------
AUSTRALIA (2.4%)
Australia & New Zealand Banking 1,749,707 5,121
MIM Holdings Ltd. 4,450,926 6,632
News Corp. Ltd. 2,000,000 13,398
Western Mining Corp. Ltd. 1,514,937 5,745
Woodside Petroleum Ltd. 1,938,000 4,358
---------
GROUP TOTAL 35,254
---------
BELGIUM (.6%)
* Generale de Banque 27,645 6,607
Sibeka 11,000 2,232
---------
GROUP TOTAL 8,839
---------
BRAZIL (.5%)
* Siderurgica Nacional (csn) 40,200,000 861
Telebras Pfd. BCR 1 184,000,000 6,010
---------
GROUP TOTAL 6,871
---------
CHILE (.4%)
Compania de Telefonos de Chile ADR 80,000 6,150
---------
FRANCE (8.2%)
Alcatel Alsthom 30,775 4,030
Accor 56,450 6,505
* Assurances Generale De France (AGF) 27,450 3,060
Axa 19,306 5,362
Bollore Technologies 54,188 4,347
Bongrain 2,480 1,235
Canal Plus 27,850 6,190
Cardif 48,870 8,677
Credit Locale de France 33,000 2,441
Degremont 29,750 2,793
Docks de France 63,675 6,468
Generale Des Eaux 25,000 10,935
LVMH 14,000 10,335
Michelin B (Registered) 110,370 3,693
Paribas 100,000 8,809
Primagaz 24,938 3,738
* Primagaz Warrants Exp.6/30/95 1,438 33
Rhone-Poulenc 200,000 5,634
Thomson--C.S.F. 150,000 4,738
Total 328,470 17,889
Valeo 22,838 3,794
---------
GROUP TOTAL 120,706
---------
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
---------- ----------
<S> <C> <C>
GERMANY (2.3%)
Deutsche Pfandbrief & Hypobank AG 22,500 $ 9,646
Frederick Grohe AG Pfd. 18,747 3,795
Krones AG Pfd. 3,247 4,930
* Krones AG Warrants Exp. 3/2/94 2,550 2,695
Muenchener Ruckvers AG 3,885 7,911
Schering AG 6,160 3,612
Signalbau Huber AG Pfd. 7,500 1,438
---------
GROUP TOTAL 34,027
---------
HONG KONG (6.7%)
Amoy Properties 5,500,000 5,608
Cheung Kong Holdings Ltd. 2,350,000 8,553
Hong Kong Electric Holdings 4,490,000 11,764
HSBC Holding PLC 1,280,000 13,877
Hutchinson Whampoa Ltd. 4,257,000 12,912
Jardine Matheson Holdings 600,000 4,763
Mandarin Oriental International Ltd. 3,350,000 3,632
Sun Hung Kai Properties Ltd. 2,474,000 12,293
Swire Pacific Ltd. 2,880,000 14,404
Wharf Holdings Ltd. 4,200,000 11,113
---------
GROUP TOTAL 98,919
---------
INDONESIA (.9%)
Bank Bali 1,500,000 4,284
Indocement 321,000 2,332
Kalbe Farma 428,000 2,750
Unilever Indonesia 284,051 4,326
---------
GROUP TOTAL 13,692
---------
ITALY (7.4%)
Assicurazioni Generali 605,500 15,833
Fiat SPA 1,021,000 4,626
Parmalat SPA 11,481,600 14,756
* Parmalat SPA Warrants Exp. 7/17/99 1,810,200 1,195
SIP 18,403,545 41,556
STET-Societa Finanziaria Tele-Fonica 11,000,000 30,735
---------
GROUP TOTAL 108,701
---------
JAPAN (24.8%)
Bridgestone Corp. 222,000 2,778
Canon 315,000 4,302
Daiwa House Industries 750,000 12,393
Fanuc Co. Ltd. 100,000 3,792
Hirose Electric Co. Ltd. 240,000 11,989
Hitachi Ltd. 2,306,000 18,589
Honda Motor Co. Ltd. 900,000 12,636
Ito-Yokado Co. 1,050,000 47,837
Japan Air Terminal Co. Ltd. 160,000 1,742
* Kao Corp. Warrants Exp. 11/16/94 2,600 2,064
Kyocera Corp. 174,000 10,553
Mabuchi Motors 220,000 13,070
Makita Corp. 600,000 10,143
Matsushita Electric Industrial Co. Ltd. 2,150,000 29,159
Murata Manufacturing Co. Ltd. 720,000 22,212
The Nomura Securities Co. Ltd. 550,000 11,504
Nippon Television Network 30,000 5,989
Ricoh Co. 500,000 3,835
Sankyo Co., Ltd. 400,000 9,819
Seino Transportation Co. Ltd. 375,000 6,375
Sekisui House Ltd. 3,000,000 42,120
Shin-Etsu Chemical Co. Ltd. 1,117,000 19,097
Showa Shell Sekiyu 1,100,000 13,028
Tokio Marine & Fire Insurance Ltd. 500,000 6,495
Tokyo Ohka Kogyo Co. Ltd. 349,000 12,500
Tokyo Electron Inc. 350,000 9,761
Toyota Motor Corp. 800,000 12,913
Yaohan Japan Corp. 402,450 5,958
Yokohama Reito 211,000 3,345
---------
GROUP TOTAL 365,998
---------
KOREA (2.1%)
Daewoo Securities 240,000 5,963
Hanil Bank 309,000 3,896
Hanshin Securities 125,000 2,658
Hyundai Engineering and Construction 182,000 4,072
* Korea Electric Power Corp. 222,000 4,528
* Samsung Electronics Co. Ltd. 108,000 3,321
Shinhan Bank 393,000 5,975
---------
GROUP TOTAL 30,413
---------
MALAYSIA (4.5%)
Genting Bhd. 2,480,000 22,101
Malayan Banking Bhd. 2,500,000 15,409
Sime Darby Bhd. 2,112,000 4,519
Tan Chong Motor Holdings Bhd. 2,266,000 2,393
Tanjong PLC 700,000 4,095
Telekom Malaysian Bhd. 2,713,000 17,574
---------
GROUP TOTAL 66,091
---------
MEXICO (3.3%)
Apasco 'A' 1,066,000 6,562
Cifra 'C' SA 4,309,000 10,083
Fomento Economico Mexicano SA 570,000 2,850
Grupo Carso 340,000 2,290
* Grupo Carso ADR 162,000 2,187
Telefonos de Mexico SA ADR 292,800 15,518
Tolmex 'B' SA 904,000 9,458
---------
GROUP TOTAL 48,948
---------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
--------- ---------
<S> <C> <C>
NETHERLANDS (5.7%)
ABN AMRO Holding NV 375,340 $13,540
Bolswessanen 287,990 6,707
Borsumij Wehry 75,000 4,218
Getronics NV 548,062 11,281
Internatio-Muller 79,300 3,071
International Nederlanden Groep 628,850 24,920
* International Nederlanden Groep (Dep. Rect.) 30,800 132
Otra NV 76,750 11,116
Sphinx (Kon) NV 354,144 9,488
---------
GROUP TOTAL 84,473
---------
NEW ZEALAND (.2%)
Fletcher Challenge 1,500,000 2,980
---------
PHILIPPINES (.6%)
Ayala Land Inc. 'B' 3,386,400 3,105
Meralco GDR 84,000 3,192
Philippine Long Distance Telephone 60,000 2,600
---------
GROUP TOTAL 8,897
---------
SINGAPORE (2.7%)
Development Bank of Singapore 1,245,000 12,807
Keppel Corp. 1,896,000 9,988
Overseas Chinese Banking Corp. 1,023,000 8,865
Singapore Press Holdings Ltd. 623,700 8,943
---------
GROUP TOTAL 40,603
---------
SWEDEN (1.2%)
Astra B AB 457,900 9,026
* SKF B AB 700,000 9,256
---------
GROUP TOTAL 18,282
---------
SWITZERLAND (6.1%)
Alusuisse-Lonza Holding (Registered) AG 26,500 9,732
Nestle (Registered) SA 37,440 27,982
Roche Holdings Ltd. CS 3,180 11,098
* SMH (Bearer) 18,370 14,636
Sandoz AG (Ptg. Ctf.) 7,000 16,571
Swiss Reinsurance (Ptg. Ctf.) 22,000 10,312
---------
GROUP TOTAL 90,331
---------
TAIWAN (.1%)
President Enterprises 85,000 1,275
---------
THAILAND (.9%)
International Cosmetics Corp. 21,700 879
Land & House 479,000 5,640
Post Publishing 143,000 1,263
Siam Commercial Bank Ltd. 560,000 3,252
Sri Thai Superware 154,000 1,103
Thai President Foods 134,000 1,642
---------
GROUP TOTAL 13,779
---------
UNITED KINGDOM (12.6%)
Argyll Group PLC 1,700,000 8,643
Barclays PLC 1,980,000 14,731
Bowthorpe Holdings PLC 420,000 2,317
British Airways PLC 850,000 4,562
British Land Co. PLC 2,000,000 11,421
Cable and Wireless PLC 1,294,000 16,631
Enterprise Oil PLC 610,000 4,375
General Accident PLC 500,000 5,077
Glaxo Holdings PLC 1,100,000 9,742
Guardian Royal Exchange PLC 2,830,000 9,283
Hartstone Group PLC 790,400 707
Kingfisher PLC 1,200,000 12,131
Legal & General Group PLC 1,418,700 10,259
National Westminster Bank PLC 1,780,000 13,110
National Power PLC 2,600,000 14,188
Peninsular & Oriental PLC 853,333 8,245
Rolls Royce PLC 4,350,000 10,215
Shell Transport & Trading PLC 1,012,000 10,155
Suter PLC 1,050,000 2,802
* Suter PLC Warrants Exp. 1996/98 105,000 70
Vodafone Group PLC 1,000,000 8,513
Wellcome PLC 750,000 8,297
---------
GROUP TOTAL 185,474
---------
TOTAL COMMON STOCKS
(Cost $1,145,614) 1,393,687
CONVERTIBLE BOND
Face
Amount
(000)
--------
HONG KONG
Dairy Farm International
Holdings Ltd. 6.5%, 5/10/49
(Cost $437) $437 605
BONDS (.2%)
KOREA
Daewoo Corp. 3.25%, 12/31/97 1,500 1,329
Dong AH Construction 3.25%, 12/31/97 1,600 1,320
-----
TOTAL BONDS (Cost $2,680) 2,649
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
TEMPORARY CASH INVESTMENT (5.9%)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
---------- -----------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 3.31%, 9/1/93 (Cost $87,583) $87,583 $ 87,583
TOTAL INVESTMENTS (100.5%)
(Cost $1,236,314) 1,484,524
OTHER ASSETS AND LIABILITIES (-.5%)
Other Assets--Notes C and E 168,518
Liabilities--Note E (175,828)
---------
(7,310)
NET ASSETS (100%)
Applicable to 122,856,857 outstanding
$.001 par value shares
(authorized 150,000,000 shares) $1,477,214
----------
NET ASSET VALUE PER SHARE $12.02
+ See Note A to Financial Statements.
* Non-Income Producing Securities.
ADR--American Depository Receipt
ADS--American Depository Share
(Dep. Rect.)--Depository Receipt
GDR--Global Depository Receipt
(Ptg. Ctf.)--Participating Certficiate
AT AUGUST 31, 1993 NET ASSETS CONSISTED OF:
Amount Per
(000) Share
---------- --------
Paid in Capital--Note G $1,264,321 $10.29
Undistributed Net Investment Income--Note G 13,695 .11
Accumulated Net Realized Losses--Note G (47,844) (.39)
Unrealized Appreciation of Investments 247,042 2.01
---------- --------
NET ASSETS $1,477,214 $12.02
</TABLE>
14
<PAGE> 17
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
U.S. GROWTH INTERNATIONAL
PORTFOLIO GROWTH PORTFOLIO
Year Ended Year Ended
August 31, 1993 August 31, 1993
(000) (000)
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends(1) . . . . . . . . . . . . . . . . . . $28,135 $17,586
Interest . . . . . . . . . . . . . . . . . . . . 7,711 1,431
------- -------
Total Income . . . . . . . . . . . . . . . . 35,846 19,017
------- -------
EXPENSES
Investment Advisory Fee--Note B
Basic Fee . . . . . . . . . . . . . . . . . . $3,655 $1,851
Performance Adjustment . . . . . . . . . . . -- 3,655 (89) 1,762
----- -----
The Vanguard Group--Note C
Management & Administrative . . . . . . . . . 4,350 3,185
Marketing and Distribution . . . . . . . . . 497 4,847 245 3,430
----- -----
Taxes (other than income taxes)--Note A . . . . 140 80
Custodians' Fees . . . . . . . . . . . . . . . . 12 600
Auditing Fees . . . . . . . . . . . . . . . . . 9 8
Shareholders' Reports . . . . . . . . . . . . . 118 94
Annual Meeting and Proxy Costs . . . . . . . . . 35 32
Directors' Fees and Expenses . . . . . . . . . . 6 3
------- -------
Total Expenses . . . . . . . . . . . . . . 8,822 6,009
------- -------
Net Investment Income . . . . . . . . . 27,024 13,008
------- -------
REALIZED NET GAIN (LOSS)--Note D
Investment Securities Sold . . . . . . . . . . . (20,430) (6,749)
Forward Currency Contracts . . . . . . . . . . . -- 5,644
------- -------
Realized Net Loss . . . . . . . . . . . (20,430) (1,105)
------- -------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)--Notes D and E . . . . . . . . . .
Investment Securities . . . . . . . . . . . . . 10,429 211,825
Forward Currency Contracts . . . . . . . . . . . -- (1,168)
------- -------
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . 10,429 210,657
------- -------
Net Increase in Net Assets
Resulting from Operations . . . . . . $17,023 $222,560
------- -------
</TABLE>
(1) Dividends for the International Growth Portfolio are net of foreign
withholding taxes of $2,549,000.
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, 1993 August 31, 1992 AUGUST 31, 1993 August 31, 1992
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . $ 27,024 $ 16,221 $ 13,008 $ 17,955
Realized Net Gain (Loss)--Note D . . . . (20,430) 19,704 (1,105) (34,496)
Change in Unrealized Appreciation
(Depreciation)--Note D . . . . . . . 10,429 42,937 210,657 27,966
-------- -------- --------- --------
Net Increase in Net Assets
Resulting from Operations . . . 17,023 78,862 222,560 11,425
-------- -------- --------- --------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . (20,757) (11,905) (19,292) (15,760)
Realized Net Gain . . . . . . . . . . . (9,225) -- -- (9,954)
-------- -------- --------- --------
Total Distributions . . . . . . . . (29,982) (11,905) (19,292) (25,714)
-------- -------- --------- --------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . 706,280 610,026 304,728 215,379
--In Lieu of Cash Distributions 28,688 10,888 17,834 23,76
--Exchange . . . . . . . . . . 365,093 337,864 386,667 128,026
Redeemed --Regular . . . . . . . . . . . (196,210) (126,586) (201,879) (122,405)
--Exchange . . . . . . . . . . (377,448) (205,936) (152,286) (157,523)
-------- -------- --------- --------
Net Increase from
Capital Share Transactions . . . . 526,403 626,256 355,064 87,245
-------- -------- --------- --------
Total Increase . . . . . . . . . . . 513,444 693,213 558,332 72,956
-------- -------- --------- --------
NET ASSETS
Beginning of Year . . . . . . . . . . 1,440,697 747,484 918,882 845,926
--------- -------- --------- --------
End of Year (3) . . . . . . . . . . . $1,954,141 $1,440,697 $1,477,214 $918,882
--------- -------- --------- --------
(1) Distributions Per Share
Net Investment Income . . . . . . . $.18 $.19 $.21 $.19
Realized Net Gain . . . . . . . . . $.08 -- -- $.12
-------- -------- --------- --------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . 71,904 65,887 65,055 33,637
Issued in Lieu of Cash Distributions 1,860 734 1,889 2,372
Redeemed . . . . . . . . . . . . . (38,898) (23,246) (34,621) (27,517)
-------- -------- --------- --------
34,866 43,375 32,323 8,492
-------- -------- --------- --------
(3) Undistributed Net
Investment Income . . . . . . . . . $ 17,470 $ 12,275 $ 13,695 $ 22,156
-------- -------- --------- --------
</TABLE>
16
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
U.S. GROWTH PORTFOLIO
Year Ended August 31,
For a Share Outstanding Throughout Each Year 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . . $14.71 $13.69 $10.38 $10.01 $7.17
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . .21 .19 .20 .14 .11
Net Realized and Unrealized Gain (Loss) on Investments . . . .05 1.02 3.30 .36 2.79
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . . . . . .26 1.21 3.50 .50 2.90
------- ------ ------ ------ ------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . (.18) (.19) (.19) (.13) (.06)
Distributions from Realized Capital Gains . . . . . . . . (.08) -- -- -- --
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . (.26) (.19) (.19) (.13) (.06)
------- ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . $14.71 $14.71 $13.69 $10.38 $10.01
------- ------ ------ ------ ------
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . +1.69% +8.83% +34.28% +5.03% +40.72%
------- ------ ------ ------ ------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) . . . . . . . . . . . . . $1,954 $1,441 $747 $339 $184
Ratio of Expenses to Average Net Assets . . . . . . . . . . . .49% .49% .56% .74% .95%
Ratio of Net Investment Income to Average Net Assets . . . . 1.50% 1.52% 1.82% 1.77% 1.44%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . 37% 24% 30% 49% 48%
------- ------ ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
International Growth Portfolio
Year Ended August 31,
For a Share Outstanding Throughout Each Year 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . . $10.15 $10.31 $11.81 $11.61 $10.45
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . .12 .20 .18 .32 .13
Net Realized and Unrealized Gain (Loss) on Investments . . 1.96 (.05) (.80) .31 2.26
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . . . 2.08 .15 (0.62) .63 2.39
------- ------ ------ ------ ------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . (.21) (.19) (.20) (.15) (.16)
Distributions from Realized Capital Gains . . . . . . . . -- (.12) (.68) (.28) (1.07)
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . (.21) (.31) (.88) (.43) (1.23)
------- ------ ------ ------ ------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . . $12.02 $10.15 $10.31 $11.81 $11.61
------- ------ ------ ------ ------
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . +21.06% +1.49% -5.11% +5.25% +24.49%
------- ------ ------ ------ ------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) . . . . . . . . . . . . . $1,477 $919 $846 $796 $550
Ratio of Expenses to Average Net Assets . . . . . . . . . . . .59% .58% .67% .68% .64%
Ratio of Net Investment Income to Average Net Assets . . . . 1.27% 2.04% 1.80% 3.01% 1.27%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . 51% 58% 49% 45% 50%
------- ------ ------ ------ ------
</TABLE>
17
<PAGE> 20
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 and 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 the
agreements 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 and 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.
18
<PAGE> 21
B. U.S. GROWTH PORTFOLIO: Under the terms of a contract which expires March
31, 1995, the Fund pays Lincoln Capital Management Co. an investment advisory
fee calculated at an annual percentage rate of the average net assets of the
U.S. Growth Portfolio. For the year ended August 31, 1993, the investment
advisory fee represented an effective annual rate of .20 of 1% of the
Portfolio's average net assets after giving effect to a fee waiver of $578,000
(.03 of 1%).
INTERNATIONAL GROWTH PORTFOLIO: Under the terms of a contract which expires
March 31, 1995, the Fund pays Schroder Capital Management International an
investment advisory fee calculated at an annual percentage rate of the average
net assets of the International Growth Portfolio. 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, 1993, the investment advisory fee represented an
effective annual base rate of .18 of 1% of the Portfolio's average net assets
before a decrease of $89,000 (.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, 1993, the Fund had contributed capital of $555,000 to Vanguard
(included in Other Assets), representing 2.8% of Vanguard's capitalization. The
Fund's directors and officers are also directors and officers of Vanguard.
D. During the year ended August 31, 1993, purchases and sales of investment
securities other than U.S. Government securities and temporary cash investments
were as follows:
<TABLE>
<CAPTION>
(000)
Portfolio Purchases Sales
<S> <C> <C>
U.S. GROWTH $942,697 $584,689
INTERNATIONAL GROWTH 856,391 506,975
</TABLE>
At August 31, 1993, the Fund had available realized capital losses 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 $20,427
INTERNATIONAL GROWTH 2001 45,191
</TABLE>
At August 31, 1993, unrealized appreciation (depreciation) 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 $251,635 ($51,151) $200,484
INTERNATIONAL GROWTH 276,201 (27,991) 248,210
</TABLE>
E. Under the terms of open forward currency exchange contracts at August 31,
1993, the International Growth Portfolio was obligated to deliver foreign
currencies in exchange for U.S. dollars as follows:
<TABLE>
<CAPTION>
(000)
Contract Foreign U.S.
Date Currency Dollars
<S> <C> <C>
9/24/93 FRENCH FRANCS 300,000 $52,233
10/14/93 SWISS FRANCS 40,000 26,338
10/14/93 NETHERLANDS GUILDERS 100,000 51,130
</TABLE>
Net unrealized depreciation related to open forward currency exchange contracts
at August 31, 1993 was $1,168,000.
19
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS (continued)
F. The market values of securities on loan to broker/dealers at August 31,
1993, and the cash collateral received with respect to such loans, were:
<TABLE>
<CAPTION>
(000)
Market Value Cash
of Loaned Collateral
Portfolio Securities Received
<S> <C> <C>
U.S. GROWTH $ 32,654 $ 33,768
INTERNATIONAL GROWTH 116,225 125,709
</TABLE>
G. Effective in 1993, generally accepted accounting principles require that
differences between undistributed net investment income or accumulated net
realized gains/losses for financial reporting and tax purposes, if permanent,
be reclassified to/from paid in capital. In connection with the adoption of
this accounting method, the following prior years' permanent book/tax
differences have been reclassified.
<TABLE>
<CAPTION>
Increase
(Decrease)
Paid in Capital
Portfolio (000)
<S> <C>
U.S. GROWTH
UNDISTRIBUTED NET INVESTMENT INCOME $1,072
ACCUMULATED NET REALIZED LOSSES (6,122)
INTERNATIONAL GROWTH
UNDISTRIBUTED NET INVESTMENT INCOME 2,177
ACCUMULATED NET REALIZED LOSSES 960
</TABLE>
These reclassifications have no effect on net assets or net asset values per
share.
20
<PAGE> 23
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 at August 31, 1993, 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
(hereinafter 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
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
September 27, 1993
21
<PAGE> 24
SPECIAL TAX INFORMATION
SPECIAL 1993 TAX INFORMATION (UNAUDITED)
FOR VANGUARD U.S. GROWTH PORTFOLIO
Corporate shareholders should note that for the fiscal year ended August 31,
1993, 90.7% of the dividend income qualifies for the intercorporate dividends
received deduction.
22
<PAGE> 25
SPECIAL 1993 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, 1993. In accordance with
current tax laws, the Foreign Income and Foreign Tax per share (for a share
outstanding on 8/31/93) is as follows:
<TABLE>
<CAPTION>
FOREIGN
COUNTRY DIVIDENDS TAX
------- --------- --------
<S> <C> <C>
Argentina .0000 .0000
Australia .0051 .0008
Belgium .0033 .0005
Brazil .0002 .0000
Chile .0014 .0004
France .0104 .0000
Germany .0032 .0003
Hong Kong .0229 .0000
Indonesia .0012 .0002
Italy .0082 .0023
Japan .0217 .0033
Korea .0011 .0001
Malaysia .0077 .0027
Mexico .0058 .0009
Netherlands .0161 .0021
Philippines .0007 .0001
Singapore .0031 .0005
Spain .0054 .0008
Sweden .0005 .0001
Switzerland .0092 .0014
Thailand .0017 .0003
United Kingdom .0361 .0054
</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 1993.
Accordingly, shareholders will receive more detailed information along with
their Form 1099-DIV in January 1994.
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. and Immune Response Corporation; Trustee of
the Universal Health Realty Income Trust.
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 Dayton
Hudson Corporation, American Express Bank Ltd., and The St. Paul Companies,
Inc. Burton G. Malkiel, Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., and The Southern New England Telephone
Company.
ALFRED M. RANKIN, JR., President and Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO Industries, The BFGoodrich 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 Director of Rohm & Haas Company; Director of
Cummins Engine Company and Vanderbilt University; Trustee of 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
Senior Vice President
Planning & Development
JAMES H. GATELY
Senior Vice President
Institutional
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
VINCENT S. MCCORMACK
Senior Vice President
Operations
RALPH K. PACKARD
Senior Vice President
Chief Financial Officer
24
<PAGE> 27
(Continued from inside front cover)
toward those of the 1970s. However, the current level of
inflation suggests that future real returns may prove to be
satisfactory. Looking forward, the main risks to the investor are
two: (1) that yields on financial assets will rise sharply,
reducing the prices of stocks and bonds alike; and (2) that
inflation, presently at moderate levels, will accelerate.
SOME COURSES OF ACTION
What, if any, present action should be taken by investors to deal
with these two major risks? Should your allocation of assets
among stock funds, bond funds, and money market funds be
adjusted? Here are some reasonable courses of action to consider:
* For long-term investors who have built a substantial
balanced portfolio of stock, bond, and money market funds,
stay the course. Even if withdrawing from the stock market
proves to be justified, the next decision--when to return--
will one day be required. "Being right twice" is no mean
challenge.
* For long-term investors gradually accumulating assets for,
say, retirement, stay your present course. Continue to
invest regularly. By doing so, you buy more shares of a
mutual fund when its price falls, and fewer shares when its
price rises, virtually assuring a reasonable average cost.
* For risk-averse investors who are highly confident that
stock prices are "too high," make only marginal--not "all or
nothing"--changes in your portfolio balance. Given the
perils of predicting the future, any changes should be
limited to, say, 15 percentage points. That is, if your
normal portfolio allocation is 60% in stock funds, it might
be reduced to 45%; if 85%, to 70%.
* For investors who simply must have more income, never lose
sight of the added principal risk involved in shifting from
money market funds to bond funds. Long-term bond funds
provide a generous and durable income stream, but their
prices are highly volatile. Short-term and intermediate-term
bond funds offer a "middle way" of increasing income with
more modest risk to principal.
* For investors who are tempted to find an "easy way" to
higher returns, never forget that risk and reward go hand in
hand. Precipitously replacing certificates of deposit with
broad-based common stock funds verges on the irrational.
Funds investing in other securities markets--emerging
nations, international stocks and bonds, and small U.S.
companies--carry their own special risks. Generally, limit
such alternative investments to, say, 20% of your total
portfolio.
For all investors, be prepared for sharp interim swings in stock
and bond prices. The central tenet of investing is "prices
fluctuate," and sensible long-term investors simply must take
such fluctuations in their stride. Successful investing is as
much a function of your own discipline and equanimity as it is of
the returns available in the securities markets.
THREE ESSENTIAL PRINCIPLES
As we confront the brave new world of investing that may well lie
ahead in the coming decade--and it is important to think in
decade-length terms--we would underscore three caveats:
1. Have "rational expectations" for future returns. At prices
prevailing today, it seems highly unlikely that the returns
enjoyed by investors in the past decade will be repeated in
the coming decade.
2. Maintain a balanced portfolio consisting of stock, bond, and
money market funds. Each asset class has its own risk and
reward characteristics. By allocating your resources among
the three asset classes according to your own requirements,
you can build a portfolio providing appropriate elements of
capital appreciation, capital conservation, and current
income.
3. In balancing risk against reward, be sure to consider cost.
Many mutual funds carry hefty sales charges or high expense
ratios, or both. Other factors held equal, expenses reduce
returns, dollar for dollar. Put another way, high-cost funds
must select investments with higher prospective gross
returns--which entail higher risks--to match the net returns
earned by low-cost funds.
This brief Annual Report essay can provide only an elementary
look at the challenges investors face today. History can give us
perspective, but it cannot give us performance. Famed British
economist Lord Keynes had it right when he said, "the inevitable
never happens. It is the unexpected always."
<PAGE> 28
THE VANGUARD FAMILY OF FUNDS
<TABLE>
<S> <C>
AGGRESSIVE GROWTH FUNDS BALANCED FUNDS
Vanguard Explorer Fund Vanguard Asset Allocation Fund
Vanguard Small Capitalization Stock Fund Vanguard Balanced Index Fund
Vanguard Specialized Portfolios Vanguard STAR Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard International Equity Index Fund INCOME FUNDS
Vanguard International Growth Portfolio Vanguard Admiral Funds
Vanguard/Morgan Growth Fund Vanguard Bond Index Fund
Vanguard/PRIMECAP Fund Vanguard Fixed Income Securities Fund
Vanguard U.S. Growth Portfolio Vanguard Preferred Stock Fund
Vanguard/Wellesley Income Fund
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund TAX-FREE INCOME FUNDS
Vanguard Equity Income Fund Vanguard Municipal Bond Fund
Vanguard Index Trust Vanguard State Tax-Free Funds
Vanguard Quantitative Portfolios (CA, FL, NJ, NY, OH, PA)
Vanguard/Trustees' Equity Fund
Vanguard/Windsor Fund MONEY MARKET FUND
Vanguard/Windsor II Vanguard Money Market Reserves
</TABLE>
[THE VANGUARD GROUP LOGO]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information 1-(800) 662-7447 Shareholder Account Services:
1-(800) 662-2739
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.
Q950-10/93
<PAGE> 29
EDGAR Appendix
This appendix describes 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 flags of
The United States of America and Vanguard flying from a halyard.
A bar chart called "A Tale of Two Decades" appears on the inside front
cover. This chart illustrates Average Annual Total Return, in nominal and real
terms, of Stocks, Bonds and Reserves (U.S. Treasury bills) for the two decades
since 1973.
A running head featuring the Vanguard flag logo appears at the top of
pages one through 24.
A photograph of John C. Bogle appears at the upper-right of page one.
A line chart of the Indexed Value (Standard & Poor's Growth Index and
Standard & Poor's Value Index) of the U.S. Growth Portfolio for the Fiscal
Years 1988 through 1993 appears at the upper-right of page two.
Line charts illustrating cumulative performance of the Vanguard U.S.
Growth Portfolio and the Vanguard International Portfolio compared to (i) the
S&P 500 Index and (ii) Average Growth and International Funds for the Fiscal
Years 1984 through 1993 appear on page four.
