<PAGE> 1
[VANGUARD LOGO]
U.S. GROWTH
PORTFOLIO
- -------------
INTERNATIONAL
GROWTH
PORTFOLIO
ANNUAL REPORT 1995
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[FIGURE 1]
In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard U.S. Growth and International Growth Portfolios
and the other Funds in The Vanguard Group. Mr. Brennan will continue to serve
as President of the Funds, and I will continue to serve as Chairman of the
Board.
As a shareholder of the Fund for more than a quarter century and as
Chairman of all the Vanguard Funds, I want to tell you that I am enthusiastic
and confident that Jack Brennan is exactly the right person to succeed me as
Chief Executive Officer. To use yet another Vanguard nautical metaphor, he will
be the new captain. He has the qualities of leadership, integrity, intelligence,
and vision that must continue to be Vanguard's hallmark as we move toward, and
then into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have been
working closely together since he joined Vanguard in 1982. He is a graduate of
Dartmouth College and Harvard Business School. He started as Assistant to the
Chairman and, rising like a rocket, became President in 1989. While, at age 41,
he may seem young, he is in fact older than I was when I became Chief Executive
Officer of Vanguard's predecessor organization in 1967, at the age of 38. Most
important of all, Jack is completely dedicated to the Vanguard character, and
believes in our basic mission: serving solely the shareholder, free of any
conflict of interest. He believes in holding our costs of operation to a
minimum, and in retaining our position as the lowest-cost provider of financial
services in the world. He is a true competitor, who shares Vanguard's dedication
to providing highly competitive returns to our investors relative to the returns
provided by other mutual funds with comparable objectives. He also believes in
reporting our results to shareholders with complete candor. He has the full
support of the Board of Directors and our crew, and is committed to staying the
course we have set for Vanguard. You need have no doubt that the essential
elements that drew you to Vanguard in the first place will remain intact.
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack Brennan
with whatever wisdom I may have acquired during my lifetime of experience in
this wonderful industry and in my service as captain of Vanguard since I founded
this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in me
in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
- -------------------------------------------------------------------------------
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:
Compared to fiscal 1994, the fiscal year ended on August 31, 1995, reflected a
striking reversal of fortunes for the Vanguard U.S. Growth and International
Growth Portfolios. This year, the U.S. Growth Portfolio, with a total return of
more than +22%, was the champion, with the International Growth Portfolio
gaining about +4%. Last year, the returns were almost precisely reversed: U.S.
Portfolio +7%; International Portfolio +20%.
Despite these differences, there was an important and beneficial
parallelism between the two years. In fiscal 1994 and 1995 alike, each Portfolio
outperformed both its market index standard and its competitive peer group of
mutual funds.
In the case of the U.S. Growth Portfolio, our success in topping the total
return (capital change plus income) of the unmanaged Standard & Poor's 500
Composite Stock Price Index was especially notable, since the Index, always a
tough standard, counted itself among the market leaders for the past twelve
months. Here are the figures:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
TOTAL RETURN
------------
Fiscal Year Ended
August 31, 1995
- ----------------------------------------------------------
<S> <C>
VANGUARD U.S. GROWTH PORTFOLIO +22.8%
- ----------------------------------------------------------
AVERAGE GROWTH MUTUAL FUND +20.0%
STANDARD & POOR'S 500 STOCK INDEX +21.4
- ----------------------------------------------------------
</TABLE>
While our absolute returns were far lower for the International Growth
Portfolio, our relative returns were more favorable. Indeed, our Portfolio
posted a positive, if modest, rate of return, while the average diversified
international mutual fund posted a net loss. We also nicely outpaced our market
standard, the unmanaged Morgan Stanley Capital International Europe, Australia,
and Far East ("EAFE") Index.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
TOTAL RETURN
------------
Fiscal Year Ended
August 31, 1995
- ----------------------------------------------------------
<S> <C>
VANGUARD INTERNATIONAL GROWTH PORTFOLIO +3.8%
- ----------------------------------------------------------
AVERAGE INTERNATIONAL MUTUAL FUND -1.2%
EAFE INTERNATIONAL INDEX +0.8
- ----------------------------------------------------------
</TABLE>
The total return for the U.S. Growth Portfolio is based on net asset values of
$15.52 per share on August 31, 1994, and $18.83 on August 31, 1995, with the
latter figure adjusted to take into account the reinvestment of our annual
dividend of $.18 per share paid from net investment income earned during
calendar 1994. For the International Growth Portfolio, the respective net asset
values were $14.36 and $14.70, and our annual income dividend was $.18 per
share.
U.S. GROWTH PORTFOLIO
Fiscal 1995 began with stocks essentially marking time for the first four
months. Then, as December ended and 1995 began, the U.S. stock market sprung to
life. During the eight months that followed, the market moved upward, week after
week, in virtually straight-line fashion, delighting the bulls and astonishing
the bears.
As usual, there were many opinions as to the source of the market's
surprising strength. In my view, it resulted from a combination of: (1) the
sharp decline in interest rates (the yield on the long-term U.S. Treasury bond
fell from 7.5% to 6.7% during the fiscal period, a dip of 80 basis points); (2)
the diminishing threat of additional increases in short-term interest rates by
the Federal Reserve Board; (3) a slight softening in U.S. economic growth,
resulting in continued optimism about the outlook for inflation; (4)
record-breaking corporate profits; and (5) a hint of speculative fever in the
marketplace.
While, as noted at the outset, U.S. stock market returns in fiscal 1995
were far ahead of those of the prior year, both years saw growth stocks (those
with above-average prospects for long-term growth and thus accorded
above-average price/earnings multiples) provide a small advantage over value
stocks (usually defined as those having above-average dividend yields and
relatively low multiples of price-to-book value). You may recall, however, that
value stocks led the way in fiscal 1993. These dichotomies in total return are,
as we noted in our 1994 Annual Report, "simply part and parcel of the way
securities markets work," and tend to iron themselves out over the longer term.
For example, the chart on page 2 presents the relative cumulative returns
of the Standard & Poor's/BARRA Growth and Value Indexes over our past five
fiscal years. (Each Index comprises one-half of the market value of the Standard
& Poor's 500 Index.) The five-year
1
<PAGE> 4
[FIGURE 2]
annual returns for the two strategies were exceptionally close: Growth +14.7%;
Value +15.3%. (I should emphasize that both returns were unusually high relative
to historical norms.) Their similarity makes the point that it is better to
"stay the course" with one type of equity strategy (or a constant proportion of
each type) than to switch back and forth from one to the other based on
short-term relative performance.
Although the total return of the U.S. Growth Portfolio fell slightly short
of the return of the Growth Index (+22.8% versus +23.7%) for fiscal 1995, we did
succeed in outpacing the +21.4% return of the broader Standard & Poor's 500
Index. With large capitalization blue-chip stocks leading the way in the stock
market, this broad index was a formidable competitor for active managers. The
success of the U.S. Growth Portfolio was based primarily on two factors: (1)
strong stock selections in the technology sector (Intel, Cisco, and
Hewlett-Packard); and (2) good selection of individual equities in the consumer
staples area. However, the positive margin we achieved through good stock
selection was eroded a bit by our cash reserve position, which averaged about 8%
during the year. (Indexes, of course, are theoretically 100% invested in stocks
at all times.)
The industry composition of our peer group of growth-oriented mutual funds
was, on average, strikingly similar to our own. Our return advantage (the
average growth fund provided a return of +20.0%) was accounted for in part by
our traditional emphasis on large-cap stocks (90% of the Vanguard portfolio
compared to 55% for our peers), which, as I noted earlier, tended to be market
leaders during the past year. We also gained a valuable edge in annual return of
nearly one full percentage point because of our customary low operating expense
ratio (expenses as a percentage of net assets). Our net expense ratio was 0.44%
during the past year; for the average growth fund, the ratio was 1.30%, or
nearly three times as high.
While the events of fiscal 1995 are interesting and significant, the most
important test we must meet is that of superior long-term performance. (The
record for the past decade is presented in the upper chart on page 5.) The table
below shows our absolute and relative returns during the past eight years in
which Lincoln Capital Management has been the investment adviser to the
Portfolio. During this period, as you can see, we have succeeded in surpassing
the returns of both our peer group and the Standard & Poor's 500 Stock Index:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
TOTAL RETURN*
-------------
Eight Years Ended
August 31, 1995
---------------------------
Cumulative Annual Rate
- ---------------------------------------------------------------
<S> <C> <C>
U.S. GROWTH PORTFOLIO +126% +10.7%
- ---------------------------------------------------------------
AVERAGE GROWTH FUND +107% + 9.5%
STANDARD & POOR'S 500 STOCK INDEX +119 +10.3
- ---------------------------------------------------------------
</TABLE>
*Assuming reinvestment of all dividends and capital gains distributions.
I emphasize that our future returns may be better or worse than those shown
above. However, on a relative basis, we are pleased that the U.S. Growth
Portfolio outperformed both measurement standards. On an absolute basis, of
course, the returns appear modest compared with the double-digit gains offered
by equities during the decade of the 1980s. But Lincoln began managing the
Portfolio at the very high of the stock market on August 31, 1987, just before
the Great Crash of October 19, when stocks tumbled by -20% in a single day. As a
result, the eight-year return of the Standard & Poor's 500 Index turned out to
be virtually identical to the
2
<PAGE> 5
long-term (since 1926) average stock return of +10.4% annually. This historical
return may well provide a more realistic perspective for the future than the
large annual return provided by stocks during the 1980s (+17.5%).
INTERNATIONAL GROWTH PORTFOLIO
In the aggregate, the world's equity markets, if I may be permitted to
generalize, went nowhere during our 1995 fiscal year. The performance of
international stocks was erratic to a fault, with a good month followed by a bad
month (and vice versa) with remarkable consistency. After all was said and done,
the EAFE Index ended the twelve months almost precisely where it began.
Two major factors shaped returns in international markets during the year.
First, from the outset of our fiscal year, the pervasive weakness of the U.S.
dollar in international currency markets added significantly to the dollar
returns earned by U.S. investors, since a foreign currency can purchase a
greater number of U.S. dollars. Second, among all of the major markets, Japan
suffered the worst decline. Japan accounts for a dominant 42% share of the
international markets; by way of contrast, the second largest market, the United
Kingdom, accounts for but 17%. A portion of the Japanese market decline was
alleviated by a very weak dollar-yen relationship during most of the year, but a
rousing rally for the dollar that began in July worsened the earlier damage to
the local Japanese market.
Combining these two factors, here are the essential elements of worldwide
investing during our fiscal year:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
TOTAL RETURN
----------------------------------------------
Twelve Months Ended August 31, 1995
----------------------------------------------
Based on Currency Based on
Stock Market Index Local Currency Effect U.S. Dollars
- ---------------------------------------------------------------------
<S> <C> <C> <C>
INTERNATIONAL* - 2.6% +3.4% + 0.8%
- ---------------------------------------------------------------------
EUROPEAN* + 6.0% +5.1% + 11.1%
PACIFIC BASIN* - 9.4 +2.0 - 7.4
- ---------------------------------------------------------------------
UNITED STATES + 21.4% -- + 21.4%
- ---------------------------------------------------------------------
</TABLE>
*Morgan Stanley Capital International Indexes.
The Vanguard International Growth Portfolio's under-weighting in Japan (about
29% of our net assets on average) played a significant part in our advantage
over the EAFE Index during the past twelve months. In addition, our individual
selections on the Tokyo bourse provided well-above-average returns. A heavy
over-weighting in a strong Netherlands market (11% of assets for our Portfolio
versus 4% for the Index)--combined with good stock selections there as
well--also made a significant positive difference. Finally, outstanding stock
selection in Germany added to our margin.
[FIGURE 3]
Our ability to provide a positive return in an environment in which the
average diversified international mutual fund was on the negative side of the
ledger came in the face of a strong headwind. The average fund's 16% commitment
to Japan was far less than our 29% average weighting, and thus did it less
damage. However, our lower average weighting during the year in the Latin
American markets--3% of our assets versus some 8% for the average
fund--benefited our shareholders. Most of these markets fell sharply over the
past twelve months--particularly in December--with Mexico, for example, off
- -47%. Congratulations are in order for our adviser, Schroder Capital Management,
for minimizing the impact of this market debacle.
Pleased as we are with our relative performance in fiscal 1995, we
acknowledge that a single year is but one lap in a long race. As illustrated by
our record during the past decade--presented in the lower chart on the
3
<PAGE> 6
facing page--we are also ahead in the never-ending test of earning your respect
and confidence. Here is a summary of our results:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
TOTAL RETURN*
-------------
Ten Years Ended August 31, 1995
--------------------------------
Cumulative Annual Rate
- ---------------------------------------------------------------
<S> <C> <C>
INTERNATIONAL GROWTH PORTFOLIO +352% +16.3%
- ---------------------------------------------------------------
AVERAGE INTERNATIONAL FUND +276% +14.2%
EAFE INTERNATIONAL INDEX +329 +15.7
- ---------------------------------------------------------------
</TABLE>
*Assuming reinvestment of all dividends and distributions.
I emphasize that our future returns may be better or worse than those shown
above. On a relative basis, we expect to outpace our competitors, in part
because of our substantial cost advantage. The International Growth Portfolio's
net expense ratio (expenses as a percentage of average net assets) was just
0.58% last year versus 1.55% for our average peer fund--nearly 170% above
ours!--giving us a "natural advantage" of +1.0% in annual return.
I should note that the absolute returns shown in the table exceed my own
expectations for the future, in part because the large boost given to
international stocks in the past by a consistently weak U.S. dollar seems
unlikely to persist indefinitely. For the decade, the annual return of the EAFE
Index was +15.7% on a dollar-adjusted basis versus +9.0% in local currency
terms--a truly astonishing dichotomy of -6.7% based solely on the weakness of
the dollar. Returns on international funds--including ours--were doubtless
similarly affected. And, as we have often warned, currency risk--in which a
stronger dollar erodes international returns rather than enhancing them--is a
special risk that need not be assumed by U.S. investors in U.S. markets.(1)
IN SUMMARY
A decade has now passed since we divided Vanguard's U.S. Growth Portfolio and
International Growth Portfolio into two separate fund portfolios. (They had
comprised a single "world fund" portfolio from September 1981 to September 1985,
with each of the two segments managed by a different investment adviser.) During
this decade, each Portfolio has had its ups and downs. Indeed, as a result of
performance that failed to measure up to our expectations, we replaced the
adviser for the U.S. Growth Portfolio in 1987 and retained Lincoln Capital
Management. On balance, as reflected in the records presented in this letter,
our returns under our present advisers have been outstanding relative to their
peers and to the relevant stock market indexes.
The net result of these excellent relative returns (for which we accept
responsibility in good times and bad alike) and absolute returns (over which,
since we cannot control the financial markets, we have little control) has been
substantial growth in our Portfolios' acceptance by investors. During the past
decade, total assets of the U.S. Growth Portfolio have grown from $138 million
to $3.0 billion; the assets of the International Growth Portfolio have grown
from $73 million to $3.4 billion. Part of that growth, I believe, reflects the
fact that our shareholders agree with Vanguard's underlying philosophy: mutual
funds should be held as long-term investments. As I put it when I wrote to you
in last year's Annual Report, "the lowest risk and the highest reward--at least
in the past--have been achieved by investors who have stayed the course."
Today, the usual risks continue to abound, perhaps attenuated by the fact
that: (1) based on fundamental norms such as dividend yields, the U.S. stock
market remains highly valued; and (2) international markets, with past returns
very much enhanced by a weak dollar, may well face the headwind of a stronger
U.S. currency. Whatever the coming fiscal year holds in store for us, we have
confidence that, in a balanced portfolio that also includes bonds and reserves,
both our U.S. Growth and International Growth Portfolios will measure up to your
high standards of performance.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board September 18, 1995
- ---------------------
(1) A strong dollar, however, enhances the earnings of U.S. corporations with
foreign operations.
Note: Mutual fund data from Lipper Analytical Services, Inc.
4
<PAGE> 7
CUMULATIVE PERFORMANCE
[FIGURE 4]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended August 31, 1995
- -------------------------------------------------------------------
1 Year 5 Years 10 Years
- -------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GROWTH PORTFOLIO +22.75% +14.30% +12.92%
AVERAGE GROWTH FUND +20.03 +14.75 +13.35
STANDARD & POOR'S 500 INDEX +21.42 +15.09 +15.14
</TABLE>
Note: Past performance is not predictive of future performance.
[FIGURE 5]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended August 31, 1995
- -------------------------------------------------------------------
1 Year 5 Years 10 Years
- -------------------------------------------------------------------
<S> <C> <C> <C>
INTERNATIONAL GROWTH PORTFOLIO +3.76% +7.82% +16.27%
AVERAGE INTERNATIONAL FUND -1.23 +7.48 +14.16
MSCI EAFE INDEX +0.79 +7.35 +15.68
</TABLE>
Note: Past performance is not predictive of future performance.
5
<PAGE> 8
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE PORTFOLIOS (PERIODS ENDED JUNE 30,
1995) 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>
U.S. GROWTH 1/6/59 +28.44% +11.45% +12.77% +10.98% +1.79%
INTERNATIONAL GROWTH 9/30/81 + 7.12 + 5.94 +16.75 +15.18 +1.57
</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.
6
<PAGE> 9
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, 1995. During the
period illustrated, stock prices fluctuated widely; 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>
- ------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA* TOTAL INVESTMENT RETURN**
- ------------------------------------------------------------------------------------------------------------
U.S. Growth Portfolio S&P 500
Value with Income ----------------------- -------
August 31 Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Return
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1971 $ 7.13 -- $ .07 $ 7.22 +29.1% +1.5% +30.6% +25.4%
- ------------------------------------------------------------------------------------------------------------
1972 8.14 -- .10 8.35 +14.2 +1.5 +15.7 +15.5
- ------------------------------------------------------------------------------------------------------------
1973 6.43 $ .13 .07 6.77 -19.7 +0.7 -19.0 - 3.3
- ------------------------------------------------------------------------------------------------------------
1974 3.60 -- .10 3.84 -44.0 +0.8 -43.2 -28.0
- ------------------------------------------------------------------------------------------------------------
1975 4.61 -- .04 4.99 +28.2 +1.6 +29.8 +26.1
- ------------------------------------------------------------------------------------------------------------
1976 5.22 -- .06 5.73 +13.3 +1.5 +14.8 +23.1
- ------------------------------------------------------------------------------------------------------------
1977 5.18 -- .09 5.79 - 0.7 +1.7 + 1.0 - 1.8
- ------------------------------------------------------------------------------------------------------------
1978 6.22 -- .10 7.08 +20.0 +2.4 +22.4 +12.4
- ------------------------------------------------------------------------------------------------------------
1979 6.87 -- .15 8.02 +10.5 +2.7 +13.2 +11.6
- ------------------------------------------------------------------------------------------------------------
1980 7.69 -- .22 9.27 +11.9 +3.7 +15.6 +18.2
- ------------------------------------------------------------------------------------------------------------
1981 8.35 -- .23 10.36 + 8.5 +3.2 +11.7 + 5.4
- ------------------------------------------------------------------------------------------------------------
1982 7.94 -- .28 10.23 - 4.8 +3.5 - 1.3 + 3.2
- ------------------------------------------------------------------------------------------------------------
1983 12.02 -- .22 15.90 +51.3 +4.2 +55.5 +44.0
- ------------------------------------------------------------------------------------------------------------
1984 10.29 1.86 .24 16.35 + 0.9 +1.9 + 2.8 + 6.1
- ------------------------------------------------------------------------------------------------------------
1985 11.57 .33 .31 19.63 +16.4 +3.7 +20.1 +18.2
- ------------------------------------------------------------------------------------------------------------
1986 13.21 .82 .26 24.85 +23.6 +3.0 +26.6 +38.9
- ------------------------------------------------------------------------------------------------------------
1987 12.74 1.94 .28 29.27 +15.1 +2.7 +17.8 +34.4
- ------------------------------------------------------------------------------------------------------------
1988 7.17 3.26 .31 22.94 -23.5 +1.9 -21.6 -17.8
- ------------------------------------------------------------------------------------------------------------
1989 10.01 -- .06 32.29 +39.6 +1.1 +40.7 +39.1
- ------------------------------------------------------------------------------------------------------------
1990 10.38 -- .13 33.91 + 3.7 +1.3 + 5.0 - 5.0
- ------------------------------------------------------------------------------------------------------------
1991 13.69 -- .19 45.54 +31.9 +2.4 +34.3 +26.9
- ------------------------------------------------------------------------------------------------------------
1992 14.71 -- .19 49.56 + 7.5 +1.3 + 8.8 + 7.9
- ------------------------------------------------------------------------------------------------------------
1993 14.71 .08 .18 50.40 + 0.5 +1.2 + 1.7 +15.2
- ------------------------------------------------------------------------------------------------------------
1994 15.52 -- .21 53.91 + 5.5 +1.5 + 7.0 + 5.5
- ------------------------------------------------------------------------------------------------------------
1995 18.83 -- .18 66.16 +21.3 +1.5 +22.8 +21.4
- ------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL +1,096.3% +1,737.7%
- ------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +10.4% +12.3%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
*Adjusted for stock splits of 3-for-2 on April 7, 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 initial net asset value was $5.53 on August 31, 1970. No adjustment
has been made for income taxes payable by shareholders on reinvested income
dividends and capital gains distributions.
7
<PAGE> 10
TOTAL INVESTMENT RETURN TABLE
(continued)
The following table illustrates the results of a single-share investment in the
INTERNATIONAL GROWTH PORTFOLIO since inception through August 31, 1995. During
the period illustrated, stock prices fluctuated widely; 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>
- -------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA* TOTAL INVESTMENT RETURN**
- -------------------------------------------------------------------------------------------------------------------
International Growth Portfolio EAFE Index
Value with Income ------------------------------ ------------
August 31 Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Return
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (9/81) $ 3.95 -- -- $ 3.95 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
1982 3.73 -- -- 3.73 - 5.7% 0.0% - 5.7% - 4.7%
- -------------------------------------------------------------------------------------------------------------------
1983 5.86 -- $ .10 6.02 +57.1 +4.3 +61.4 + 31.0
- -------------------------------------------------------------------------------------------------------------------
1984 6.07 $ .12 .09 6.46 + 5.7 +1.6 + 7.3 + 14.7
- -------------------------------------------------------------------------------------------------------------------
1985 6.57 .38 .11 7.61 +15.7 +2.1 +17.8 + 32.3
- -------------------------------------------------------------------------------------------------------------------
1986 11.67 .65 .09 15.14 +96.4 +2.5 +98.9 +103.7
- -------------------------------------------------------------------------------------------------------------------
1987 14.21 .80 .07 19.99 +31.2 +0.8 +32.0 + 46.0
- -------------------------------------------------------------------------------------------------------------------
1988 10.45 2.43 .13 18.01 -10.8 +0.9 - 9.9 - 6.2
- -------------------------------------------------------------------------------------------------------------------
1989 11.61 1.07 .16 22.42 +22.7 +1.8 +24.5 + 22.4
- -------------------------------------------------------------------------------------------------------------------
1990 11.81 .28 .15 23.60 + 4.0 +1.2 + 5.2 - 11.8
- -------------------------------------------------------------------------------------------------------------------
1991 10.31 .68 .20 22.39 - 6.8 +1.7 - 5.1 - 0.3
- -------------------------------------------------------------------------------------------------------------------
1992 10.15 .12 .19 22.72 - 0.4 +1.9 + 1.5 + 0.4
- -------------------------------------------------------------------------------------------------------------------
1993 12.02 -- .21 27.50 +18.4 +2.7 +21.1 + 27.1
- -------------------------------------------------------------------------------------------------------------------
1994 14.36 -- .11 33.12 +19.5 +0.9 +20.4 + 11.1
- -------------------------------------------------------------------------------------------------------------------
1995 14.70 -- .18 34.32 + 2.4 +1.4 + 3.8 + 0.8
- -------------------------------------------------------------------------------------------------------------------
LIFETIME +768.9% +712.8%
- -------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +16.8% +16.2%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Adjusted for stock split of 2.908-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: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
8
<PAGE> 11
REPORT FROM
LINCOLN CAPITAL MANAGEMENT COMPANY
The fiscal year ended August 31, 1995, marks the eighth full year of Lincoln
Capital's management of the U.S. Growth Portfolio. The Portfolio earned a return
of +22.8% over the past year, the best result since the +34.3% return in fiscal
1991. The return exceeded that of the S&P 500 Index and the average growth
mutual fund for the year, but lagged one investment objective, the S&P Growth
Index (+23.7%).
Since the inception of Lincoln's management eight years ago, the U.S.
Growth Portfolio's cumulative return is modestly ahead of the three performance
standards that we have adopted; we also outperformed each of the three
benchmarks in six of the eight years.
As you would guess, cash reserves were a drag on our fiscal 1995 return.
While your Portfolio averaged weekly reserves of only 7.6%, these did detract
- -1% from the total return compared to a 100% invested position. Sales turnover
for the year was 32%, about the same as our historical average.
During the six months since the Semi-Annual Report, three new names have
joined the largest ten issues. These are Philip Morris, Johnson & Johnson, and
PepsiCo. Philip Morris has been among the largest ten commitments in Lincoln
portfolios off and on for 13 of the past 18 years. PepsiCo has been among
Lincoln's largest 15 holdings for each of the past eleven years. It is amazing
to us that the underlying earnings fundamentals of such dominant companies can
continue to be so dynamic for periods longer than a decade. The three companies
that exited the top ten are all still held in the Portfolio.
The table that follows lists our ten major holdings, which represent 40%
of the Portfolio's total net assets. Good stock selections helped our return
during the year, with Coca-Cola, PepsiCo, and three technology stocks leading
the way. Less-than-representative health care and technology weightings
constrained returns in the past several months.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
CONSECUTIVE
COMPANY BUSINESS YEARS HELD
- ---------------------------------------------------------------
<S> <C> <C>
1. WAL-MART STORES #1 RETAILER 8
2. GENERAL ELECTRIC #1 DIVERSIFIED MANUFACTURER 7
3. PHILIP MORRIS #1 DIVERSIFIED CONSUMER
PRODUCTS CO. 1
4. COCA-COLA #1 SOFT DRINKS 2
5. INTEL #1 MICROPROCESSOR
MANUFACTURER 2
6. JOHNSON & JOHNSON #1 HEALTH CARE/
CONSUMER PRODUCTS 1
7. AT&T #1 COMMUNICATIONS CO. 2
8. PEPSICO #1 SNACK FOODS 8
9. AUTOMATIC DATA #1 PAYROLL SERVICE 7
10. PROCTER & GAMBLE #1 HOUSEHOLD PRODUCTS CO. 5
- ---------------------------------------------------------------
</TABLE>
You'll be interested to know that the present ten largest holdings sell at an
average P/E ratio of 15.6 times estimated 1996 earnings. The S&P 500 Index is
selling at about the same multiple. Excepting the low dividend yield, these ten
important holdings seem to us to possess qualitative and quantitative attributes
that are relatively more attractive than the broad market.
Respectfully,
Dave Fowler and Parker Hall, Co-managers
Lincoln Capital Management Company
September 8, 1995
9
<PAGE> 12
REPORT FROM
SCHRODER CAPITAL MANAGEMENT INTERNATIONAL
Vanguard International Growth Portfolio rose by +15.3% during the second half of
fiscal 1995, erasing the -10.0% fall during the first half. For the full fiscal
year, the Portfolio returned +3.8%, which compares favorably to a +0.8% return
for the MSCI EAFE Index. Clearly, it has been a volatile year, but throughout we
have invested the Portfolio on the basis that markets would emerge from this
period of consolidation on the upside. This continues to be our view.
Sentiment in favor of the U.S. dollar has changed dramatically during
the past two months. Relative to the Japanese yen, the U.S. dollar has risen
+22% from its low point in April; against the deutschemark, it has risen +9%.
These sharp moves reflect: (1) the extent of the recent falls (note that the
dollar is only back to February 1995 levels); and (2) some very effective policy
action by the Japanese authorities at a time when U.S.-Japan trade talks had
become less confrontational. In my letter six months ago, I discussed the impact
of currency moves on the Portfolio and will only reiterate here the conclusion:
that currency and stock price moves tend to offset each other and that, on
balance, a weak dollar environment is better for our returns relative to U.S.
stocks.
The future value of foreign currencies is notoriously difficult to
predict; accordingly, only a small proportion (9%) of the Portfolio's assets is
hedged through the forward currency markets back to U.S. dollars. However,
"bullish dollar" investors may take comfort from the 19% of the Portfolio that
is invested in S.E. Asian countries, whose currencies are to varying degrees
linked to the U.S. dollar. From my standpoint, I would emphasize that the
reason for such a large commitment to this area is not currency related, but to
capture the excellent economic growth prospects that reside there. Local stock
markets have been miserable performers over the past 20 months reflecting
over-enthusiasm in 1993, but inflationary fears more recently. In our opinion,
poor performance is unlikely to last for much longer.
Japan is the other major part of the Portfolio that has held back
returns during the past year, as the market fell by -8% in U.S. dollar terms.
Although our stocks performed relatively better, the period must be termed a
disappointment. As of fiscal year end, 24% of the Portfolio was invested in
Japan. Our good stock performance relative to the local index is a consequence
of focusing over 70% of our stock picks in manufacturing companies; of these,
half are electronics related. Although the broad economic recovery is once
again faltering, there is no doubting the profit recovery now underway in the
manufacturing industry. Moreover, if, as we expect, the government continues
to provide stimuli to the economy, profits will be further boosted by a
recovery in domestic consumer spending.
The Portfolio's strong point during the past year has been Europe:
markets generally are up +11% in dollar terms and your stocks by significantly
more. In total, we have 50% of the Portfolio invested there with particularly
large exposures to the UK (17%) and the Netherlands (11%). The former market
has performed strongly in the past six months, but in line with other European
markets over the year, while the Netherlands has done well throughout the year.
As in the U.S., economic growth in Europe has been hobbled by tight fiscal
stances and high interest rates. The strength of European currencies against
competitor nations, notably the U.S., has also restrained corporate profits. The
complete absence of inflationary pressures encourages us to see the current slow
growth as the harbinger of a longer period of economic expansion, which we
regard as bullish for investors. Three-quarters of our European stocks are in
high- growth industries or relate to companies where management is proving
particularly effective at cutting costs to maintain above-average profit growth
in a difficult business environment.
I look forward to the year ahead and to reporting results to you in
six-months time.
Respectfully,
Richard Foulkes
Schroder Capital Management International
September 12, 1995
10
<PAGE> 13
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
August 31, 1995
<TABLE>
<CAPTION>
Market
Value
U.S. GROWTH PORTFOLIO Shares (000)+
- ------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (94.0%)
- ------------------------------------------------------------------------------
BASIC MATERIALS (1.0%)
Kimberly-Clark Corp. 270,000 $ 17,246
Scott Paper Co. 254,000 11,779
---------
GROUP TOTAL 29,025
---------
- ------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (7.2%)
Duracell International, Inc. 931,000 41,546
General Electric Co. 2,307,000 135,825
Honeywell, Inc. 436,000 19,075
Illinois Tool Works, Inc. 308,000 18,865
---------
GROUP TOTAL 215,311
---------
- ------------------------------------------------------------------------------
CONSUMER CYCLICAL (15.7%)
Carnival Cruise Lines, Inc. 892,000 19,401
The Walt Disney Co. 1,583,000 88,846
Home Depot, Inc. 223,000 8,892
Lowes Cos., Inc. 1,850,000 61,512
May Department Stores Co. 1,387,000 58,774
McDonald's Corp. 2,195,000 80,118
Nordstrom, Inc. 339,000 13,899
Wal-Mart Stores, Inc. 5,620,000 138,393
---------
GROUP TOTAL 469,835
---------
- ------------------------------------------------------------------------------
CONSUMER STAPLES (19.7%)
Campbell Soup Co. 295,000 13,496
The Coca-Cola Co. 1,920,000 123,360
Colgate-Palmolive Co. 295,000 20,060
Gillette Co. 2,224,000 92,852
PepsiCo, Inc. 2,364,000 106,971
Philip Morris Cos., Inc. 1,741,000 129,922
Procter & Gamble Co. 1,480,000 102,675
---------
GROUP TOTAL 589,336
---------
- ------------------------------------------------------------------------------
DIVERSIFIED (1.5%)
Alco Standard Corp. 193,000 15,537
Minnesota Mining &
Manufacturing Co. 530,000 28,951
---------
GROUP TOTAL 44,488
---------
- ------------------------------------------------------------------------------
ENERGY (1.8%)
*Renaissance Energy Ltd. 1,250,000 27,335
*Talisman Energy, Inc. 1,298,000 25,365
---------
GROUP TOTAL 52,700
---------
- ------------------------------------------------------------------------------
FINANCIAL (8.7%)
American International Group, Inc. 984,000 79,335
Chemical Banking Corp. 506,000 29,474
Federal Home Loan Mortgage Corp. 362,000 23,258
Federal National Mortgage Assn. 1,047,000 99,858
First Financial Management 117,000 10,545
Norwest Corp. 600,000 18,075
---------
GROUP TOTAL 260,545
---------
- ------------------------------------------------------------------------------
HEALTH CARE (12.6%)
Abbott Laboratories, Inc. 713,000 27,629
American Home Products Corp. 424,000 32,648
Glaxo Wellcome PLC ADS 605,000 14,368
Johnson & Johnson 1,621,000 111,849
Eli Lilly & Co. 1,001,000 81,957
Merck & Co., Inc. 770,000 38,404
Pfizer, Inc. 1,010,000 49,869
Upjohn Co. 458,000 19,408
---------
GROUP TOTAL 376,132
---------
- ------------------------------------------------------------------------------
TECHNOLOGY (20.9%)
AMP, Inc. 995,000 40,422
Automatic Data Processing, Inc. 1,644,000 106,860
*Cisco Systems, Inc. 1,265,000 82,857
General Motors Corp. Class E 1,755,000 81,827
Hewlett-Packard Co. 1,083,000 86,640
Intel Corp. 1,906,000 116,981
Motorola, Inc. 461,000 34,460
*Oracle Corp. 914,000 36,560
Reuters Holdings PLC ADR 716,000 37,321
---------
GROUP TOTAL 623,928
---------
- ------------------------------------------------------------------------------
UTILITIES (4.9%)
AT&T Corp. 1,941,000 109,666
MCI Communications Corp. 1,600,000 38,400
---------
GROUP TOTAL 148,066
---------
- ------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $2,121,367) 2,809,366
- ------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (6.5%)
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
---------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.82%, 9/1/95
(Cost $193,775) $193,775 193,775
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.5%)
(Cost $2,315,142) 3,003,141
- ------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (Continued)
<TABLE>
<CAPTION>
Market
Value
(000)+
- ------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (-.5%)
- ------------------------------------------------------------------------------
Other Assets--Note C $ 37,481
Liabilities (51,572)
-----------
(14,091)
- ------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------
Applicable to 158,739,027 outstanding
$1.00 par value shares
(authorized 200,000,000 shares) $ 2,989,050
- ------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $ 18.83
==============================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
ADR--American Depository Receipt
ADS--American Depository Share
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
AT AUGUST 31, 1995, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------
Amount Per
(000) Share
----------- ----------
<S> <C> <C>
Paid in Capital--Note D $ 2,196,727 $ 13.84
Undistributed Net
Investment Income 29,948 .19
Accumulated Net
Realized Gains--Note D 74,376 .47
Unrealized Appreciation
of Investments--Note E 687,999 4.33
- ------------------------------------------------------------------------------
NET ASSETS $ 2,989,050 $ 18.83
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
INTERNATIONAL GROWTH Value
PORTFOLIO Shares (000)+
- ------------------------------------------------------------------------------
<C> <C> <C>
COMMON STOCKS (95.5%)
- ------------------------------------------------------------------------------
ARGENTINA (.1%)
YPF Sociedad ADR 162,500 $ 2,864
- ------------------------------------------------------------------------------
AUSTRALIA (1.3%)
Broken Hill Proprietary Ltd.280,500 4,076
CSR Ltd. 1,550,000 5,485
Comalco A 395,000 2,016
Lend Lease Corp. 245,000 3,505
MIM Holdings Ltd. 1,750,000 2,503
Mayne Nickless Ltd. 1,044,289 5,016
News Corp. Ltd. 1,015,000 5,838
News Corp. Ltd. Pfd. 607,500 3,137
Normandy Mining Ltd. 3,871,315 5,071
*Quantas Airways Ltd 250,000 408
Western Mining Corp. 954,937 6,420
-----------
GROUP TOTAL 43,475
-----------
- ------------------------------------------------------------------------------
BRAZIL (1.2%)
Electrobras Pfd. B 34,638,332 9,559
Ipiranga Pfd. 30,240,000 319
Petrobras Distribuidora SA Pfd. 49,451,000 1,672
Telecom Brasileiras SA 147,460,000 5,436
Telecom Brasileiras SA Pfd. 313,665,755 13,612
Usiminas ADR 440,000 4,400
Usiminas Pfd. 4,612,149,000 4,712
-----------
GROUP TOTAL 39,710
-----------
- ------------------------------------------------------------------------------
CHILE (.2%)
Compania de Telecomunicaciones
de Chile SA ADR 54,000 3,942
Sociedad Quimica 60,000 2,790
-----------
GROUP TOTAL 6,732
-----------
- ------------------------------------------------------------------------------
FINLAND (.5%)
Kymmene Oy 330,000 9,693
Repola Oy 370,000 7,069
-----------
GROUP TOTAL 16,762
-----------
- ------------------------------------------------------------------------------
FRANCE (4.2%)
Cardif 59,222 6,102
Carrefour 25,000 13,955
Cie. Generale des Eaux 259,976 27,510
Docks de France 49,500 7,298
Michelin Series B (Registered) 283,870 12,319
Primagaz 76,971 5,303
Societe National Elf Aquitaine 928,017 67,949
-----------
GROUP TOTAL 140,436
-----------
- ------------------------------------------------------------------------------
GERMANY (4.7%)
*Allianz AG Holdings 26,281 47,072
Friedrich Grohe AG Pfd. 18,747 5,039
Sap AG Pfd. 250,000 36,951
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------
<C> <C> <C>
Signalbau Huber AG Pfd. 7,404 $ 902
Veba AG 1,750,000 66,856
----------
GROUP TOTAL 156,820
----------
- ------------------------------------------------------------------------------
HONG KONG (6.1%)
Cheung Kong Holdings Ltd. 5,580,000 27,680
HSBC Holdings PLC 2,962,943 39,807
Hong Kong Electric Holdings Ltd. 5,500,000 19,077
Hutchison Whampoa Ltd. 6,810,000 32,814
Sun Hung Kai Properties Ltd. 5,345,400 38,842
Swire Pacific Ltd. A 4,084,000 30,600
Wharf Holdings Ltd. 5,500,000 15,809
----------
GROUP TOTAL 204,629
----------
- ------------------------------------------------------------------------------
INDONESIA (1.7%)
Indocement (Foreign) 2,062,000 7,329
Indofood (Foreign) 4,493,400 19,243
Kalbe Farma (Foreign) 1,874,000 7,736
PT Indosat ADS 528,000 18,546
Unilever Indonesia (Foreign) 287,551 4,380
----------
GROUP TOTAL 57,234
----------
- ------------------------------------------------------------------------------
ITALY (3.4%)
Fiat SPA 7,000,000 25,675
Parmalat Finanziaria SPA 15,681,600 13,792
*Parmalat Finanziaria SPA
Warrants Exp. 7/17/99 1,545,200 930
Telecom Italia SPA 24,137,190 38,783
*Telecom Italia Mobile SPA 24,137,190 35,525
----------
GROUP TOTAL 114,705
----------
- ------------------------------------------------------------------------------
JAPAN (23.8%)
Advantest Corp. 250,000 14,344
Anritsu Corp. 13,000 153
Bridgestone Corp. 2,330,000 34,254
Dai-Nippon Printing Co. Ltd. 1,500,000 23,737
Daini Den Den Corp. 37,500 31,623
East Japan Railway 469,200 22,274
Eisai Co., Ltd. 350,000 5,646
Fanuc Co. Ltd. 60,000 2,738
Fuji Photo Film Co., Ltd. 900,000 22,511
Fujitsu Ltd. 320,000 3,463
Hirose Electronics Co. Ltd.300,000 20,367
Hitachi Ltd. 4,600,000 50,250
Hoya Corp. 430,000 12,336
Ito-Yokado Co. 1,740,000 92,551
Japan Air Terminal Co. Ltd. 160,000 1,830
Keyence Inc. 50,000 6,381
Kuraray Co., Ltd. 2,250,000 22,534
Kyocera Corp. 380,000 33,519
Mabuchi Motors 400,000 27,075
Makita Corp. 700,000 11,220
Matsushita Electric
Industrial Co., Ltd. 3,200,000 49,985
Mitsui & Co., Ltd. 3,480,000 27,179
Murata Manufacturing Co. Ltd. 2,000,000 79,632
NEC Corp. 1,100,000 14,375
Nippon Television Network 39,300 9,228
Sankyo Co., Ltd. 935,000 20,810
Seino Transportation Co. Ltd. 425,000 7,072
Sharp Corp. 800,000 11,353
Shin-Etsu Chemical Co., Ltd. 1,000,000 19,908
Showa Shell Sekiyu 2,760,000 24,261
Skylark Co., Ltd. 225,000 3,583
Tokio Marine & Fire Insurance Ltd. 700,000 8,290
Tokyo Electron Inc. 635,000 25,543
Tokyo Ohka Kogyo Co. Ltd. 202,000 6,476
Toyota Motor Corp. 2,160,000 42,781
Yamazaki Baking Co., Ltd. 400,000 7,106
Yokohama Reito 211,000 2,370
----------
GROUP TOTAL 798,758
----------
- ------------------------------------------------------------------------------
KOREA (1.5%)
Daewoo Securities (Foreign) 9,888 312
Hyundai Engineering and
Construction (Foreign) 189,352 9,431
Korea Electric Power Co. (Foreign) 223,000 7,847
Pohang Iron & Steel Co. 80,000 6,603
*Samsung Electronics Co. Ltd. GDR
1/2 Non-Voting Stock 212,030 13,358
*Samsung Electronics Co. Ltd.
New GDR 1/2 Voting Stock 12,931 1,293
*Samsung Electronics Co. Ltd. GDR
1/2 Voting Stock Rfd 2,790 279
Shinhan Bank (Foreign) 465,162 9,929
----------
GROUP TOTAL 49,052
----------
- ------------------------------------------------------------------------------
MALAYSIA (3.4%)
Genting Bhd 4,047,000 35,850
Malayan Banking Bhd 4,333,000 35,605
Renong Bhd 9,200,000 17,774
Tan Chong Motor Holdings Bhd. 2,242,000 2,642
*Technology Resources
Industries Bhd 700,000 1,796
Telekom Malaysian Bhd 2,863,000 20,083
----------
GROUP TOTAL 113,750
----------
- ------------------------------------------------------------------------------
MEXICO (.6%)
Apasco A 1,066,000 4,686
Cifra C SA 4,309,000 5,167
*Grupo Carso 162,000 2,085
*Grupo Carso 340,000 2,188
Grupo Financiero Banamex B 1,618,300 3,301
Tolmex SA de CV B2 452,000 2,609
----------
GROUP TOTAL 20,036
----------
- ------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (Continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------
<S> <C> <C>
NETHERLANDS (10.5%)
Borsumij Wehry 399,010 $ 8,418
*Borsumij Wehry Warrants
Exp. 12/21/98 14,287 339
Cap Volmac Group 460,000 5,818
*Ceteco Holdings NV 122,2623,821
*(1)Delft Instruments 454,330 8,453
Getronics NV 565,512 24,241
Heineken NV 627,500 94,924
Internationale Nederlanden Groep 917,455 50,985
*KLM Royal Dutch Airlines 573,658 18,940
Oce van der Grinten NV 400,000 21,791
Otra NV 78,950 15,337
Philips Electronics NV (non-voting) 1,950,000 87,499
Sphinx Gustavsberg (Kon) NV 396,046 12,401
----------
GROUP TOTAL 352,967
----------
- ------------------------------------------------------------------------------
NORWAY (1.1%)
Norsk Hydro 900,000 38,003
----------
- ------------------------------------------------------------------------------
PHILIPPINES (1.3%)
Ayala Land Inc. B 9,033,437 11,174
Meralco GDR 304,312 11,716
Philippine Long Distance
Telephone Co. 166,999 10,554
Philippine National Bank Class B 140,550 1,494
San Miguel Corp. B 2,362,000 8,263
----------
GROUP TOTAL 43,201
----------
- ------------------------------------------------------------------------------
SINGAPORE (2.6%)
DBS Land 3,948,000 11,340
Development Bank of
Singapore (Foreign) 1,575,000 17,740
Keppel Corp. 2,416,000 19,389
Mandarin Oriental
International Ltd. 4,311,369 3,915
Overseas Chinese
Banking Corp. (Foreign) 1,193,500 13,443
Singapore International Airlines Ltd.
(Foreign) 1,268,000 10,712
Singapore Press
Holdings Ltd. (Foreign) 796,320 10,987
----------
GROUP TOTAL 87,526
----------
- ------------------------------------------------------------------------------
SWEDEN (1.7%)
Astra AB Series B 650,000 21,104
LM Ericsson Telephone 1,120,000 23,935
Stora Kopparberg Series A 900,000 11,096
----------
GROUP TOTAL 56,135
----------
- ------------------------------------------------------------------------------
SWITZERLAND (6.1%)
BBC Brown Boveri AG A (Bearer) 50,000 52,695
Ciba Geigy AG (Bearer) 38,000 26,877
Nestle SA (Registered) 45,000 45,485
Roche Holdings Ltd. 5,000 33,458
Sandoz AG (Registered) 30,000 21,617
Swiss Bank Corp. (Bearer) 72,058 24,497
----------
GROUP TOTAL 204,629
----------
- ------------------------------------------------------------------------------
THAILAND (2.1%)
Land & House Co., Ltd. (Foreign) 746,000 12,925
Siam Cement Co., Ltd. (Foreign) 269,000 18,341
Siam City Bank (Foreign) 7,500,000 9,730
*TelecomAsia Corp. (Foreign) 3,849,000 12,369
Thai Farmers Bank Ltd. (Foreign) 1,840,000 17,923
----------
GROUP TOTAL 71,288
----------
- ------------------------------------------------------------------------------
UNITED KINGDOM (17.4%)
Allied Domecq PLC 1,730,768 13,405
Asda Group PLC 18,000,000 30,112
BOC Group 1,823,600 23,388
Barclays PLC 2,500,000 27,920
Blue Circle Industries 1,800,000 8,880
British Aerospace 3,000,000 30,623
*British Aerospace Warrants
Exp. 11/15/00 120,000 409
British Airways PLC 2,350,000 15,506
British Land Co., PLC 5,040,000 31,149
British Petroleum Co. 2,305,000 17,280
British Steel 8,000,000 22,305
Burton Group 15,900,000 25,121
Cable and Wireless PLC 4,588,000 29,848
Courtaulds PLC 1,500,000 10,874
De La Rue Co. PLC 972,200 13,124
ECC Group (English China Clays) 1,900,000 11,154
Enterprise Oil PLC 2,000,000 11,462
Fisons 3,000,000 11,896
Glaxo Wellcome PLC 2,149,000 25,431
Grand Metropolitan PLC 2,500,000 15,819
National Power 2,300,000 18,703
Peninsular & Orient Steam
Navigation Co. 1,957,704 16,784
Rank Organisation Ltd. 6,965,000 47,361
Rexam PLC 1,750,000 11,331
Rolls Royce PLC 3,500,000 9,453
Smith (David S.) 1,400,400 12,982
*Suter PLC Warrants
Exp. 1999/2004 80,000 36
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------
<S> <C> <C>
Thorn EMI PLC 1,500,000 $ 34,329
United News & Media 2,800,000 23,593
Vodafone Group PLC 5,000,000 20,523
Zeneca Group PLC 700,000 12,122
----------
GROUP TOTAL 582,923
----------
- ------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $2,589,214) 3,201,635
- ------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.3%)
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
-----------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.82%, 9/1/95
(Cost $78,408) $78,408 78,408
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.8%)
(Cost $2,667,622) 3,280,043
- ------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.2%)
- ------------------------------------------------------------------------------
Other Assets--Notes C and F 165,054
Liabilities--Note F (91,452)
----------
73,602
- ------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------
Applicable to 228,145,054 outstanding
$1.00 par value shares
(authorized 300,000,000 shares) $3,353,645
- ------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $ 14.70
==============================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
(1)Considered an affiliated company as the Fund owns more than 5% of the
outstanding voting securities of such company.
ADR--American Depository Receipt
ADS--American Depository Share
GDR--Global Depository Receipt
GDS--Global Depository Share
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
AT AUGUST 31, 1995, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------
Amount Per
(000) Share
----------- --------
<S> <C> <C>
Paid in Capital $ 2,693,507 $ 11.80
Undistributed Net
Investment Income--Note D 35,617 .16
Accumulated Net
Realized Losses--Notes D and E (28,210) (.12)
Unrealized Appreciation
of Investments--Note E 652,731 2.86
- ------------------------------------------------------------------------------
NET ASSETS $ 3,353,645 $ 14.70
- ------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
U.S. GROWTH INTERNATIONAL
PORTFOLIO GROWTH PORTFOLIO
- --------------------------------------------------------------------------------------------------
Year Ended Year Ended
August 31, 1995 August 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends(1) ................................. $ 37,847 $ 57,741
Interest...................................... 11,115 6,009
- --------------------------------------------------------------------------------------------------
Total Income........................... 48,962 63,750
- --------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee.................................. $4,523 $4,369
Performance Adjustment..................... -- 4,523 518 4,887
------ ------
The Vanguard Group--Note C
Management & Administrative................ 5,996 9,728
Marketing and Distribution................. 502 6,498 642 10,370
------ ------
Taxes (other than income taxes)............... 186 248
Custodians' Fees.............................. 13 2,247
Auditing Fees................................. 9 9
Shareholders' Reports......................... 99 187
Annual Meeting and Proxy Costs................ 42 45
Directors' Fees and Expenses.................. 9 13
- --------------------------------------------------------------------------------------------------
Total Expenses......................... 11,379 18,006
Expenses Paid Indirectly--Note C........ (698) (401)
- --------------------------------------------------------------------------------------------------
Net Expenses........................ 10,681 17,605
- --------------------------------------------------------------------------------------------------
Net Investment Income............... 38,281 46,145
- --------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold.................... 91,924 16,668
Foreign Currencies and Forward Currency Contracts -- (32,883)
- --------------------------------------------------------------------------------------------------
Realized Net Gain (Loss)............ 91,924 (16,215)
- --------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities......................... 388,046 35,670
Foreign Currencies and Forward Currency Contracts -- 47,097
- --------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation).................... 388,046 82,767
- --------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations......... $518,251 $112,697
==================================================================================================
</TABLE>
(1) Dividends for the International Growth Portfolio are net of foreign
withholding taxes of $9,606,000.
16
<PAGE> 19
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, 1995 August 31, 1994 AUGUST 31, 1995 August 31, 1994
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income................. $ 38,281 $ 24,103 $ 46,145 $ 31,686
Realized Net Gain (Loss).............. 91,924 4,709 (16,215) 35,464
Change in Unrealized Appreciation
(Depreciation)...................... 388,046 99,469 82,767 322,922
- -----------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations...... 518,251 128,281 112,697 390,072
- -----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income................. (24,203) (25,703) (38,607) (16,917)
Realized Net Gain..................... -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Total Distributions.............. (24,203) (25,703) (38,607) (16,917)
- -----------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular..................... 688,919 380,823 754,485 804,345
--In Lieu of Cash Distributions 23,081 21,905 36,111 15,892
--Exchange.................... 278,467 128,844 368,755 992,770
Redeemed--Regular..................... (326,198) (332,474) (323,043) (264,837)
--Exchange.................... (132,698) (292,386) (545,911) (409,381)
- -----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions..... 531,571 (93,288) 290,397 1,138,789
- -----------------------------------------------------------------------------------------------------------------
Total Increase................... 1,025,619 9,290 364,487 1,511,944
- -----------------------------------------------------------------------------------------------------------------
Net Assets
Beginning of Year..................... 1,963,431 1,954,141 2,989,158 1,477,214
- -----------------------------------------------------------------------------------------------------------------
End of Year (3)....................... $2,989,050 $1,963,431 $3,353,645 $2,989,158
=================================================================================================================
(1) Distributions Per Share
Net Investment Income............. $.18 $.21 $.18 $.11
Realized Net Gain................. -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued............................ 57,733 34,159 80,730 134,746
Issued in Lieu of Cash Distributions 1,504 1,453 2,719 1,180
Redeemed.......................... (27,003) (41,944) (63,495) (50,592)
- -----------------------------------------------------------------------------------------------------------------
32,234 (6,332) 19,954 85,334
- -----------------------------------------------------------------------------------------------------------------
(3) Undistributed Net
Investment Income--Note D......... $ 29,948 $ 15,870 $ 35,617 $ 28,464
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
U.S. GROWTH PORTFOLIO
- --------------------------------------------------------------------------------------------------
Year Ended August 31,
------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ......... $15.52 $14.71 $14.71 $13.69 $10.38
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.................... .25 .20 .21 .19 .20
Net Realized and Unrealized Gain (Loss)
on Investments......................... 3.24 .82 .05 1.02 3.30
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS ... 3.49 1.02 .26 1.21 3.50
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income..... (.18) (.21) (.18) (.19) (.19)
Distributions from Realized Capital Gains -- -- (.08) -- --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS ................ (.18) (.21) (.26) (.19) (.19)
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR ............... $18.83 $15.52 $14.71 $14.71 $13.69
==================================================================================================
TOTAL RETURN ............................... +22.75% +6.98% +1.69% +8.83% +34.28%
- --------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions).......... $2,989 $1,963 $1,954 $1,441 $747
Ratio of Expenses to Average Net Assets..... .47%+ .52% .49% .49% .56%
Ratio of Net Investment Income to
Average Net Assets....................... 1.59% 1.30% 1.50% 1.52% 1.82%
Portfolio Turnover Rate..................... 32% 47% 37% 24% 30%
- --------------------------------------------------------------------------------------------------
</TABLE>
+ Effective in fiscal 1995, does not include expense reductions from
directed brokerage arrangements (see Note C). The Ratio of Net Expenses to
Average Net Assets is .44%.
18
<PAGE> 21
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH PORTFOLIO
- ---------------------------------------------------------------------------------------------------
Year Ended August 31,
-------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ......... $14.36 $12.02 $10.15 $10.31 $11.81
INVESTMENT OPERATIONS
Net Investment Income.................... .20 .14 .12 .20 .18
Net Realized and Unrealized Gain (Loss)
on Investments......................... .32 2.31 1.96 (.05) (.80)
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ... .52 2.45 2.08 .15 (.62)
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income..... (.18) (.11) (.21) (.19) (.20)
Distributions from Realized Capital Gains -- -- -- (.12) (.68)
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ................ (.18) (.11) (.21) (.31) (.88)
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR ............... $14.70 $14.36 $12.02 $10.15 $10.31
===================================================================================================
TOTAL RETURN ............................... +3.76% +20.44% +21.06% +1.49% -5.11%
- ---------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions).......... $3,354 $2,989 $1,477 $919 $846
Ratio of Expenses to Average Net Assets..... .59%+ .46% .59% .58% .67%
Ratio of Net Investment Income to
Average Net Assets....................... 1.53% 1.37% 1.27% 2.04% 1.80%
Portfolio Turnover Rate..................... 31% 28% 51% 58% 49%
- ---------------------------------------------------------------------------------------------------
</TABLE>
+ Effective in fiscal 1995, does not include expense reductions from
directed brokerage arrangements (see Note C). The Ratio of Net Expenses to
Average Net Assets is .58%.
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.
19
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
(continued)
2. FOREIGN CURRENCY: Securities and other assets and liabilities denominated
in foreign currencies are translated into U.S. dollars at the bid prices of
those currencies against U.S. dollars last quoted by major banks as of 4:00
PM London Time on the valuation date.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on securities from the portion arising
from changes in market prices of securities. Such fluctuations are included
in realized net gains (losses) and unrealized appreciation (depreciation) on
investment securities. Changes in the value of other assets and liabilities
resulting from changes in foreign exchange rates are recorded as unrealized
foreign currency gains (losses) until settled in cash, at which time realized
foreign currency gains (losses) are recognized.
3. FORWARD CURRENCY CONTRACTS: The International Growth Portfolio enters into
forward currency contracts to protect the value of 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
counterparties to fulfill their obligations under the contracts. Fluctuations
in the value of such contracts are recorded as unrealized appreciation
(depreciation) until terminated, at which time realized gains (losses) are
recognized.
4. 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.
5. 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 a custodian bank
until maturity of the repurchase agreements. Provisions of each agreement
require 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.
6. DISTRIBUTIONS: Distributions to shareholders are recorded on the ex-dividend
date. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting
purposes. See Note E.
7. OTHER: Dividend income is recorded on the ex-dividend date. 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.
B. U.S. GROWTH PORTFOLIO: Under the terms of a contract which expires March 31,
1996, 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, 1995, the investment advisory fee represented an effective
annual rate of .19 of 1% of the Portfolio's average net assets.
INTERNATIONAL GROWTH PORTFOLIO: Under the terms of a contract which expires
March 31, 1996, 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, 1995, the
investment advisory fee represented an effective annual base rate of .14 of 1%
of the Portfolio's average net assets before an increase of $518,000
(.02 of 1%) based on performance.
20
<PAGE> 23
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, 1995, the Fund had contributed capital of $823,000
to Vanguard (included in Other Assets), representing 4.1% 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 to the Fund 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, 1995,
directed brokerage arrangements reduced the expenses of the U.S. Growth
and International Growth Portfolios by $698,000 (.03 of 1% of average net
assets) and $401,000 (.01 of 1% of average net assets), respectively.
D. During the year ended August 31, 1995, 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 $1,240,962 $724,609
INTERNATIONAL GROWTH 1,154,606 911,408
- -----------------------------------------------
</TABLE>
During the year ended August 31, 1995, the U.S. Growth Portfolio realized
$672,000 of net capital gains resulting from in-kind redemptions. Such gains
are not taxable to the Portfolio and therefore will not be distributed to
shareholders; accordingly, such gains have been reclassified from accumulated
net realized gains to paid in capital.
During the year ended August 31, 1995, the International Growth Portfolio
realized net foreign currency losses of $385,000 which reduced distributable
net income for tax purposes; accordingly such losses have been reclassified from
accumulated net realized losses to reduce undistributed net investment income.
The U.S. Growth and International Growth Portfolios utilized capital loss
carryforwards of $15,721,000 and $20,227,000, respectively, to offset taxable
capital gains realized during the year ended August 31, 1995.
E. At August 31, 1995, net 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 $691,566 $ (3,567) $687,999
INTERNATIONAL GROWTH 682,356 (69,935) 612,421
- --------------------------------------------------------------------
</TABLE>
Under the terms of open forward currency contracts at August 31, 1995, the
International Growth Portfolio was obligated to deliver foreign currency in
exchange for U.S. dollars as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------
(000)
-----------------------
Contract Foreign U.S.
Settlement Date Currency Dollars
- -------------------------------------------------
<S> <C> <C>
9/22/95 JAPANESE YEN 28,600,000 $333,401
- -------------------------------------------------
</TABLE>
Unrealized appreciation related to open forward currency contracts of
$40,716,000 is required to be treated as realized gain for tax purposes. After
adjusting the International Growth Portfolio's accumulated net realized losses
of $28,210,000 for the unrealized appreciation on forward currency contracts,
the Portfolio had $12,506,000 of tax basis capital gains available for
distribution.
At August 31, 1995, the International Growth Portfolio had net unrealized
foreign currency losses of $406,000 resulting from the translation of other
assets and liabilities.
F. The market value of the International Growth Portfolio securities on loan to
broker/dealers at August 31, 1995, was $76,604,000 for which the Portfolio had
received cash collateral of $81,496,000.
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, 1995, and 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 LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
October 10, 1995
22
<PAGE> 25
SPECIAL TAX INFORMATION
SPECIAL 1995 TAX INFORMATION (UNAUDITED)
FOR VANGUARD U.S. GROWTH PORTFOLIO
Corporate shareholders should note that for the fiscal year ended August 31,
1995, 67% of the investment income (i.e., dividend income plus short-term
capital gains, if any) qualifies for the intercorporate dividends received
deduction.
SPECIAL 1995 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, 1995. In accordance
with current tax laws, the Foreign Income and Foreign Tax per share (for a
share outstanding on 8/31/95) is as follows:
<TABLE>
<CAPTION>
GROSS FOREIGN FOREIGN
COUNTRY DIVIDENDS TAX
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Argentina .0006 .0000
Australia .0074 .0000
Belgium .0002 .0000
Brazil .0052 .0008
Chile .0013 .0005
Finland .0022 .0003
France .0301 .0045
Germany .0123 .0012
Hong Kong .0264 .0000
Indonesia .0026 .0004
Italy .0109 .0035
Japan .0297 .0045
Korea .0062 .0010
Malaysia .0068 .0020
Mexico .0012 .0000
Netherlands .0391 .0059
Norway .0027 .0004
Philippines .0004 .0001
Singapore .0053 .0014
Sweden .0037 .0006
Switzerland .0122 .0018
Thailand .0030 .0003
United Kingdom .0857 .0129
- ---------------------------------------------------------------------------------------
</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 1995.
Accordingly, shareholders will receive more detailed information along with
their Form 1099-DIV in January 1996.
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 of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts Mutual
Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of 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 Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co.,
and The Standard Products Co.
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 Co.
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. and
Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University and the
Culver Educational Foundation.
OTHER FUND OFFICERS
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.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and 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
ROBERT A. DISTEFANO IAN A. MACKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
24
<PAGE> 27
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LIFEStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
[LOGO]
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.
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q230-8/95
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson
sailed his flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night
encounter, the British fleet decimated Napoleon Bonaparte's ships of the line
in what is still considered to be the most complete victory ever recorded in
naval history. Our Report's cover illustration is Thomas Luny's 1830 painting,
The Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 28
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 battle ships in the
night.
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sextant, a map and ships in the background appear at
the top of pages one through four.
A line chart of the Indexed Value (Standard & Poor's Value Index and Standard &
Poor's Growth Index) of the U.S. Growth Portfolio of World Fund for the fiscal
years 1991 through 1995 appears at the upper-left of page 2.
A line chart of the Indexed Value (MSCI Europe Index and MSCI Pacific Index) of
the International Growth Portfolio of World Fund for the fiscal years 1991
through 1995 appears at the upper-right of page 3.
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, 1985 to August 31, 1995 appears 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, 1985 to August 31, 1995 appear at the bottom
of page 5.
A running head featuring open log book, pen and ships in the background appears
at the top of pages six through eight.
A running head featuring ships wheel, rope and ships in the background appears
at the top of pages nine and ten.
A running head featuring open log book, pen and ships in the background appears
at the top of pages eleven through twenty three.
A running head featuring birds flying and ships in the background appears at
the top of pages twenty four and twenty five.
