<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-17620) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 70 /X/
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 70 /X/
VANGUARD WORLD FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ARTICLES OF INCORPORATION)
P.O. BOX 2600,
VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, SECRETARY
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE
on April 29, 1996 pursuant to paragraph (a) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SECURITIES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24f-2 OF THE INVESTMENT COMPANY ACT OF
1940. REGISTRANT FILED ITS RULE 24f-2 NOTICE FOR ITS FISCAL YEAR ENDED AUGUST
31, 1995, WITH THE COMMISSION ON OCTOBER 26, 1995.
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<PAGE> 2
VANGUARD WORLD FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
- ----------- ----------------------------------------
<S> <C> <C>
Item 1. Cover Page.............................. Cover Page
Item 2. Synopsis................................ Not Applicable
Item 3. Condensed Financial Information......... Financial Highlights
Item 4. General Description of Registrant....... Investment Objective; Investment
Policies; General Information
Item 5. Management of the Fund.................. Management of the Portfolio
Item 6. Capital Stock and Other Securities...... Opening an Account and Purchasing
Shares; Selling Your Shares; The Share
Price of the Portfolio; Dividends,
Capital Gains and Taxes; General
Information Cover Page; Other Vanguard
Services
Item 7. Purchase of Securities Being Offered.... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase................ Selling Your Shares
Item 9. Pending Legal Proceedings............... Not Applicable
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
- ----------- ----------------------------------------
Item 10. Cover Page.............................. Cover Page
Item 11. Table of Contents....................... Cover Page
Item 12. General Information and History......... Investment Objective and Policies;
Management of the Fund
Item 13. Investment Objective and Policies....... Investment Objective and Policies;
Investment Limitations
Item 14. Management of the Fund.................. Management of the Fund; Investment
Advisory Services
Item 15. Control Persons and Principal Holders of
Securities.............................. Management of the Fund
Item 16. Investment Advisory and Other
Services................................ Management of the Fund; Investment
Advisory Services
Item 17. Brokerage Allocation.................... Portfolio Transactions
Item 18. Capital Stock and Other Securities...... Financial Statements
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered................ Purchase of Shares; Redemption of
Shares; Financial Statements
Item 20. Tax Status.............................. Not Applicable
Item 21. Underwriters............................ Not Applicable
Item 22. Calculations of Yield Quotations of
Money Market Fund....................... Not Applicable
Item 23. Financial Statements.................... Financial Statements
</TABLE>
<PAGE> 3
Vanguard
U.S. Growth
Portfolio
Prospectus
April 29, 1996
This prospectus contains financial data for the Portfolio through the fiscal
year ended August 31, 1995.
[THE VANGUARD GROUP LOGO]
<PAGE> 4
PORTFOLIO PROFILE
WHO SHOULD INVEST (page 4)
- - Investors seeking a growth stock mutual fund as part of a balanced and
diversified investment program.
- - Investors seeking growth of their capital over the long term --
at least five years.
WHO SHOULD NOT INVEST
- - Investors seeking current dividend income.
- - Investors unwilling to accept significant fluctuations in share price.
RISKS OF THE PORTFOLIO (pages 4 - 7)
This Portfolio's total return will fluctuate within a wide range, so an
investor could lose money over short or even extended periods. The Portfolio is
subject to manager risk (the chance that poor security selection will cause it
to lag the stock market as a whole) and, as a growth stock fund, to objective
risk (the chance that returns from growth stocks will trail returns from the
overall stock market).
DIVIDENDS AND CAPITAL GAINS (page 9)
Paid annually in December.
INVESTMENT ADVISER (page 10)
Lincoln Capital Management Company, Chicago, IL.
QUARTERLY RETURNS (%) 1986-1995
Vanguard U.S. Growth Portfolio
INCEPTION DATE: January 6, 1959
NET ASSETS AS OF 8/31/95: $2.98 billion
PORTFOLIO'S EXPENSE RATIO FOR THE
YEAR ENDED 8/31/95: 0.47%
LOADS, 12b-1 MARKETING FEES: None
SUITABLE FOR IRAs: Yes
Minimum Initial Investment: $3,000; $1,000 for IRAs and accounts for minors
NEWSPAPER ABBREVIATION: USGro
VANGUARD FUND NUMBER: 023
ACCOUNT FEATURES (page 13)
- - Telephone Redemption
- - Vanguard Direct Deposit Service(sm)
- - Vanguard Automatic Exchange Service(sm)
- - Vanguard Fund Express(R)
- - Vanguard Dividend Express(sm)
AVERAGE ANNUAL TOTAL RETURN --
PERIODS ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
U.S. Growth Portfolio +22.8% +14.3% +12.9%
S&P 500 Index +21.4 +15.1 +15.1
</TABLE>
[ GRAPH ]
In evaluating past performance, remember that it is not indicative of future
performance and that returns from stocks before adjusting for inflation were
relatively high during the periods shown. Performance figures include the
reinvestment of any dividends and capital gains distributions. The returns
shown are net of expenses, but they do not reflect income taxes an investor
would have incurred. Note, too, that both the 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.
1
<PAGE> 5
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Portfolio Expenses 2
Financial Highlights 3
A Word About Risk 4
The Portfolio's Objective 4
Who Should Invest 4
Investment Strategies 5
Investment Policies 7
Investment Limitations 8
Investment Performance 8
Share Price 9
Dividends, Capital Gains, and Taxes 9
The Portfolio and Vanguard 10
Investment Adviser 10
General Information 11
Investing with Vanguard 12
Services and Account Features 13
Types of Accounts 13
Distribution Options 14
Buying Shares 15
Redeeming Shares 16
Fund and Account Updates 18
Prospectus Postscript 20
Glossary Inside Back Cover
</TABLE>
VANGUARD U.S. GROWTH PORTFOLIO A Growth Stock Mutual Fund
INVESTMENT OBJECTIVE AND POLICIES
Vanguard U.S. Growth Portfolio (the "Portfolio") is a diversified mutual fund,
a part of Vanguard World Fund, Inc. (the "Fund"), an open-end investment
management company.
The Portfolio seeks to provide long-term capital growth by investing in
equity securities of high-quality, seasoned U.S. companies with records of
exceptional growth. The Portfolio emphasizes companies with strong positions in
their markets, reasonable financial strength, and low sensitivity to changing
economic conditions.
IT IS IMPORTANT TO NOTE THAT THE PORTFOLIO'S SHARES ARE NOT GUARANTEED OR
INSURED BY THE FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT. AS WITH ANY
INVESTMENT IN COMMON STOCKS, WHICH ARE SUBJECT TO WIDE FLUCTUATIONS IN MARKET
VALUE, YOU COULD LOSE MONEY BY INVESTING IN THE PORTFOLIO.
FEES AND EXPENSES
The Portfolio is offered on a no-load basis, which means that you pay no sales
commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the expense ratio.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
A Statement of Additional Information containing more information about the
Portfolio is, by reference, part of this prospectus and may be obtained without
charge by writing to Vanguard or by calling our Investor Information Department
at 1-800-662-7447.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of the U.S.
Growth Portfolio. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk" explanations along the way. Reading
the prospectus will help you to decide whether the Portfolio is the right
investment for you. We suggest that you keep it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE> 6
Plain Talk About
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time,
have a dramatic impact on a fund's performance.
PORTFOLIO EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Portfolio.
As noted in this table, you do not pay fees of any kind when you buy, sell,
or exchange shares of the Portfolio:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
</TABLE>
The next table illustrates the operating expenses that you would incur as a
shareholder of the Portfolio. These expenses are deducted from the Portfolio's
income before it is paid to you. Expenses include investment advisory fees as
well as the costs of maintaining accounts, administering the Portfolio,
providing shareholder services, and other activities. The expenses shown in the
table are for the fiscal year ended August 31, 1995.
Plain Talk About
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard U.S. Growth Portfolio's expense ratio in fiscal year 1995
was 0.47%, or $4.70 per $1,000 of average net assets. The average growth equity
mutual fund had expenses in 1995 of 1.36%, or $13.60 per $1,000 of average net
assets, according to Lipper Analytical Services, Inc., which reports on the
mutual fund industry.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES
<S> <C>
Management and Administrative Expenses: 0.25%
Investment Advisory Expenses: 0.19%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.01%
----
Total Other Expenses: 0.03%
----
Total Operating Expenses (Expense Ratio): 0.47%
====
</TABLE>
The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes (1) that
the Portfolio provides a return of 5% a year and (2) that you redeem your
investment at the end of each period.
<TABLE>
<CAPTION>
--------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------
<S> <C> <C> <C>
$5 $15 $26 $59
--------------------------------------------
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 7
Plain Talk About
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Portfolio began fiscal 1995 with a net asset value (price) of $15.52 per
share. During the year, the Portfolio earned $0.25 per share from investment
income (interest and dividends) and $3.24 per share from investments that had
appreciated in value or that were sold for higher prices than the Portfolio paid
for them. Of those total earnings of $3.49 per share, $0.18 per share was
returned to shareholders in the form of dividend distributions. The earnings
($3.49 per share) less distributions ($0.18 per share) resulted in a share price
of $18.83 at the end of the year, an increase of $3.31 per share (from $15.52 at
the beginning of the period to $18.83 at the end of the period). Assuming that
the shareholder had reinvested the distribution in the purchase of more shares,
total return from the Portfolio was 22.75% for the year.
As of August 31, 1995 the Portfolio had $2.98 billion in net assets;
an expense ratio of 0.47% ($4.70 per $1,000 of net assets); and net investment
income amounting to 1.59% of its average net assets. It sold and replaced
securities valued at 32% of its total net assets.
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended August 31, 1995. The financial
highlights were audited by Price Waterhouse LLP, independent accountants. You
should read this information in conjunction with the Portfolio's financial
statements and accompanying notes, which appear, along with the audit report
from Price Waterhouse, in the Portfolio's most recent Annual Report to
shareholders. The Annual Report is incorporated by reference in the Statement
of Additional Information and in this prospectus, and contains a more complete
discussion of the Portfolio's performance. You may have the Report sent to you
without charge by writing to Vanguard or by calling our Investor Information
Department.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Year Ended August 31,
---------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986*
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $15.52 $14.71 $14.71 $13.69 $10.38 $10.01 $7.17 $12.74 $13.21 $9.94
------ ------ ------ ------ ------ ------ ----- ------ ------ -----
Investment Operations
Net Investment Income .25 .20 .21 .19 .20 .14 .11 .10 .30 .24
Net Realized and
Unrealized Gain (Loss)
on Investments 3.24 .82 .05 1.02 3.30 .36 2.79 (2.10) 1.45 3.03
------ ------ ------ ------ ------ ------ ----- ------ ------ -----
Total from Investment
Operations 3.49 1.02 .26 1.21 3.50 .50 2.90 (2.00) 1.75 3.27
- --------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net
Investment
Income (.18) (.21) (.18) (.19) (.19) (.13) (.06) (.31) (.28) -
Distributions from
Realized Capital Gains - - (.08) - - - - (3.26) (1.94) -
------ ------ ------ ------ ------ ------ ----- ------ ------ -----
Total Distributions (.18) (.21) (.26) (.19) (.19) (.13) (.06) (3.57) (2.22) -
- --------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $18.83 $15.52 $14.71 $14.71 $13.69 $10.38 $10.01 $7.17 $12.74 $13.21
========================================================================================================
Total Return 22.75% 6.98% 1.69% 8.83% 34.28% 5.03% 40.72% (21.62)% 17.81% 32.90%
========================================================================================================
Ratios/Supplemental Data
Net Assets, End of
Period (Millions) $2,989 $1,963 $1,954 $1,441 $747 $339 $184 $130 $184 $188
Ratio of Expenses to
Average Net Assets .47%** .52% .49% .49% .56% .74% .95% .88% .65% .80%***
Ratio of Net Investment
Income to Average
Net Assets 1.59% 1.30% 1.50% 1.52% 1.82% 1.77% 1.44% 1.23% 2.41% 2.27%*
Portfolio Turnover Rate 32% 47% 37% 24% 30% 49% 48% 38% 142 77%
</TABLE>
- ---------------------------
* Partial period: October 1, 1985, to August 31, 1986.
** Beginning in fiscal year 1995, this figure does not include expense
reductions from directed brokerage arrangements. The Ratio of Net
Expenses to Average Net Assets was 0.44%.
*** Annualized.
________________________________________________________________________________
From time to time, the Vanguard Funds advertise yield and total return
figures. Yield is an historical measure of dividend income, and total
return is a measure of past dividend income (assuming that it has been
reinvested) plus capital appreciation. Neither yield nor total return
should be used to predict the future performance of a fund.
3
<PAGE> 8
Plain Talk About
GROWTH FUNDS AND VALUE FUNDS
Growth investing and value investing are two styles employed by stock fund
managers. Growth funds generally focus on companies that, due to their strong
earnings and revenue potential, offer above-average prospects for capital
growth, with less emphasis on dividend income. Value funds generally emphasize
companies that, considering their assets and earnings history, are
attractively priced; these companies often pay regular dividend income to
shareholders. Growth and value stocks have, in the past, produced similar
long-term returns, though each has periods when it outperforms the other.
In general, growth funds appeal to investors who will accept more volatility
in hope of a greater increase in share price, while value funds are appropriate
for investors who want some dividend income and the potential for capital gains
but are less tolerant of share-price fluctuations.
================================================================================
A WORD ABOUT RISK
This prospectus describes the risks you will face as an investor in Vanguard
U.S. Growth Portfolio. It is important to keep in mind one of the main axioms
of investing: the higher the risk of losing money, the higher the potential
reward. The reverse, also, is generally true: the lower the risk, the lower
the potential reward. However, as you consider an investment in the U.S.
Growth Portfolio, you should also take into account your personal tolerance
for the daily fluctuations of the stock market.
Look for this "warning flag" symbol [WARNING FLAG] throughout the prospectus.
It is used to mark detailed information about each type of risk that you, as a
shareholder of the Portfolio, will confront.
================================================================================
THE PORTFOLIO'S OBJECTIVE
The Portfolio seeks to provide long-term growth in capital. This objective is
fundamental, which means that it cannot be changed unless a majority of
shareholders vote to do so.
[WARNING FLAG] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING
PAGES, YOUR INVESTMENT IN THE PORTFOLIO, AS WITH ANY INVESTMENT
IN COMMON STOCKS, COULD LOSE MONEY.
Plain Talk About
INVESTING FOR THE LONG TERM
Vanguard U.S. Growth Portfolio is intended to be a long-term investment
vehicle and is not designed to provide investors with a means of speculating on
short-term fluctuations in the stock market.
WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:
- - You wish to add a growth stock fund to your existing holdings, which
could include other stock -- as well as bond, money market, and
tax-exempt -- investments.
- - You are seeking growth of capital over the long term -- at least five
years.
- - You are not looking for current income.
- - You characterize your investment temperament as "relatively aggressive."
- - You are seeking a fund that emphasizes good-quality companies with
established records of growth.
This Portfolio is not an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of the Portfolio's shareholders. To
minimize such costs, which reduce the ultimate returns achieved by you and
other shareholders, the Portfolio has adopted the following policies:
- - The Portfolio reserves the right to reject any purchase request --
including exchanges from other Vanguard Funds -- that it regards as
disruptive to the efficient management of the Portfo-
4
<PAGE> 9
lio. This could be because of the timing of the investment or because of a
history of excessive trading by the investor.
- - There is a limit on the number of times you can exchange into or out of
the Portfolio (see "Redeeming Shares" in the INVESTING WITH VANGUARD
section).
- - The Portfolio reserves the right to stop offering shares at any time.
Plain Talk About
COSTS AND MARKET TIMING
Some investors try to profit from "market timing" -- switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all
fund shareholders, including the long-term investors who do not generate the
costs. Therefore, the Portfolio discourages short-term trading by, among other
things, limiting the number of exchanges it permits.
INVESTMENT STRATEGIES
This section explains how the Portfolio's investment adviser pursues the
objective of long-term growth in capital. It also explains three important
risks -- market risk, objective risk, and manager risk -- faced by investors in
the Portfolio. Unlike the Portfolio's investment objective, the adviser's
investment strategies are not fundamental and can be changed by the Portfolio's
Board of Directors without shareholder approval. However, before making any
important change in its strategies, the Portfolio will give shareholders
30-days notice, in writing.
Plain Talk About
LARGE-CAP, MID-CAP,and SMALL-CAP STOCKS
Stocks of publicly traded companies -- and mutual funds that hold these stocks
- -- can be classified by the companies' market value, or capitalization. Vanguard
defines large-cap, funds as those holding stocks of companies with an average
total market value exceeding $5 billion. Mid-cap funds hold stocks of companies
with an average market value between $750 million and $5 billion. Small-cap
funds hold stocks of companies with an average market value of less than $750
million.
MARKET EXPOSURE
The Portfolio invests chiefly in large-capitalization common stocks that offer
favorable prospects for capital growth but that produce little current income.
At times, the Portfolio may also invest in securities that are convertible into
common stocks.
[WARNING FLAG] THE PORTFOLIO IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY
THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN
EXTENDED PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH
PERIODS OF RISING STOCK PRICES AND PERIODS OF FALLING STOCK
PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns (dividend income plus change in market
value) for the U.S. stock market over various periods as measured by the
Standard & Poor's 500 Composite Stock Price Index, a widely used barometer
of stock market activity. Note that the returns shown do not include the costs
of buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, how the gap between best and worst tends
to narrow over the long term.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1995)
- ----------------------------------------------------------
1 Year 5 Years 10 Years 20 Years
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% %20.1% %16.9%
Worst -43.3 -12.5 -.9 +3.1
Average +12.5 +10.3 +10.7 +10.7
- ----------------------------------------------------------
</TABLE>
5
<PAGE> 10
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1995. For example, while the average return on stocks for all of the
5-year periods was +10.3%, returns for these five-year periods ranged from a
- -12.5% average (from 1928 through 1932), to +23.9% (from 1951 through 1955).
These average returns reflect past performance on common stocks and
should not be regarded as an indication of future returns from either the stock
market as a whole or this Portfolio in particular.
Finally, because the U.S. Growth Portfolio does not hold the same securities
held in the Standard & Poor's 500 Index or any other market index, the
performance of the Portfolio will not mirror the returns of any particular
index.
[WARNING FLAG]
THE PORTFOLIO IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE POSSIBILITY THAT
RETURNS FROM GROWTH STOCKS WILL TRAIL RETURNS FROM THE OVERALL STOCK
MARKET. AS A GROUP, GROWTH STOCKS TEND TO GO THROUGH CYCLES OF RELATIVE
UNDERPERFORMANCE AND OUTPERFORMANCE IN COMPARISON TO COMMON STOCKS IN
GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL
YEARS.
Plain Talk About
PORTFOLIO DIVERSIFICATION
In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average U.S. equity mutual fund has
about 25% of its assets invested in its ten largest holdings, while some
less-diversified mutual funds have more than 50% of their assets invested in the
stocks of just ten companies.
SECURITY SELECTION
Lincoln Capital Management Company (Lincoln), adviser to the Portfolio, selects
common stocks of seasoned U.S. companies that have past records of growth and,
in Lincoln's opinion, above-average prospects for continued growth. Such
companies tend to have strong positions in their markets, reasonable financial
strength, and relatively low sensitivity to changing economic conditions.
Lincoln seeks to identify stocks that sell at attractive prices in relation to
their growth potential. The top ten holdings (which amounted to 40% of the
Portfolio's total net assets) as of August 31, 1995, follow.
1. Wal-Mart Stores, Inc.
2. General Electric Co.
3. Philip Morris Cos., Inc.
4. The Coca-Cola Co.
5. Intel Corp.
6. Johnson & Johnson
7. AT&T Corp.
8. PepsiCo, Inc.
9. Automatic Data Processing Inc.
10. Procter & Gamble Co.
Keep in mind that, because the makeup of the Portfolio changes daily, this
listing is only a "snapshot" at one point in time. Note, too, that the
Portfolio's relatively low level of diversification means that there is a
greater chance that the poor performance of a single stock held could hurt the
Portfolio.
The Portfolio is run by Lincoln according to traditional methods of active
investment management, which means securities are
6
<PAGE> 11
bought and sold according to Lincoln's judgments about companies and their
financial prospects, and about the stock market and the economy in general.
[WARNING FLAG] THE PORTFOLIO IS SUBJECT TO MANAGER RISK, WHICH IS THE
POSSIBILITY THAT LINCOLN MAY DO A POOR JOB OF SELECTING STOCKS.
Plain Talk About
PORTFOLIO TURNOVER
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. Also, funds with high portfolio turnover rates
may be more likely than low-turnover funds to generate capital gains that must
be distributed to shareholders as taxable income. The average turnover rate for
actively managed funds investing in common stocks is 75%.
PORTFOLIO TURNOVER
Although the Portfolio generally seeks to invest for the long term, it retains
the right to sell securities regardless of how long they have been held. The
Portfolio's average turnover rate for the past ten years has been about 50%. (A
turnover rate of 100% would occur, for example, if the Portfolio sold and
replaced securities valued at 100% of its total net assets within a one-year
period.)
Plain Talk About
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new, exotic types of derivatives -- some of which
can carry considerable risks.
INVESTMENT POLICIES
Besides investing in common stocks of growth companies, the Portfolio may
follow a number of investment policies to achieve its objective.
[WARNING FLAG] ALTHOUGH IT HAS NOT DONE SO IN THE PAST, THE PORTFOLIO RESERVES
THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN STOCK FUTURES AND
OPTIONS CONTRACTS, WHICH ARE TRADITIONAL TYPES OF DERIVATIVES.
Losses (or gains) involving futures can sometimes be substantial -- in part
because a relatively small price movement in a futures contract may result in an
immediate and a substantial loss (or gain) for a Portfolio. This Portfolio will
not use futures and options for speculative purposes or as leveraged investments
that magnify the gains or losses of an investment. Rather, the Portfolio will
keep separate cash reserves or short-term cash-equivalent securities in the
amount of the obligation underlying the futures contract. Only a limited
percentage of the Portfolio's assets -- up to 5% if required for deposit and no
more than 20% of total assets -- may be committed to such contracts.
The reasons for which the Portfolio may use futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To make it easier to trade.
- - To reduce costs by buying futures instead of actual stocks when futures
are cheaper.
The Portfolio will usually hold only a small percentage of its assets in cash
reserves, although if the investment adviser believes that market conditions
warrant a temporary defensive measure, the Portfolio may hold cash reserves
without limit.
7
<PAGE> 12
INVESTMENT LIMITATIONS
To reduce risk and maintain diversification, the Portfolio has adopted limits
on some of its investment policies. Specifically, the Portfolio will not:
- - Invest more than 5% of its assets in the securities of companies that
have been in business for less than three years.
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for the purpose of meeting shareholder requests to
redeem shares.
With respect to 75% of its assets, this Portfolio will not:
- - Invest more than 5% in the securities of any one company.
- - Buy more than 10% of the outstanding voting securities of any company.
The limitations listed in this prospectus and in the Statement of Additional
Information are fundamental and may be changed only by approval of a majority
of the Portfolio's shareholders.
Plain Talk About
PAST PERFORMANCE
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
INVESTMENT PERFORMANCE
Vanguard U.S. Growth Portfolio invests primarily in common stocks, so its
performance is closely correlated to the performance of the overall stock
market. Historically, stock market performance has been characterized by sharp
up-and-down swings in the short term and by more stable growth over the long
term.
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 8/31/95
[ BAR GRAPH ]
The results shown above represent the Portfolio's "average annual total
return" performance, which assumes that any distributions of capital gains and
dividends were reinvested for the indicated periods. Also included is
comparative information on the unmanaged Standard & Poor's 500 Index. The chart
does not make any allowance for Federal, state, or local income taxes that
shareholders must pay on a current basis.
In weighing these performance figures, note that the Portfolio has been in
operation since January 6, 1959, and managed by Lincoln Capital Management
since August 31, 1987.
8
<PAGE> 13
Plain Talk About
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive
such earnings as either an income dividend or capital gains distribution.
Income dividends come from the dividends that the fund earns from its holdings
as well as interest it receives from its money market and bond investments.
Capital gains are realized whenever the fund sells securities for higher prices
than it paid for them. These capital gains are either short-term or long-term
depending on whether the fund held the securities for less than or more than
one year.
SHARE PRICE
The Portfolio's share price, called its net asset value, is calculated each
business day after the close of regular trading (generally 4:00 p.m. Eastern
time) of the New York Stock Exchange. Net asset value per share is computed by
adding up the total value of the Portfolio's investments and other assets,
subtracting any of its liabilities, or debts, and then dividing by the number
of Portfolio shares outstanding.
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = ---------------------------------
NUMBER OF SHARES OUTSTANDING
Daily net asset value, or NAV, is useful to you as a shareholder because the
NAV, multiplied by the number of Portfolio shares you own, gives you the dollar
amount you would have received had you sold all of your shares back to the
Portfolio that day.
The Portfolio's share price can be found daily in the mutual fund listings of
most major newspapers under the heading Vanguard Group. Different newspapers
use different abbreviations of the Portfolio's name, but the most common is
USGro.
Plain Talk About
"BUYING A DIVIDEND"
Unless you are investing in a tax-deferred retirement account (such as an IRA),
it is not to your advantage to buy shares of a fund shortly before it makes a
distribution, because part of your investment will come back to you as a
taxable distribution. This is known as "buying a dividend." For example: on
December 15, you invest $5,000, buying 250 shares for $20 each. If the fund
pays a distribution of $1 per share on December 16, its share price would drop
to $19 (not counting market change). You would still have only $5,000
(250 shares x $19 = $4,750 in share value, plus 250 shares x $1 = $250
in distributions), but you would owe tax on the $250 distribution you received,
even if you had reinvested the dividends in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each December, the Portfolio distributes to shareholders virtually all of its
income from interest and dividends, as well as any capital gains realized from
the sale of securities. You can receive distributions of income or capital
gains in cash, or you may have them automatically reinvested in more shares of
the Portfolio. In either case, distributions of dividends and capital gains that
are declared in December -- even if paid to you in January -- are taxed as if
they had been paid to you in December. Vanguard will process your dividend
distribution and send you a statement each year showing the tax status of all
your distributions.
- - The dividends and short-term capital gains that you receive are taxable
to you as ordinary dividend income. Any distributions of net long-term
capital gains by the Portfolio are taxable to you as long-term capital
gains, no matter how long you've owned shares in the Portfolio. Both
dividends and capital gains distributions are taxable to you whether
received in cash or reinvested in additional shares. Although the
Portfolio does not seek to realize any particular amount of capital
gains during a year, such gains are realized from time to time as
byproducts of the ordinary investment activities of the Portfolio.
Consequently, distributions may vary considerably from year to year.
- - If you sell or exchange shares, any gain or loss you have is a taxable
event, which means that you may have a capital gain to report as income,
or a capital loss to report as a deduction, when you complete your
Federal income tax return.
9
<PAGE> 14
- - Distributions of dividends or capital gains, and capital gains or losses
from your sale or exchange of Portfolio shares, may be subject to state
and local income taxes as well.
The tax information in this prospectus is provided as general information
and will not apply to you if you are investing in a tax-deferred account such
as an IRA. You should consult your own tax adviser about the tax consequences
of an investment in the Portfolio.
Plain Talk About
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group, Inc. is the only MUTUAL fund company. It is owned
jointly by the Funds it oversees and by the shareholders in those Funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its Funds at cost. Instead of distributing profits from operations to
a separate management company, Vanguard returns profits to Fund shareholders
in the form of lower operating expenses.
THE PORTFOLIO AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 30 investment
companies with more than 90 distinct investment portfolios and total net assets
of more than $180 billion. All of the Vanguard Funds share in the expenses
associated with business operations, such as personnel, office space,
equipment, and advertising.
Vanguard also provides marketing services to the Funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each Fund pays its
allocated share of the Vanguard Group's costs.
A list of the Fund's Directors and Officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.
INVESTMENT ADVISER
The Portfolio employs Lincoln Capital Management Company, 200 South Wacker
Drive, Chicago, IL 60606, as its investment adviser. Lincoln manages the
Portfolio subject to the control of the Officers and Directors of the Fund.
Lincoln is paid an advisory fee based on average month-end net assets of the
Portfolio and a sliding percentage scale:
<TABLE>
<CAPTION>
---------------------------------
Assets Managed Fee
---------------------------------
<S> <C>
First $25 million 0.40%
Next $125 million 0.35
Next $350 million 0.25
Next $500 million 0.20
Next $1.5 billion 0.15
Assets over $2.5 billion 0.10
---------------------------------
</TABLE>
For the year ended August 31, 1995, the investment advisory fee paid to
Lincoln was $4.52 million.
The fee agreement with Lincoln does not provide for either an incentive bonus
or penalty based on performance. The agreement authorizes Lincoln to choose
brokers or dealers to handle the purchase and sale of the Portfolio's
securities, and directs Lincoln to
10
<PAGE> 15
get the best available price and most favorable execution from these brokers
with respect to all transactions.
The Board of Directors may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser, either as
a replacement for Lincoln or as an additional adviser. However, no such change
would be made before giving shareholders 30-days notice, in writing.
Plain Talk About
THE PORTFOLIO'S ADVISER
Lincoln Capital Management Company, an investment advisory firm founded in
1967, currently manages about $33 billion in assets. It provides investment
counseling services to a limited number of clients, most of which are
institutional clients such as pension funds. The managers overseeing the
implementation of Lincoln's strategy for Vanguard U.S. Growth Portfolio are:
J. PARKER HALL III, President of Lincoln; 39 years investment experience, 25
years with Lincoln; B.A. from Swarthmore College, M.B.A. from Harvard Business
School.
DAVID M. FOWLER, Vice President of Lincoln; 24 years investment experience,
12 years with Lincoln; B.S. from Loyola University, M.B.A. from Northwestern
University.
Both have served in this capacity since Lincoln became the Portfolio's
adviser in August 1987.
GENERAL INFORMATION
The U.S. Growth Portfolio is one of two Portfolios of Vanguard World Fund, Inc.
The other Portfolio is the International Growth Portfolio. Vanguard World Fund
was originally formed as a corporation in 1959 and is now organized under the
laws of the State of Maryland. The Portfolios are combined under one
corporation for administrative purposes, but in virtually all respects operate
like separate corporations.
Shareholders of the U.S. Growth Portfolio have rights and privileges similar
to those enjoyed by other corporate shareholders. For example, shareholders
will not be responsible for any liabilities of the corporation. If any matters
are to be voted on by shareholders (such as a change in a fundamental
investment objective or the election of directors), each share outstanding at
that point would be entitled to one vote. Although the Portfolio does not
usually hold an annual meeting, shareholders may request one under certain
circumstances, which are described in the Statement of Additional Information.
11
<PAGE> 16
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to Fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer you as a Vanguard U.S. Growth Portfolio shareholder. Booklets providing
detailed information are available on the services marked with a [Booklet].
Please call us to request copies.
SERVICES AND ACCOUNT FEATURES
We offer a variety of options designed to fit your financial planning needs,
including . . .
- - Automatic methods for depositing your paycheck or government check, and
moving money between Vanguard Fund accounts or between your Vanguard Fund
account and your bank account.
- - A cost-effective way to complement your Vanguard mutual fund shares with
individual stocks, bonds, and options.
TYPES OF ACCOUNTS
You can establish an account for yourself (or yourself and another party), a
minor child, a trust, or an organization, or as a third-party trustee
retirement investment. We also offer retirement accounts for individuals,
self-employed people, small businesses, partnerships, corporations, and
tax-exempt institutions.
DISTRIBUTION OPTIONS
You can receive your dividends and capital gains in cash, or reinvest them in
additional Portfolio shares.
BUYING SHARES
It's easy to open an account or add money to an existing account.
REDEEMING SHARES
You can withdraw money you have invested in the Portfolio by selling or
exchanging shares.
FUND AND ACCOUNT UPDATES
- - Our clear, concise Portfolio Summaries and tax statements help you keep
track of your Vanguard investments throughout the year as well as when
you are preparing your income tax returns.
- - Twice each year, you will receive comprehensive fund reports about
Vanguard U.S. Growth Portfolio. These reports include an assessment of
the Portfolio's performance (and a comparison to its benchmark index) as
well as a complete listing of its holdings.
- - Vanguard Tele-Account(R) offers toll-free Fund and account information 24
hours a day from any TouchTone(TM) telephone.
- - You can use your personal computer to obtain share price, yield, and
total return -- as well as general investment information -- through
Vanguard Online(sm) and the World Wide Web.
12
<PAGE> 17
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to purchase, sell, or
exchange shares.
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Portfolio unless you notify us otherwise.
VANGUARD DIRECT DEPOSIT EXCHANGE SERVICE
[BOOKLET]
Automatic method for depositing your paycheck or U.S. Government payment
including (Social Security and Government pension checks) into your account.
VANGUARD AUTOMATIC EXCHANGE SERVICE
[BOOKLET]
Automatic method for moving a fixed amount of money from one Vanguard Fund
account to another.*
VANGUARD FUND EXPRESS
[BOOKLET]
Electronic method for purchasing or selling shares: transferring money between
your Vanguard Fund account and an account at your bank, savings and loan, or
credit union -- on a systematic schedule or whenever you wish.*
VANGUARD DIVIDEND EXPRESS
[BOOKLET]
Electronic method for transferring dividends and/or capital gains distributions
directly from your Vanguard Fund account to your bank, savings and loan, or
credit union account or to another Vanguard Fund account.
VANGUARD BROKERAGE SERVICES (VBS)
[BOOKLET]
A way to trade stocks, bonds, and options on major exchanges, Nasdaq, and other
domestic over-the-counter markets at reduced rates, and to buy and sell shares
of non-Vanguard mutual funds. Call VBS (1-800-992-8327) for additional
information and the appropriate forms.
*Can be used to "dollar-cost average" [BOOKLET] or to contribute to an IRA or
other retirement plan.
TYPES OF ACCOUNTS
INDIVIDUAL OR OTHER ENTITY
Vanguard's account registration form can be used to establish a variety of
account types.
FOR ONE OR MORE PEOPLE
To open an account in the name of one (individual) or more (joint tenants)
people. $3,000 minimum initial investment.
FOR A MINOR CHILD
[BOOKLET]
To open an account as an UGMA/UTMA (Uniform Gifts/Transfers to Minors Act). Age
of majority and other transfer requirements are set by state law. $1,000
minimum initial investment.
FOR HOLDING TRUST ASSETS
[BOOKLET]
To register assets held in an existing trust. $3,000 minimum initial
investment.
13
<PAGE> 18
TYPES OF ACCOUNTS (continued)
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
(Vanguard is not the custodian or trustee)
To open an account as a retirement trust or plan based on an existing corporate
or plan. These accounts are established by the custodian or trustee of the
existing plan.
FOR AN ORGANIZATION
To open an account as a corporation, partnership, or other entity. These
accounts may require a corporate resolution or other documents to name the
individuals authorized to act. $3,000 minimum initial investment.
RETIREMENT
These accounts must be established with a Vanguard adoption agreement -- not a
Vanguard account registration form -- and may require additional documentation.
To request the appropriate adoption agreement and forms or to receive answers
to your questions about investing for retirement, call Investor Information.
FOR AN INDIVIDUAL RETIREMENT ACCOUNT (IRA)
(Vanguard Fiduciary Trust Company is the custodian)
To open a retirement account in the name of an individual. IRAs can also be
established through a regular contribution, a direct rollover from an
employer's plan such as a 401(k), or through an asset transfer or rollover
from another financial institution such as a bank or mutual fund company.
$1,000 minimum initial investment.
FOR A SIMPLIFIED EMPLOYEE PENSION PLAN ACCOUNT (SEP-IRA)
(Vanguard Fiduciary Trust Company is the custodian)
To open a retirement account in the name of an employee. SEPs allow employers
to make deductible contributions directly to IRAs established by their
employees. A SEP can be established by self-employed individuals, small
businesses, partnerships, or corporations.
FOR A QUALIFIED RETIREMENT PROGRAM ACCOUNT
(Vanguard Fiduciary Trust Company can be the custodian)
To open a retirement account that allows small business owners or self-employed
individuals to make tax-deductible retirement contributions for themselves and
their employees into Profit Sharing and Money Purchase Pension (Keogh) plans.
FOR A 403(b)(7) CUSTODIAL ACCOUNT
(Vanguard Fiduciary Trust Company is the custodian)
To open a retirement account that allows employees of tax-exempt institutions
(for example, schools or hospitals) to make pre-tax retirement contributions.
DISTRIBUTION OPTIONS
You can receive distributions of dividends and/or capital gains in a number of
ways:
REINVESTMENT
Dividends and capital gains are reinvested in additional shares of the
Portfolio.
DIVIDENDS IN CASH
Dividends are paid by check and mailed to your account's address of record, and
capital gains are reinvested in additional shares of the Portfolio.
14
<PAGE> 19
DISTRIBUTION OPTIONS (continued)
DIVIDENDS AND CAPITAL GAINS IN CASH
Both dividends and capital gains are paid by check and mailed to your account's
address of record.
To electronically transfer cash dividends and/or capital gains to your bank,
savings and loan, or credit union account, or to another Vanguard Fund account,
see Vanguard Dividend Express under "Services and Account Features."
BUYING SHARES
The price you pay for your shares is the Portfolio's next-determined net asset
value after Vanguard receives your request, provided we receive your request
before 4:00 p.m. Eastern time (the close of trading on the New York Stock
Exchange). The Portfolio is offered on a no-load basis, meaning that you do not
pay sales commissions or 12b-1 marketing fees.
MINIMUM INVESTMENT
BY MAIL
[ENVELOPE]
FIRST-CLASS mail to:
The Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482
EXPRESS or REGISTERED mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087
OPEN A NEW ACCOUNT
$3,000 (regular account); $1,000 (IRAs and accounts for minors).
Complete and sign the application form.
Make your check payable to: The Vanguard Group-23.
All purchases must be made in U.S. dollars, and checks must be drawn on
U.S. banks.
ADD TO AN EXISTING ACCOUNT
$100 by mail or exchange; $1,000 by wire.
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form.
Make your check payable to:
The Vanguard Group-23.
All purchases must be made in U.S. dollars, and checks must be drawn on
U.S. banks.
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
BY TELEPHONE
[TELEPHONE ICON]
1-800-662-6273
Vanguard Tele-Account
1-800-662-2739
Client Services
OPEN A NEW ACCOUNT
Call Vanguard Tele-Account* 24 hours a day -- or Client Services during business
hours -- to exchange from another Vanguard Fund account with the same
registration (name, address, and taxpayer I.D. number).
ADD TO AN EXISTING ACCOUNT
Call Vanguard Tele-Account* 24 hours a day -- or Client Services during business
hours -- to exchange from another Vanguard Fund account with the same
registration (name, address, and taxpayer I.D. number).
Use Vanguard Fund Express (see "Services and Account Features") to transfer
assets from your bank account. Call Client Services before your first use to
verify that this option is in place.
*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.
IMPORTANT NOTE: Once a telephone transaction has been approved by you and a
confirmation number assigned, it cannot be revoked. We reserve the right to
refuse any purchase.
15
<PAGE> 20
BUYING SHARES (continued)
BY WIRE
[Electronic Symbol]
Wire to:
CoreStates Bank, N.A.
ABA 031000011
CoreStates No 01019897
[Temporary Account Number]
Vanguard U.S. Growth Portfolio
[Account Registration]
Attn Vanguard
OPEN A NEW ACCOUNT
Call Client Services to arrange your wire transaction.
Wire transactions are not available for retirement accounts.
ADD TO AN EXISTING ACCOUNT
Call Client Services to arrange your wire transaction.
Wire transactions are not available for retirement accounts.
AUTOMATICALLY
OPEN A NEW ACCOUNT
N/A
ADD TO AN EXISTING ACCOUNT
Vanguard offers a variety of ways that you can add to your account
automatically. See "Services and Account Features."
Shares purchased by check or Vanguard Fund Express can be redeemed at any time.
However, while your redemption request will be processed as soon as it is
received, your redemption proceeds will not be available until payment for your
purchase is collected, which may take up to ten days.
It is important that you call Vanguard before you invest a large dollar
amount by wire or check. Vanguard must consider the interests of all Portfolio
shareholders and so reserves the right to delay or refuse any purchase that may
disrupt the Portfolio's operation or performance.
REDEEMING SHARES
IMPORTANT TAX NOTE: Any sale or exchange of shares in a non-retirement account
could result in a taxable gain or a loss.
The ability to redeem (that is, sell or exchange) Portfolio shares by telephone
is automatically established for your account unless you tell us in writing that
you do not want this option.
To protect your account from unauthorized or fraudulent telephone
instructions, Vanguard follows specific security procedures. When we receive a
call requesting an account transaction, we require the caller to provide:
- Portfolio name.
- 10-digit account number.
- Name and address exactly as registered on that account.
- Social Security or Employer Identification number as registered on that
account.
If you call to sell shares, the sale proceeds will be made payable to you, as
the registered shareholder, and mailed to your account's address of record.
If we follow reasonable security procedures, neither the Portfolio nor
Vanguard will be responsible for the authenticity of transaction instructions
received by telephone. We believe that these procedures are reasonable and that,
if we follow them, you bear the risk of any losses resulting from unauthorized
or fraudulent telephone transactions on your account. However, if we do not
follow these or other reasonable procedures, Vanguard may be liable for any
losses resulting from unauthorized or fraudulent transactions.
16
<PAGE> 21
REDEEMING SHARES (continued)
HOW TO SELL SHARES
You may withdraw any part of your account, at any time, by selling shares;
however, the Portfolio reserves the right to close any non-retirement of
UGMA/UTMA account whose balance falls below the minimum initial investment. The
Portfolio will deduct a $10 annual fee if your non-retirement account balance
falls below $2,500 or if your UGMA/UTMA account balance falls below $500. The
fee is waived if your total Vanguard Fund account assets are $50,000 or more.
Sale proceeds are normally mailed within two business days after Vanguard
receives your request. The sale price of your shares will be the Portfolio's
next-determined net asset value after Vanguard receives all required documents
in good order.
Good order means that the request includes:
- Portfolio name and account number.
- Amount of the transaction (in dollars or shares).
- Signatures of all owners exactly as registered on the account.
- Signature guarantees (if required).
- Any supporting legal documentation that may be required.
- Any certificates you are holding for the account.
Sales or exchange requests received after the close of trading on the New
York Stock Exchange (generally 4:00 p.m. Eastern time) are processed at the
next business day's net asset value.
Some written requests require a signature guarantee from a bank, broker, or
other acceptable institution. A notary public cannot provide a signature
guarantee.
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one Vanguard Fund to purchase shares of
another.
Although every effort will be made to maintain the exchange privilege,
Vanguard reserves the right to revise or terminate the exchange privilege, limit
the amount of an exchange, or reject any exchange, at any time, without notice.
Because excessive exchanges can potentially disrupt the management of the
Portfolio and increase transaction costs, Vanguard has established a policy of
limiting exchange activity to two SUBSTANTIVE EXCHANGE REDEMPTIONS (at least 30
days apart) from the Portfolio during any 12-month period. "Substantive" means
either a dollar amount large enough to have a negative impact on the Portfolio
or a series of movements between Vanguard Funds.
Before you exchange into a new Vanguard Fund, please read its prospectus. For
a copy and for answers to questions you might have, please call Investor
Information.
SELLING OR EXCHANGING SHARES
BY TELEPHONE
[TELEPHONE ICON]
1-800-662-6273
Vanguard Tele-Account
1-800-662-2739
Client Services
ACCOUNT TYPE
ALL TYPES EXCEPT RETIREMENT:
Call Vanguard Tele-Account* 24 hours a day -- or Client Services during business
hours -- to request a sale or exchange of shares. You can exchange shares from
this Portfolio to open an account in another Vanguard Fund or to add to an
existing Vanguard Fund account with an identical registration.
RETIREMENT:
You can exchange -- but not sell -- shares by calling Tele-Account or Client
Services.
*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first redemption.
17
<PAGE> 22
REDEEMING SHARES (continued)
SELLING OR EXCHANGING SHARES
BY MAIL
[ENVELOPE]
FIRST-CLASS mail to:
The Vanguard Group
Vanguard U.S. Growth Portfolio
P.O. Box 1120
Valley Forge, PA 19482
EXPRESS or REGISTERED mail to:
The Vanguard Group
Vanguard U.S. Growth Portfolio
455 Devon Park Drive
Wayne, PA 19087
ACCOUNT TYPE
ALL TYPES EXCEPT RETIREMENT: Send a letter of instruction signed by all
registered account holders. Include the Portfolio name and account number and
(if you are selling) a dollar amount or number of shares OR (if you are
exchanging) the name of the Fund you want to exchange into and a dollar amount
or number of shares.
RETIREMENT:
Call Client Services (for IRAs) or Individual Retirement Services (for
SEP-IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and Money Purchase
Pension [Keogh] plans: 1-800-662- 2003) for information on how to request a
distribution. Depending on your account registration type, additional
documentation may be required.
AUTOMATICALLY
ALL TYPES EXCEPT RETIREMENT:
Vanguard offers several ways to sell or exchange shares automatically (see
"Services and Account Features"). Call Investor Information for the appropriate
booklet and application if you did not elect a feature when you opened your
account.
It is important that you call Vanguard before you redeem a large dollar
amount. In protecting the interests of all Portfolio shareholders, Vanguard may
not be able to deliver your redemption proceeds immediately if the amount is
considered to be disruptive to the Portfolio's operation or performance.
Vanguard reserves the right to take up to seven days to deliver your redemption
proceeds.
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the United States
Securities and Exchange Commission. If you experience difficulty making a
telephone redemption during periods of drastic economic or market change, you
can send us your request by regular or express mail. Follow the instructions on
selling or exchanging shares by mail in the "Redeeming Shares" section.
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you a variety of statements to help you monitor your account
activity and to help you complete your tax returns. You will also receive
annual and semi-annual financial reports on the Portfolio's operation and
performance.
CONFIRMATION STATEMENT
Sent each time you purchase, exchange, or redeem shares; confirms the date and
the amount of the transaction.
18
<PAGE> 23
FUND AND ACCOUNT UPDATES (continued)
PORTFOLIO SUMMARY
Mailed quarterly; shows the market value of your account as of the close of the
statement period, as well as distributions, purchases, exchanges, and
redemptions for the current calendar year.
FUND FINANCIAL REPORTS
Mailed in April and October for this Portfolio.
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
AVERAGE COST STATEMENT
[LOGO]
Issued quarterly for taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the previous quarter,
using the average cost single category method.
AUTOMATED TELEPHONE ACCESS
VANGUARD TELE-ACCOUNT
1-800-662-6273
Any time, seven days a week,
from anywhere in the continental
United States and Canada.
[LOGO]
Toll-free access to total return, share price, price change, and yield
quotations through any TouchTone telephone. Also provides your account balance
(in dollars and shares), last transaction, redemptions by check during the last
three months, and the latest dividend or capital gains distribution. Permits
exchanges and sales of Portfolio shares.
COMPUTER ACCESS
VANGUARD ONLINE
Keyword: vanguard
Information via your personal computer on Fund share price, yield, and total
return; offered through America Online (AOL). To establish an AOL account, call
1-800-238-6336.
VANGUARD ON THE WORLD WIDE WEB
http://www.vanguard.com
An education-oriented website offering news and information about Vanguard
Funds and services, as well as interactive, easy-to-use investment planning
tools.
SHARES OF THE PORTFOLIO MAY ONLY BE SOLD IN THOSE STATES IN WHICH THEY ARE
REGISTERED. THE PORTFOLIO'S SHARES ARE CURRENTLY REGISTERED FOR SALE IN ALL 50
STATES, AND THE PORTFOLIO INTENDS TO MAINTAIN SUCH REGISTRATION.
19
<PAGE> 24
Plain Talk About
KEEPING YOUR PROSPECTUS
Reading this prospectus will help you to decide whether Vanguard U.S. Growth
Portfolio is suitable for your investment goals. If you decide to invest,
don't throw the prospectus out: you will no doubt need it for future reference.
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about
Vanguard U.S. Growth Portfolio, including its investment objective, risks,
strategies, and expenses, as well as services available to you as a shareholder.
It is important that you understand these facts so that you can decide whether
an investment in this Portfolio is right for you. The following questions offer
a quick review of some of the subjects covered by this prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN . . .
- The Portfolio's objective? (page 4)
- The Portfolio's investment strategies? (page 5)
- Who should invest in the Portfolio? (page 4)
- The risks associated with the Portfolio? (pages 4-7)
- Whether the Portfolio is Federally insured? (inside front cover)
- The Portfolio's expenses? (page 2)
- The background of the Portfolio's investment managers? (page 11)
- How to open an account? (page 15)
- How to sell or exchange shares? (page 16)
- How often you'll receive statements and financial reports? (page 19)
20
<PAGE> 25
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments,
and U.S. Treasury bills.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investment.
DOLLAR-COST AVERAGING
Investing equal amounts of money at regular intervals on an ongoing basis.
This technique ensures that an investor buys fewer shares when prices are high
and more shares when prices are low.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
marketing fees.
FIXED-INCOME SECURITIES
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies whose strong earnings and
revenue potential indicate above-average prospects for capital growth, with
less emphasis on dividend income.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a portfolio's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security or industry.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per
share, has a price/earnings ratio of 10.
PRINCIPAL
The amount of your own money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net
asset value adjusted to account for the reinvestment of all distributions of
dividends and capital gains.
VALUE STOCK FUND
A mutual fund that focuses on the stocks of companies that, considering their
earnings and dividends, are attractively priced, these companies often pay
regular dividend income to shareholders.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 26
[ LOGO ]
Post Office Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
For information on our Funds, Fund services,
and retirement accounts; requests for literature
CLIENT SERVICES DEPARTMENT
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-662-2738
For information on your
account, account transactions,
account statements
VANGUARD BROKERAGE
SERVICES
1-800-992-8327
For information on trading
stocks, bonds, and options
at reduced commissions
VANGUARD TELE-ACCOUNT(R)
1-800-662-6273 (ON-BOARD)
For 24-hour automated access
to price and yield, information
on your account, certain
transactions
ELECTRONIC ACCESS TO THE
VANGUARD MUTUAL FUND
EDUCATION AND INFORMATION
CENTER
On America Online(R)
Keyword: vanguard
On the World Wide Web
http://www.vanguard.com
To send e-mail to Vanguard
[email protected]
(C) 1996 Vanguard Marketing
Corporation, Distributor
PO23N
<PAGE> 27
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[VANGUARD U.S. GROWTH PORTFOLIO LOGO]
A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS -- APRIL 29, 1996
- --------------------------------------------------------------------------------
FUND INFORMATION: PARTICIPANT SERVICES DEPARTMENT -- 1-800-523-1188
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE AND
POLICIES
Vanguard U.S. Growth Portfolio (the "Portfolio") is an
independent series of Vanguard World Fund, Inc. (the
"Fund"), an open-end diversified investment company. The
Portfolio seeks to provide long-term capital appreciation.
Dividend income is expected to be incidental to this
objective. The Fund is currently offering shares of two
Portfolios. This prospectus relates to Vanguard U.S.
Growth Portfolio only. There is no assurance that the
Portfolio will achieve its stated objective. Shares of the
Fund are neither insured nor guaranteed by any agency of
the U.S. Government, including the FDIC.
- --------------------------------------------------------------------------------
IMPORTANT NOTE This Prospectus is intended exclusively for participants
in employer-sponsored retirement or savings plans, such as
tax-qualified pension and profit-sharing plans and 401(k)
thrift plans, as well as 403(b)7 custodial accounts for
non-profit educational and charitable organizations.
Another version of this Prospectus, containing information
on how to open a personal investment account with the
Portfolio, is available for individual investors. To
obtain a copy of that version of the Prospectus, please
call 1-800-662-7447.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT The Portfolio is an investment option under a retirement
or savings program sponsored by your employer. The
administrator of your retirement plan or your employee
benefits office can provide you with detailed information
on how to participate in your plan and how to elect the
Portfolio as an investment option. If you have any
questions about the Portfolio please contact Participant
Services at 1-800-523-1188. If you have any questions
about your plan account, contact your plan administrator
or the organization that provides recordkeeping services
for your plan.
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Portfolio before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Portfolio has been filed
with the Securities and Exchange Commission. This
Statement is dated April 29, 1996, and has been
incorporated by reference into this Prospectus. A copy may
be obtained without charge by writing to the Portfolio or
by calling our Participant Services Department.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page Page
<S> <C> <C>
Portfolio Expenses ................ 2 Who Should Invest ................ 5 Dividends, Capital Gains
Financial Highlights ............. 2 Implementation of Policies ....... 6 and Taxes ......................... 10
Yield and Total Return ........... 4 Investment Limitations ........... 7 The Share Price of The Portfolio... 10
Investment Objective .............. 4 Management of the Portfolio ...... 8 General Information ............... 11
Investment Policies ............... 4 Investment Adviser ............... 8 Service Guide ..................... 12
Investment Risks .................. 5 Performance Record ............... 9
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 28
PORTFOLIO
EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Portfolio. The
expenses and fees set forth in the table are for the 1995
fiscal year.
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
-----------------------------------------------------------------------------------
Sales Load Imposed on Purchases........................................ None
Sales Load Imposed on Reinvested Dividends............................. None
Redemption Fees........................................................ None
Exchange Fees.......................................................... None
ANNUAL PORTFOLIO OPERATING EXPENSES
-----------------------------------------------------------------------------------
Management & Administrative Expenses................................... 0.25%
Investment Advisory Fees............................................... 0.19
12b-1 Fees............................................................. None
Other Expenses
Distribution Costs............................................ 0.02%
Miscellaneous Expenses........................................ 0.01
----
Total Other Expenses................................................... 0.03
------
TOTAL OPERATING EXPENSES...................................... 0.47%
======
</TABLE>
The purpose of this table is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Fund.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period. As noted in the table above,
the Fund charges no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ 5 $ 15 $ 26 $ 59
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
through each period, insofar as they relate to each of the
five years in the period ended August 31, 1995, have been
audited by Price Waterhouse LLP, independent accountants,
whose report thereon was unqualified. This information
should be read in conjunction with the Fund's financial
statements and notes thereto, which, together with the
remaining portions of the Fund's 1995 Annual Report to
Shareholders, are incorporated by reference in the
Statement of Additional Information and this Prospectus,
and which appear, along with the report of Price
Waterhouse LLP, in the Fund's 1995 Annual Report to
Shareholders. For a more complete discussion of the Fund's
performance, please see the Fund's 1995 Annual Report to
Shareholders, which may be obtained without charge by
writing to the Fund or by calling Participant Services at
1-800-523-1188.
2
<PAGE> 29
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, OCT. 1,
1985 TO
------------------------------------------------------------------------------------- AUG. 31,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD.... $15.52 $14.71 $14.71 $13.69 $10.38 $10.01 $7.17 $12.74 $13.21 $9.94
------ ------ ------ ------ ------ ------ ------ ------ ------ -------
INVESTMENT OPERATIONS
Net Investment
Income............... .25 .20 .21 .19 .20 .14 .11 .10 .30 .24
Net Realized and
Unrealized Gain
(Loss) on
Investments.......... 3.24 .82 .05 1.02 3.30 .36 2.79 (2.10) 1.45 3.03
------ ------ ------ ------ ------ ------ ------ ------ ------ -------
TOTAL FROM INVESTMENT
OPERATIONS......... 3.49 1.02 .26 1.21 3.50 .50 2.90 (2.00) 1.75 3.27
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income.... (.18) (.21) (.18) (.19) (.19) (.13) (.06) (.31) (.28) --
Distributions from
Realized Capital
Gains................ -- -- (.08) -- -- -- -- (3.26) (1.94) --
------ ------ ------ ------ ------ ------ ------ ------ ------ -------
TOTAL
DISTRIBUTIONS...... (.18) (.21) (.26) (.19) (.19) (.13) (.06) (3.57) (2.22) --
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD................. $18.83 $15.52 $14.71 $14.71 $13.69 $10.38 $10.01 $7.17 $12.74 $13.21
================================================================================================================================
TOTAL RETURN............. 22.75% 6.98% 1.69% 8.83% 34.28% 5.03% 40.72% (21.62)% 17.81% 32.90%
================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)............. $2,989 $1,963 $1,954 $1,441 $747 $339 $184 $130 $184 $188
Ratio of Expenses to
Average Net Assets..... .47%+ .52% .49% .49% .56% .74% .95% .88% .65% .80%*
Ratio of Net Investment
Income to
Average Net Assets..... 1.59% 1.30% 1.50% 1.52% 1.82% 1.77% 1.44% 1.23% 2.41% 2.27%*
Portfolio Turnover
Rate................... 32% 47% 37% 24% 30% 49% 48% 38% 142% 77%
</TABLE>
* Annualized.
+ Effective in fiscal 1995, does not include expense reductions from directed
brokerage arrangements. The Ratio of Net Expenses to Average Net Assets is
.44%.
<TABLE>
<CAPTION>
IVEST FUND+
---------------
SEPT. 1 TO 30,
1985
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................................................................. $18.15
---------
INVESTMENT OPERATIONS
Net Investment Income.............................................................................. .04
Net Realized and Unrealized Gain (Loss) on Investments............................................. (.23)
---------
TOTAL FROM INVESTMENT OPERATIONS................................................................. (.19)
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............................................................... (.35)
Distributions from Realized Capital Gains.......................................................... (1.48)
---------
TOTAL DISTRIBUTIONS.............................................................................. (1.83)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE END OF PERIOD........................................................................ $16.13
========================================================================================================================
TOTAL RETURN......................................................................................... (1.05)%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)................................................................. $201
Ratio of Expenses to Average Net Assets.............................................................. .76%*
Ratio of Net Investment Income to Average Net Assets................................................. 2.97%*
Portfolio Turnover Rate.............................................................................. 30%
</TABLE>
* Annualized.
+ Prior to October 1, 1985, the Fund consisted of one portfolio and was known as
Ivest Fund.
- --------------------------------------------------------------------------------
3
<PAGE> 30
YIELD AND TOTAL
RETURN From time to time the Portfolio may advertise its yield
and total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of the
Portfolio refers to the average annual compounded rates of
return over one-, five- and ten-year periods or for the
life of the Portfolio (as stated in the advertisement)
that would equate an initial amount invested at the
beginning of a stated period to the ending redeemable
value of the investment, assuming the reinvestment of all
dividend and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of the Portfolio is calculated by dividing net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on the Portfolio's securities and
is net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder
accounts. The yield calculation assumes that net
investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods differ
from the accounting methods used by the Portfolio to
maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid to your
own account.
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE
THE PORTFOLIO SEEKS
TO PROVIDE LONG-TERM
CAPITAL GROWTH
The Portfolio invests primarily in equity securities of
companies based in the United States. The objective of the
Portfolio is to provide long-term capital appreciation.
Dividend income is expected to be incidental to this
objective. There is no assurance that the Portfolio will
achieve its objective.
The investment objective of the Portfolio is fundamental,
and so cannot be changed without the approval of a
majority of its shareholders.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
THE PORTFOLIO
EMPHASIZES U.S.
STOCKS WITH ABOVE-
AVERAGE GROWTH
POTENTIAL
The Portfolio invests primarily in equity securities of
seasoned U.S. companies with above-average prospects for
growth. In selecting securities for the Portfolio, Lincoln
Capital Management, adviser to the Portfolio, emphasizes
common stocks of high-quality, established-growth
companies. Such companies tend to have exceptional growth
records, strong market positions, reasonable financial
strength, and relatively low sensitivity to changing
economic conditions. The adviser seeks to identify common
stocks that sell at attractive valuations and companies
that have the best prospects for continued above-average
growth. The Portfolio is managed without regard to tax
ramifications.
Besides investing in equity securities, the Portfolio may
utilize stock index futures contracts and options to a
limited extent. In addition, although the Portfolio will
normally remain fully invested in equity securities, it
may temporarily invest in certain short-term fixed income
securities. See "Implementation of Policies" for a
description of these and other investment practices of the
Portfolio.
The Portfolio is responsible for voting the shares of all
securities it holds.
4
<PAGE> 31
The investment policies described above are not
fundamental policies and therefore may be changed by the
Board of Directors without shareholder approval. However,
shareholders would be notified prior to any material
change in the Portfolio policies.
- --------------------------------------------------------------------------------
INVESTMENT RISKS
THE PORTFOLIO IS
SUBJECT TO STOCK
MARKET RISK
As a mutual fund investing in equity securities, the
Portfolio is subject to market risk -- i.e., the
possibility that stock prices in general will decline over
short or even extended periods. Stock markets tend to be
cyclical, with periods when stock prices generally rise
and periods when stock prices generally decline.
To illustrate the volatility of domestic stock prices, the
following table sets forth the extremes for U.S. stock
market returns as well as the average return for the
period from 1926 to 1994, as measured by the Standard &
Poor's 500 Composite Stock Price Index:
<TABLE>
<CAPTION>
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1994)
OVER VARIOUS TIME HORIZONS
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9 +23.9 +20.1 +16.9
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.2 +10.2 +10.6 +10.7
</TABLE>
As shown, stocks have provided an average annual total
return (capital appreciation plus dividend income) for 10
years, of +10.6%. Average return may not be useful for
forecasting future returns in any particular period, as
stock returns are quite volatile from year-to-year.
This table on U.S. stock market returns should not be
viewed as a representation of future returns from the U.S.
stock market or the Portfolio. The illustrated returns
represent the historical performance of an unmanaged
portfolio of securities (before subtracting portfolio
transaction costs and other expenses of an investment
portfolio), which may be a poor guide to future returns.
In addition, the Portfolio is likely to differ in terms of
portfolio composition from this particular index, and so
the performance of the Portfolio should not be expected to
mirror the return provided by such an index.
THE PORTFOLIO IS
SUBJECT TO MANAGER
RISK
The investment adviser manages the Portfolio according to
the traditional methods of "active" investment management,
which involve the buying and selling of securities based
upon economic, financial and market analysis and
investment judgment. Manager risk refers to the
possibility that the Portfolio's investment adviser may
fail to effectively execute the Portfolio's investment
strategy. As a result, the Portfolio may fail to achieve
its stated objective.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST
LONG-TERM INVESTORS
SEEKING CAPITAL
APPRECIATION
The U.S. Growth Portfolio is intended for investors who
are seeking long-term capital appreciation, and who do not
need to earn current income from their investment in the
Portfolio. Because of the risks associated with common
stock investments, the Portfolio is intended to be a
long-term investment vehicle and is not designed to
provide investors with a means of speculating on
short-term stock market movements. Investors should be
able to tolerate sudden, sometimes
5
<PAGE> 32
substantial fluctuations in the value of their investment.
Investors who engage in excessive account activity
generate additional costs which are borne by all the
Portfolio's shareholders. In order to minimize such
costs, the Portfolio has adopted the following policies.
The Portfolio reserves the right to reject any purchase
request (including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive
to efficient portfolio management, either because of the
timing of the investment or previous excessive trading by
the investor. Additionally, the Portfolio reserves the
right to suspend the offering of its shares.
Because of these risks, the Portfolio should not be
considered a complete investment program. Most investors
should maintain diversified holdings of securities with
different risk characteristics -- including common stocks,
bonds and money market instruments. Investors may wish to
purchase shares on a regular, periodic basis (dollar-cost
averaging), rather than investing in one lump sum, in
order to reduce the risk of investing all their monies in
common stocks at a particularly unfavorable time.
Investors may also wish to complement an investment in the
Portfolio with other types of common stock investments.
- --------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES In addition to investing in growth-oriented common stocks,
the Portfolio follows a number of additional investment
practices to achieve its objective.
THE PORTFOLIO MAY
INVEST IN SHORT-TERM
FIXED INCOME
SECURITIES
Although the Portfolio normally seeks to remain fully
invested in equity securities, the Portfolio may invest in
certain short-term fixed income securities for temporary
defensive purposes. Such securities may be used to invest
uncommitted cash balances, to maintain liquidity to meet
shareholder redemptions, or to take a temporary defensive
position against potential stock market declines. These
securities include: obligations of the United States
Government and its agencies or instrumentalities;
commercial paper, bank certificates of deposit, and
bankers' acceptances; and repurchase agreements
collateralized by these securities.
THE PORTFOLIO MAY
LEND ITS SECURITIES The Portfolio may lend its investment securities to
qualified institutional investors for either short-term or
long-term purposes of realizing additional net investment
income. Loans of securities by the Portfolio will be
collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. The collateral will equal
at least 100% of the current market value of the loaned
securities.
PORTFOLIO TURNOVER IS
NOT EXPECTED TO
EXCEED 100% Although it generally seeks to invest for the long term,
the Portfolio retains the right to sell securities
irrespective of how long they have been held. It is
anticipated that the annual portfolio turnover rate of the
Portfolio will not exceed 100%. A turnover rate of 100%
would occur, for example, if all of the securities of the
Portfolio were replaced within a one-year period.
DERIVATIVE
INVESTING
Derivatives are instruments whose values are linked to or
derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.
6
<PAGE> 33
THE PORTFOLIO MAY
INVEST IN DERIVATIVE
SECURITIES
The Portfolio may invest in futures contracts and options,
but only to a limited extent. Specifically, a Portfolio of
the Fund may enter into futures contracts provided that
not more than 5% of its assets are required as a futures
contract deposit; in addition, a Portfolio may enter into
futures contracts and options transactions only to the
extent that obligations under such contracts or
transactions represent not more than 20% of the
Portfolio's assets.
Futures contracts and options may be used for several
common fund management strategies; to maintain cash
reserves while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher
investment returns when a specific futures contract is
priced more attractively than other futures contracts or
the underlying security or index.
FUTURES AND OPTIONS
POSE CERTAIN RISKS
The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between the change in market value of the stocks held by
the Portfolio and the prices of futures and options; and
(ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing only
in those contracts whose behavior is expected to resemble
that of the Portfolio's underlying securities. The risk
that the Portfolio will be unable to close out a futures
position will be minimized by entering into such
transactions on a national exchange with an active and
liquid secondary market.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss (or gain) to the
Portfolio. When investing in futures contracts, the
Portfolio will segregate cash or cash equivalents in the
amount of the underlying obligation.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
THE PORTFOLIO HAS
ADOPTED CERTAIN
FUNDAMENTAL
LIMITATIONS The Portfolio has adopted certain limitations on its
investment practices. Specifically, the Portfolio will
not:
(a) with respect to 75% of its assets, invest more than 5%
of its assets in the securities of any single company,
excluding obligations of the U.S. Government;
(b) with respect to 75% of its assets, purchase more than
10% of the outstanding voting securities of any
issuer;
(c) invest more than 5% of its assets in the securities of
companies that have a continuous operating history of
less than three years;
(d) invest more than 25% of its assets in any one
industry;
(e) borrow money, except from a bank and only for
temporary or emergency purposes to facilitate the
meeting of redemption requests (not for leverage); and
(f ) pledge, mortgage or hypothecate assets to an extent
greater than 15% of the value of its gross assets.
7
<PAGE> 34
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information are fundamental and so may be changed only
with the approval of a majority of the Portfolio's
shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF
THE PORTFOLIO
VANGUARD ADMINISTERS
AND DISTRIBUTES
THE PORTFOLIO The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 90 distinct investment portfolios and total
assets in excess of $170 billion. Through their
jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other funds in the Group
obtain at cost virtually all of their corporate
management, administrative and distribution services.
Vanguard also provides investment advisory services on an
at-cost basis to certain Vanguard funds. As a result of
Vanguard's unique corporate structure, the Vanguard funds
have costs substantially lower than those of most
competing mutual funds. In 1994, the average expense ratio
(annual costs including advisory fees divided by average
total net assets) for the Vanguard funds amounted to
approximately .30%, compared to an average of 1.05% for
the mutual fund industry (data provided by Lipper
Analytical Services).
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's total expenses, which
are allocated among the funds under methods approved by
the Board of Directors (Trustees) of each fund. In
addition, each fund bears its own direct expenses, such as
legal, auditing, and custodian fees.
Vanguard provides distribution and marketing services to
the funds. The funds are available on a no-load basis,
(i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its allocated share of the
Group's distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISER
LINCOLN CAPITAL SERVES
AS ADVISER TO THE
PORTFOLIO Lincoln Capital Management Company ("Lincoln"), 200 South
Wacker Drive, Chicago, IL 60606, serves as the adviser to
the Portfolio. Lincoln is responsible for the investment
management of the assets in the Portfolio and discharges
its responsibilities subject to the control of the
Officers and Directors of the Portfolio.
Lincoln, an investment advisory firm founded in 1967,
currently provides investment counseling services to a
limited number of clients, most of which are institutional
clients, such as pension funds. Currently, Lincoln holds
discretionary management authority with respect to
approximately $33 billion in assets.
Lincoln employs a team of investment professionals who
participate in investment strategy formulation and issue
selection. Client equity portfolios are similar in terms
of their stock composition. The individuals responsible
for overseeing
8
<PAGE> 35
the implementation of Lincoln's strategy for the
U.S. Growth Portfolio, who have served in this capacity
since Lincoln became the Portfolio's adviser in
August 1987, are J. Parker Hall III, President of
Lincoln, and David M. Fowler, Vice President of Lincoln.
The Portfolio pays Lincoln an advisory fee calculated by
applying varying percentage rates to the average month-end
net assets of the Portfolio. The maximum rate is .40% on
the first $25 million of net assets. The rate decreases to
.35% on the next $125 million of net assets, to .25% on
the next $350 million of net assets to .20% on the next
$500 million of net assets, .15% on the next $1.5 billion
of assets and .10% on assets in excess of $2.5 billion.
The agreement does not provide for an incentive
fee/penalty based on performance. For the year ended
August 31, 1995, the investment advisory fee paid to
Lincoln represented an effective annual rate of .19 of 1%
of the Portfolio's average net assets.
The investment advisory agreement with Lincoln authorizes
the adviser to select brokers or dealers to execute
purchases and sales of the Portfolio's securities, and
directs the adviser to use its best efforts to obtain the
best available price and most favorable execution with
respect to all transactions.
The Portfolio has authorized Lincoln to pay higher
commissions in recognition of brokerage services felt
necessary for the achievement of better execution,
provided Lincoln believes this to be in the best interest
of the Portfolio. Although the Portfolio does not market
its shares through intermediary brokers or dealers, the
Portfolio may place orders for the Portfolio with
qualified broker-dealers who recommend the Portfolio to
clients if the Officers of the Fund believe that the
quality of the transaction and the commission are
comparable to what they would be with other qualified
brokerage firms.
The Board of Directors may, without the approval of
shareholders, provide for: (a) the employment of a new
investment adviser pursuant to the terms of a new advisory
agreement either as a replacement for an existing adviser
or as an additional adviser; (b) a change in the terms of
an advisory agreement; and (c) the continued employment of
an existing adviser on the same advisory contract terms
where a contract has been assigned because of a change in
control of the adviser. Any such change will only be made
upon not less than 30 days, prior written notice to
shareholders of the Portfolio which shall include
substantially the information concerning the adviser that
would have normally been included in a proxy statement.
- --------------------------------------------------------------------------------
PERFORMANCE
RECORD The table on page 10 shows the investment results for the
Portfolio for several periods throughout the Portfolio's
lifetime, both as Ivest Fund and as Vanguard U.S. Growth
Portfolio. The results shown represent "total return"
investment performance, which assumes the reinvestment of
all capital gains and income dividends for the indicated
periods. Also included is comparative information with
respect to the unmanaged Standard & Poor's 500 Composite
Stock Price Index, a widely-used barometer of stock market
activity; and the Consumer Price Index, a statistical
measurement of changes in the prices of goods and
services. The table does not
9
<PAGE> 36
make any allowance for federal, state or local income
taxes which shareholders may pay on a current basis.
The results should not be considered a representation of
the total return from an investment made in the Portfolio
today. The periods shown were generally favorable ones for
stock market investing. This information is provided to
help you better understand the Portfolio and may not
provide a basis for comparison with other investments or
mutual funds which use a different method to calculate
performance. In weighing these performance figures, you
should note that the Portfolio was managed by a different
adviser through August 31, 1987.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------
VANGUARD
PERIODS U.S. GROWTH S&P 500 CONSUMER
ENDED 8/31/95 PORTFOLIO INDEX INDEX
------------- ----------- ---------- -----------
<S> <C> <C> <C>
1 Year 22.8% 21.4% 2.6%
3 Years 10.1 13.8 2.8
5 Years 14.3 15.1 3.1
10 Years 12.9 15.1 3.5
20 Years 13.8 14.3 5.3
Lifetime* 12.8 10.5 4.5
* January 6, 1959 to August 31, 1995.
</TABLE>
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL
GAINS AND TAXES
THE PORTFOLIO PAYS
DIVIDENDS AND ANY
CAPITAL GAINS The Portfolio expects to pay annual dividends. Net capital
ANNUALLY gains, if any, will also be distributed annually. Dividend
and capital gains distributions may be automatically
reinvested in additional shares. The Portfolio intends to
continue to qualify for taxation as a "regulated
investment company" under the Internal Revenue Code so
that it will not be subject to federal income tax to the
extent its income is distributed to shareholders.
If you utilize the Portfolio as an investment option in an
employer-sponsored retirement savings plan, dividend and
capital gains distributions from the Portfolio ordinarily
will not be subject to current taxation, but will
accumulate on a tax-deferred basis. In general,
employer-sponsored retirement and savings plans are
governed by complex tax rules. If you participate in such
a plan, consult your plan administrator, your plan's
Summary Plan Description, or a professional tax adviser
regarding the tax consequences of your participation in
the plan and of any plan contributions or withdrawals.
- --------------------------------------------------------------------------------
THE SHARE PRICE OF
THE PORTFOLIO The Portfolio's share price or "net asset value" is
calculated each business day after the close of regular
trading (generally 4:00 p.m. Eastern time) of the New York
Stock Exchange. Net asset value per share is computed by
adding up the total value of the Portfolio's investments
and other assets, subtracting any of its liabilities, or
debts, and then dividing by the number of outstanding
shares of the Portfolio.
Securities listed on a U.S. exchange are valued at the
latest quoted sale price on the day the valuation is made.
Securities listed on a U.S. exchange not traded on the
valuation date are valued at the mean of the bid and ask
prices. If events which
10
<PAGE> 37
materially affect the value of a Portfolio's investments
occur after the close of the securities markets on which
such securities are primarily traded, those investments
will be priced at "fair value". All prices of listed
securities are taken from the exchange where the security
is primarily traded. Securities regularly traded in the
over-the-counter market for which market quotations are
readily available will be valued at the latest quoted
bid price. Securities may be valued on the basis of
prices provided by a pricing service when such prices
are believed to reflect the fair market value of such
securities. Other assets and securities for which no
quotations are readily available will be valued in a
manner determined in good faith by the Board of Directors.
The Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of Vanguard.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION The Fund was organized as Ivest Fund, a Massachusetts
Corporation, in 1959. The Fund is now a Maryland
Corporation. The Fund is authorized to issue 550,000,000
shares with a par value of $1.00 per share. Currently, the
Fund is offering shares of two Portfolios with 250,000,000
shares allocated to the U.S. Growth Portfolio and
300,000,000 shares allocated to the International Growth
Portfolio.
The shares of each Portfolio of the Fund are fully paid
and non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no pre-emptive rights. The shares of each Portfolio
have non-cumulative voting rights, meaning that the
holders of more than 50% of the shares voting for the
election of Directors can elect 100% of the Directors if
they so choose.
The Fund will not hold annual meetings of shareholders
except as required by the Investment Company Act of 1940
and other applicable law. The Directors of the Fund will
call a meeting of shareholders for the purpose of voting
upon the question of removal of a Director or Directors if
such a meeting is requested in writing by the holders of
not less than 10% of the outstanding shares of the Fund.
All securities and cash of the Portfolio are held by State
Street Bank and Trust Company, Boston, MA. The Vanguard
Group, Inc., Valley Forge, PA, serves as the Portfolio's
Transfer and Dividend Disbursing Agent. Price Waterhouse
LLP, serves as independent accountants for the Portfolio
and will audit its financial statements annually. The
Portfolio is not involved in any litigation.
- --------------------------------------------------------------------------------
11
<PAGE> 38
SERVICE GUIDE
PARTICIPATING
IN YOUR PLAN The Portfolio is available as an investment option in your
retirement or savings plan. The administrator of your plan
or your employee benefits office can provide you with
detailed information on how to participate in your plan
and how to elect the Portfolio as an investment option.
If you have any questions about the Portfolio, including
the Portfolio's investment objective, policies, risk
characteristics or historical performance, please contact
Participant Services at 1-800-523-1188.
If you have questions about your account, contact your
plan administrator or the organization which provides
recordkeeping services for your plan.
- --------------------------------------------------------------------------------
INVESTMENT OPTIONS
AND ALLOCATIONS You may be permitted to elect different investment
options, alter the amounts contributed to your plan, or
change how contributions are allocated among your
investment options in accordance with your plan's specific
provisions. See your plan administrator or employee
benefits office for more details.
- --------------------------------------------------------------------------------
TRANSACTIONS IN
FUND SHARES Contributions, exchanges or redemptions of the Portfolio's
shares are effective when received in "good order" by
Vanguard. "Good order" means that complete information on
the contribution, exchange or redemption and the
appropriate monies have been received by Vanguard.
- --------------------------------------------------------------------------------
MAKING EXCHANGES Your plan may allow you to exchange monies from one
investment option to another. However, the Fund reserves
the right to refuse any exchange purchase request. Check
with your plan administrator for details on the rules
governing exchanges in your plan. Certain investment
options, particularly company stock or guaranteed
investment contracts (GICs), may be subject to unique
restrictions.
Before making an exchange, your should consider the
following:
- If you are making an exchange to another Vanguard Fund
option, please read that Fund's prospectus. Contact
Participant Services at 1-800-523-1188 for a copy.
- Exchanges are accepted by Vanguard only as permitted by
your plan. Your plan administrator can explain how
frequently exchanges are allowed.
- --------------------------------------------------------------------------------
12
<PAGE> 39
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<PAGE> 40
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 41
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 42
<TABLE>
<S> <C> <C> <C>
[VANGUARD U.S. GROWTH PORTFOLIO LOGO]
------------------------------------ [FLAG LOGO]
THE VANGUARD GROUP [VANGUARD U.S. GROWTH PORTFOLIO LOGO]
OF INVESTMENT I N S T I T U T I O N A L
COMPANIES P R O S P E C T U S
Vanguard Financial Center APRIL 29, 1996
P.O. Box 2900 [VANGUARD GROUP LOGO]
Valley Forge, PA 19482
INSTITUTIONAL PARTICIPANT
SERVICES DEPARTMENT:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
I023
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 43
VANGUARD
INTERNATIONAL GROWTH
PORTFOLIO
Prospectus
April 29, 1996
This prospectus contains financial data for the Portfolio through the fiscal
year ended August 31, 1995.
[THE VANGUARD GROUP LOGO]
<PAGE> 44
CONTENTS
Portfolio Expenses 2
Financial Highlights 3
A Word About Risk 4
The Portfolio's
Objective 4
Who Should Invest 4
Investment Strategies 5
Investment Policies 7
Investment Limitations 8
Investment
Performance 9
Share Price 9
Dividends, Capital
Gains, and Taxes 10
The Portfolio and
Vanguard 11
Investment Adviser 11
General Information 12
Investing
with Vanguard 13
Services and
Account Features 14
Types of Accounts 14
Distribution Options 15
Buying Shares 16
Redeeming Shares 17
Fund and Account
Updates 19
Glossary Inside Back Cover
VANGUARD INTERNATIONAL GROWTH PORTFOLIO An International Stock Mutual Fund
INVESTMENT OBJECTIVE AND POLICIES
Vanguard International Growth Portfolio (the "Portfolio") is a diversified
mutual fund, a part of Vanguard World Fund, Inc. (the "Fund"), an open-end
investment management company.
The International Growth Portfolio seeks to provide long-term capital
growth by investing in equity securities of seasoned companies located outside
the United States. The Portfolio invests in up to 30 foreign stock markets,
emphasizing companies with above-average growth potential.
IT IS IMPORTANT TO NOTE THAT THE PORTFOLIO'S SHARES ARE NOT GUARANTEED
OR INSURED BY THE FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT OR FOREIGN
GOVERNMENTS. AS WITH ANY INVESTMENT IN COMMON STOCKS, WHICH ARE SUBJECT TO WIDE
FLUCTUATIONS IN MARKET VALUE, YOU COULD LOSE MONEY BY INVESTING IN THE
PORTFOLIO.
FEES AND EXPENSES
The Portfolio is offered on a no-load basis, which means that you pay no sales
commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the expense ratio.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
A Statement of Additional Information containing more information about the
Portfolio is, by reference, part of this prospectus and may be obtained without
charge by writing to Vanguard or by calling our Investor Information Department
at 1-800-662-7447.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of the
International Growth Portfolio. To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk" explanations along the way.
Reading the prospectus will help you to decide whether the Portfolio is the
right investment for you. We suggest that you keep it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE> 45
PORTFOLIO PROFILE
WHO SHOULD INVEST (page 4)
- - Investors seeking investment opportunities outside the United States.
- - Investors seeking growth of their capital over the long term--at least
five years.
- - Investors willing to accept the additional risks associated with
international investing.
- - Investors wishing to add an international component to an investment
mix that already includes U.S. stock, bond, and money market mutual
funds.
WHO SHOULD NOT INVEST
- - Investors seeking current dividend income.
- - Investors unwilling to accept significant fluctuations in share price.
RISKS OF THE PORTFOLIO (pages 4-8)
This Portfolio's total return will fluctuate within a wide range, so an investor
could lose money over short or even extended periods. In addition to the risks
of U.S. stock funds (market risk, etc.), the Portfolio is subject to the risks
associated with foreign investing. Among these are country risk (the chance that
a country's economy will be hurt by political or financial problems or natural
disasters) and currency risk (the chance that Americans investing abroad could
lose money because of a rise in the value of the U.S. dollar versus foreign
currencies).
DIVIDENDS AND CAPITAL GAINS (page 10)
Paid annually in December.
Vanguard International Growth Portfolio
INVESTMENT ADVISER (page 11)
Schroder Capital Management International, Inc., London, England.
INCEPTION DATE: September 30, 1981
NET ASSETS AS OF 8/31/95: $3.35 billion
PORTFOLIO'S EXPENSE RATIO FOR THE YEAR ENDED 8/31/95: 0.59%
LOADS, 12B-1 MARKETING FEES: None
SUITABLE FOR IRAS: Yes
MINIMUM INITIAL INVESTMENT: $3,000; $1,000 for IRAs and accounts for minors
NEWSPAPER ABBREVIATION: IntlGr
VANGUARD FUND NUMBER: 081
ACCOUNT FEATURES (page 14)
- - Telephone Redemption
- - Vanguard Direct Deposit Service(sm)
- - Vanguard Automatic Exchange Service(sm)
- - Vanguard Fund Express(R)
- - Vanguard Dividend Express(sm)
AVERAGE ANNUAL TOTAL RETURN--
PERIODS ENDED AUGUST 31, 1995
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
----------------------------
<S> <C> <C> <C>
International
Growth Portfolio +3.8% +7.8% +16.3%
MSCI EAFE Index +0.8 +7.3 +15.7
</TABLE>
QUARTERLY RETURNS (%) 1986-1995
[BAR CHART]
In evaluating past performance, remember that it is not indicative of
future performance. Performance figures include the reinvestment of any
dividends and capital gains distributions. The returns shown are net of
expenses, but they do not reflect income taxes an investor would have incurred.
Note, too, that both the 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.
1
<PAGE> 46
Plain Talk About
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time, have
a dramatic impact on a fund's performance.
Plain Talk About
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard International Growth Portfolio's expense ratio in fiscal year
1995 was 0.59%, or $5.90 per $1,000 of average net assets. The average actively
managed international equity mutual fund had expenses in 1995 of 1.58%, or
$15.80 per $1,000 of average net assets, according to Lipper Analytical
Services, Inc., which reports on the mutual fund industry.
PORTFOLIO EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Portfolio.
As noted in this table, you do not pay fees of any kind when you buy, sell, or
exchange shares of the Portfolio:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
</TABLE>
The next table illustrates the operating expenses that you would incur
as a shareholder of the Portfolio. These expenses are deducted from the
Portfolio's income before it is paid to you. Expenses include investment
advisory fees as well as the costs of maintaining accounts, administering the
Portfolio, providing shareholder services, and other activities. The expenses
shown in the table are for the fiscal year ended August 31, 1995.
ANNUAL PORTFOLIO OPERATING EXPENSES
<TABLE>
<S> <C> <C>
Management and Administrative Expenses: 0.32%
Investment Advisory Expenses: 0.16%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.09%
----
Total Other Expenses: 0.11%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.59%
====
</TABLE>
The following example illustrates the hypothetical expenses that you
would incur on a $1,000 investment over various periods. The example assumes (1)
that the Portfolio provides a return of 5% a year and (2) that you redeem your
investment at the end of each period.
<TABLE>
<CAPTION>
-----------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------
<S> <C> <C> <C> <C>
$6 $19 $33 $74
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 47
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended August 31, 1995. The financial
highlights were audited by Price Waterhouse LLP, independent accountants. You
should read this information in conjunction with the Portfolio's financial
statements and accompanying notes, which appear, along with the audit report
from Price Waterhouse, in the Portfolio's most recent Annual Report to
shareholders. The Annual Report is incorporated by reference in the Statement
of Additional Information and in this prospectus, and contains a more complete
discussion of the Portfolio's performance. You may have the Report sent to you
without charge by writing to Vanguard or by calling our Investor Information
Department.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $14.36 $12.02 $10.15 $10.31 $11.81 $11.61 $10.45 $14.21 $11.67 $ 6.19
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income .20 .14 .12 .20 .18 .32 .13 .16 .12 .07
Net Realized and
Unrealized Gain (Loss)
on Investments .32 2.31 1.96 (.05) (.80) .31 2.26 (1.36) 3.29 5.41
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS .52 2.45 2.08 .15 (.62) .63 2.39 (1.20) 3.41 5.48
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.18) (.11) (.21) (.19) (.20) (.15) (.16) (.13) (.07) --
Distributions from
Realized Capital Gains -- -- -- (.12) (.68) (.28) (1.07) (2.43) (.80) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS (.18) (.11) (.21) (.31) (.88) (.43) (1.23) (2.56) (.87) --
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $14.70 $14.36 $12.02 $10.15 $10.31 $11.81 $11.61 $10.45 $14.21 $11.67
====================================================================================================================================
TOTAL RETURN 3.76% 20.44% 21.06% 1.49% (5.11)% 5.25% 24.49% (9.92)% 32.01% 88.53%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $3,354 $2,989 $1,477 $919 $846 $796 $550 $454 $607 $451
Ratio of Expenses to
Average Net Assets .59%** .46% .59% .58% .67% .68% .64% .67% .66% .78%+
Ratio of Net Investment
Income to Average
Net Assets 1.53% 1.37% 1.27% 2.04% 1.80% 3.01% 1.27% 1.39% 1.00% 1.10%+
Portfolio Turnover Rate 31% 28% 51% 58% 49% 45% 50% 71% 77% 39%
</TABLE>
*Partial period: October 1, 1985, to August 31, 1986.
**Beginning in fiscal year 1995, this figure does not include expense reductions
from directed brokerage arrangements. The Ratio of Net Expenses to Average Net
Assets was .58%.
+Annualized.
From time to time, the Vanguard Funds advertise yield and total return
figures. Yield is an historical measure of dividend income, and total return is
a measure of past dividend income (assuming that it has been reinvested) plus
capital appreciation. Neither yield nor total return should be used to predict
the future performance of a fund.
Plain Talk About
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Portfolio began fiscal 1995 with a net asset value (price) of $14.36 per
share. During the year, the Portfolio earned $0.20 per share from investment
income (interest and dividends) and $0.32 per share from investments that had
appreciated in value or that were sold for higher prices than the Portfolio paid
for them. Of those total earnings of $0.52 per share, $0.18 per share was
returned to shareholders in the form of dividend distributions. The earnings
($0.52 per share) less distributions ($0.18 per share) resulted in a share price
of $14.70 at the end of the year, an increase of $0.34 per share (from $14.36 at
the beginning of the period to $14.70 at the end of the period). Assuming that
the shareholder had reinvested the distribution in the purchase of more shares,
total return from the Portfolio was 3.76% for the year.
As of August 31, 1995, the Portfolio had $3.35 billion in net assets;
an expense ratio of 0.59% ($5.90 per $1,000 of net assets); and net investment
income amounting to 1.53% of its average net assets. It sold and replaced
securities valued at 31% of its total net assets.
3
<PAGE> 48
Plain Talk About
GROWTH FUNDS AND VALUE FUNDS
Growth investing and value investing are two styles employed by stock
fund managers. Growth funds generally focus on companies that, due to their
strong earnings and revenue potential, offer above-average prospects for
capital growth, with less emphasis on dividend income. Value funds generally
emphasize companies that, considering their assets and earnings history, are
attractively priced; these companies often pay regular dividend income to
shareholders. Growth and value stocks have, in the past, produced similar
long-term returns, though each has periods when it outperforms the other. In
general, growth funds appeal to investors who will accept more volatility in
hope of a greater increase in share price, while value funds are appropriate
for investors some dividend income and the potential for capital gains but are
less tolerant of share-price fluctuations.
Plain Talk About
INVESTING FOR THE LONG TERM
The Portfolio is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on short-term
fluctuations in the stock market.
A WORD ABOUT RISK
This prospectus describes the risks you will face as an investor in Vanguard
International Growth Portfolio. It is important to keep in mind one of the main
axioms of investing: the higher the risk of losing money, the higher the
potential reward. The reverse, also, is generally true: the lower the risk, the
lower the potential reward. However, as you consider an investment in the
International Growth Portfolio, you should also take into account your personal
tolerance for the daily fluctuations of the stock market.
Look for this "warning flag" symbol [WARNING FLAG] throughout the
prospectus. It is used to mark detailed information about each type of risk that
you, as a shareholder of the Portfolio, will confront.
THE PORTFOLIO'S OBJECTIVE
The Portfolio seeks to provide long-term growth of capital. This objective is
fundamental, which means that it cannot be changed unless a majority of
shareholders vote to do so.
[WARNING FLAG] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING
PAGES, YOUR INVESTMENT IN THE PORTFOLIO, AS WITH ANY INVESTMENT IN COMMON
STOCKS, COULD LOSE MONEY.
WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:
- - You wish to add an international stock fund to your existing holdings,
which could include U.S. stock, bond, money market, and tax-exempt
investments.
- - You are willing to accept the additional risks (country risk, currency
risk, etc.) associated with international investments.
- - You are seeking growth of capital over the long term--at least five
years.
- - You are not looking for current income.
- - You characterize your investment temperament as "relatively
aggressive."
This Portfolio is not an appropriate investment if you are a
market-timer. Investors who engage in excessive in-and-out trading activity
generate additional costs that are borne by all of the Portfolio's shareholders.
To minimize such costs, which reduce the ultimate returns achieved by you and
other shareholders, the Portfolio has adopted the following policies:
- - The Portfolio reserves the right to reject any purchase
request--including exchanges from other Vanguard Funds--that it regards
as disruptive to the efficient management of the Portfolio. This
4
<PAGE> 49
could be because of the timing of the investment or because of a
history of excessive trading by the investor.
- - There is a limit on the number of times you can exchange into or out of
the Portfolio (see "Redeeming Shares" in the INVESTING WITH VANGUARD
section).
- - The Portfolio reserves the right to stop offering shares at any time.
INVESTMENT STRATEGIES
This section explains how the Portfolio's investment adviser pursues its
objective. It also explains several of the risks--market risk, objective risk,
country risk, manager risk, and currency risk--faced by investors in the
Portfolio. Unlike the Portfolio's investment objective, the adviser's investment
strategies are not fundamental and can be changed by the Portfolio's Board of
Directors without shareholder approval. However, before making any important
change in its policies, the Portfolio will give shareholders 30-days notice, in
writing.
MARKET EXPOSURE
The Portfolio invests in stocks of non-U.S. companies. About two-thirds of the
Portfolio's assets are invested in small and medium-size companies, the
remaining third in large companies.
[WARNING FLAG] THE PORTFOLIO IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY
THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN EXTENDED PERIODS.
STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING STOCK PRICES AND
PERIODS OF FALLING STOCK PRICES. IN ADDITION, INVESTMENTS IN FOREIGN STOCK
MARKETS CAN BE AS RISKY, IF NOT MORE RISKY, THAN U.S. STOCK INVESTMENTS.
To illustrate the volatility of international stock prices, the
following table shows the best, worst, and average total returns (dividend
income plus change in market value) for foreign stock markets over various
periods as measured by the Morgan Stanley Capital International Europe,
Australia, and Far East (EAFE) Index, a widely used barometer of international
stock market activity. Note that the
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1995)
- ----------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Best +69.9% +36.5% +22.8% +16.3%
Worst -23.2 +1.5 +7.0 +12.0
Average +15.3 +14.2 +16.2 +14.9
- ----------------------------------------------------------------------
</TABLE>
returns shown do not include the costs of buying and selling stocks or other
expenses that a real-world investment portfolio would incur. Note, also, how the
gap between best and worst tends to narrow over the long term.
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1995. Keep in mind that this was a particularly favorable
Plain Talk About
COSTS AND MARKET TIMING
Some investors try to profit from "market timing"--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Portfolio discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
5
<PAGE> 50
Plain Talk About
THE RISKS OF INTERNATIONAL INVESTING
Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign countries are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies, and may not be as liquid as similar U.S. companies. In addition,
foreign stock exchanges, brokers, and companies generally have less government
supervision and regulation than in the U.S. These factors--as well as possible
country risk and currency rish (which are described in detail in this
propectus)--could negatively impact the returns that Americans receive from a
foreign investment. For more information about foreign investment risk, see the
Statement of Additional Information. The table covers all of the 1-, 5-, 10-,
and 20-year periods from 1969 through 1995. Keep in mind that this was a
particularly favorable period for foreign markets. For instance, over 10-year
periods, foreign stocks provided an average return of +16.2%, compared to
+13.1% for U.S. stocks (as measured by the Standard & Poor's 500 Composite
Stock Price Index) during the same time frame. These average returns reflect
past performance and should not be regarded as an indication of future returns
from either foreign markets as a whole or this Portfolio in particular.
Keep in mind, too, that while the Portfolio invests mainly in small and
medium-size companies, classifications of companies as large, medium, and small
vary from country to country. For instance, a large company in one country may
be considered a small company in another.
Finally, because the International Growth Portfolio does not hold the
same securities held in the EAFE Index or any other market index, the
performance of the Portfolio will not mirror the returns of any particular
index.
[WARNING FLAG] THE PORTFOLIO IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE
POSSIBILITY THAT RETURNS FROM INTERNATIONAL STOCKS WILL TRAIL RETURNS FROM THE
U.S. STOCK MARKETS. THE PRICES OF INTERNATIONAL STOCKS AND THE PRICES OF U.S.
STOCKS HAVE OFTEN MOVED IN OPPOSITE DIRECTIONS. THESE PERIODS HAVE, IN THE PAST,
LASTED FOR AS LONG AS SEVERAL YEARS.
SECURITY SELECTION
Schroder Capital Management International, Inc. (Schroder Capital), adviser to
the Portfolio, believes that the two most important factors in managing the
investments of an international stock fund are country selection and stock
selection. Schroder Capital evaluates up to 30 financial markets--including
Japan, the United Kingdom, the Netherlands, Germany, France, Switzerland,
Sweden, Australia, Hong Kong, Singapore, Malaysia, and Italy--and identifies
those countries with, in the adviser's opinion, the most favorable business
climates.
[WARNING FLAG] THE PORTFOLIO IS SUBJECT TO COUNTRY RISK, WHICH IS THE
POSSIBILITY THAT POLITICAL EVENTS (A WAR, NATIONAL ELECTIONS), FINANCIAL
PROBLEMS (RISING INFLATION, GOVERNMENT DEFAULT), OR NATURAL DISASTERS (AN
EARTHQUAKE, A FLOOD) WILL WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN
THAT COUNTRY TO LOSE MONEY.
Once an attractive market has been identified, Schroder Capital
analyzes and ranks the companies in that country that, Schroder believes, offer
the potential for above-average earnings growth. Schroder Capital considers
on-site evaluations a vital part of the security selection process, visiting
more than 1,000 companies in 20 countries each year. The companies chosen by
Schroder Capital reflect a wide variety of countries and industries.
6
<PAGE> 51
The top ten holdings (which amounted to 21% of the Portfolio's total
net assets) as of August 31, 1995, follow.
COMPANY COUNTRY
1. Heineken NV Netherlands
2. Ito-Yokado Co. Japan
3. Philips Electronics NV (non-voting) Netherlands
4. Murata Manufacturing Co. Ltd. Japan
5. Societe National Elf Aquitaine France
6. Veba AG Germany
7. BBC Brown Boveri AG A (bearer) Switzerland
8. Internationale Nederlanden Groep Netherlands
9. Hitachi Ltd. Japan
10. Matsushita Electric Industrial Co., Ltd. Japan
Keep in mind that, because the makeup of the Portfolio changes daily,
this listing is only a "snapshot" at one point in time.
The Portfolio is run by Schroder Capital according to traditional
methods of active investment management, which means securities are bought and
sold according to Schroder Capital's judgments about companies and their
financial prospects, and about foreign stock markets and economies in general.
[WARNING FLAG] THE PORTFOLIO IS SUBJECT TO MANAGER RISK, WHICH IS THE
POSSIBILITY THAT SCHRODER CAPITAL MAY DO A POOR JOB OF EVALUATING FOREIGN
MARKETS AND SELECTING STOCKS.
PORTFOLIO TURNOVER
Although the Portfolio generally seeks to invest for the long term, it retains
the right to sell securities regardless of how long they have been held. The
Portfolio's average turnover rate for the past ten years has been about 63%. (A
turnover rate of 100% would occur, for example, if the Portfolio sold and
replaced securities valued at 100% of its total net assets within a one-year
period.)
INVESTMENT POLICIES
Besides investing in stocks of foreign companies, the Portfolio may follow a
number of investment policies to achieve its objective.
The Portfolio may enter into forward foreign currency contracts, which
help protect the Portfolio's securities against unfavorable short-term changes
in exchange rates. A forward foreign currency contract is an agreement to buy or
sell a country's currency at a specific price usually 30, 60, or 90 days in the
future. In other words, the contract guarantees an exchange rate on a given
date. Managers of international stock funds use these contracts to guard against
sudden, unfavorable changes in U.S. dollar/foreign currency exchange rates. The
contracts will not prevent the fund's securities from falling in value during
foreign market downswings. Schroder Capital will use these contracts to
eliminate some of the uncertainty of foreign exchange rates--but will not
speculate on changes in the market.
Plain Talk About
PORTFOLIO DIVERSIFICATION
In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average foreign equity mutual fund
has about 25% of its assets invested in its ten largest holdings, while some
less-diversified international mutual funds have more than 50% of their assets
invested in the stocks of just ten companies.
Plain Talk About
PORTFOLIO TURNOVER
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. Also, funds with high portfolio turnover rates
may be more likely than low-turnover funds to generate capital gains that must
be distributed to shareholders as taxable income. The average turnover rate for
actively managed international stock funds is 57%.
7
<PAGE> 52
Plain Talk About
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new, exotic types of derivatives--some of which can
carry considerable risks.
Plain Talk About
CASH RESERVES
With mutual funds, holding cash reserves--or "cash"--does not mean literally
that the fund holds a stack of currency. Rather, cash reserves refer to
short-term, interest-bearing securities that can easily and quickly be converted
to cash. (Most mutual funds hold at least a small percentage of assets in cash
to accommodate shareholder redemptions.) While some equity funds strive to keep
cash levels at a minimum and to always remain fully invested in stocks, other
equity funds allow investment advisers to hold up to 20% or more of a fund's
assets in cash reserves.
[WARNING FLAG] THE PORTFOLIO IS SUBJECT TO CURRENCY RISK, WHICH IS THE
POSSIBILITY THAT A "STRONGER" U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS
INVESTING OVERSEAS. GENERALLY, WHEN THE DOLLAR RISES IN VALUE AGAINST A FOREIGN
CURRENCY, YOUR INVESTMENT IN THAT COUNTRY LOSES VALUE BECAUSE ITS CURRENCY IS
WORTH FEWER U.S. DOLLARS. ON THE OTHER HAND, A "WEAKER" DOLLAR GENERALLY LEADS
TO HIGHER RETURNS FOR AMERICANS HOLDING FOREIGN INVESTMENTS.
The Portfolio may also invest in derivatives.
[WARNING FLAG] ALTHOUGH IT HAS NOT DONE SO IN THE PAST, THE PORTFOLIO RESERVES
THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN STOCK FUTURES AND OPTIONS
CONTRACTS, WHICH ARE TRADITIONAL TYPES OF DERIVATIVES.
Losses (or gains) involving futures can sometimes be substantial--in
part because a relatively small price movement in a futures contract may result
in an immediate and substantial loss (or gain) for a Portfolio. This Portfolio
will not use futures and options for speculative purposes or as leveraged
investments that magnify the gains or losses of an investment. Rather, the
Portfolio will keep separate cash reserves or short-term cash-equivalent
securities in the amount of the obligation underlying the futures or options
contract. Only a limited percentage of the Portfolio's assets--no more than 20%
of total assets--may be committed to such contracts.
The reasons for which the Portfolio may use futures and options
contracts are:
- - To keep cash on hand to meet shareholder redemptions or other needs
while simulating full investment in stocks.
- - To make it easier to trade.
- - To reduce costs by buying futures instead of actual stocks when futures
are cheaper.
The Portfolio will usually hold only a small percentage of its assets
in cash reserves, although if the investment adviser believes that market
conditions warrant a temporary defensive measure, the Portfolio may hold cash
reserves without limit.
INVESTMENT LIMITATIONS
To reduce risk and maintain diversification, the Portfolio has adopted limits on
some of its investment policies. Specifically, the Portfolio will not:
- - Invest more than 5% of its assets in the securities of companies that
have been in business for less than three years.
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for the purpose of meeting shareholder requests to
redeem shares.
With respect to 75% of its assets, this Portfolio will not:
- - Invest more than 5% in the securities of any one company.
8
<PAGE> 53
- - Buy more than 10% of the outstanding voting securities of any company.
The limitations listed in this prospectus and in the Statement of
Additional Information are fundamental and may be changed only by approval of a
majority of the Portfolio's shareholders.
INVESTMENT PERFORMANCE
Vanguard International Growth Portfolio invests in foreign stocks, so its
performance is tied to the performance of many stock markets outside the United
States. Historically, stock market performance, both foreign and domestic, has
been characterized by sharp up-and-down swings in the short term and by more
stable growth over the long term.
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 8/31/95
[BAR GRAPH]
<TABLE>
<CAPTION>
International MSCI International MSCI
Growth EAFE Index Growth EAFE Index
<S> <C> <C> <C> <C>
1986 23.24 29.98 10.21 8.83
1987 7.99 23.35 7.4 7.11
1988 6.96 15.32 -2.08 -4.33
1989 -0.1 0.33 0.78 -6.11
1990 -8.29 -19.72 10.18 9.64
1991 4.98 7.52 -3.6 -5.38
1992 -5.09 -11.79 7.33 2.21
1993 7.76 12.08 7.3 10.14
1994 -1.78 3.56 2.03 5.18
1995 -0.74 1.94 7.35 0.81
10-Year
Average
Annual
Returns 13.95% 16.27%
</TABLE>
The results shown above represent the Portfolio's "average annual total
return" performance, which assumes that any distributions of capital gains and
dividends were reinvested for the indicated periods. Also included is
comparative information on the unmanaged Morgan Stanley Capital International
Europe, Australia, and Far East (EAFE) Index. The chart does not make any
allowance for Federal, state, or local income taxes that shareholders must pay
on a current basis.
SHARE PRICE
The Portfolio's share price, called its net asset value, is calculated each
business day after the close of regular trading (generally 4:00 p.m. Eastern
time) of the New York Stock Exchange. Net asset value per share is computed by
adding up the total value of the Portfolio's investments and other assets,
subtracting any of its liabilities, or debts, and then dividing by the number of
Portfolio shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = ----------------------------
NUMBER OF SHARES OUTSTANDING
Plain Talk About
PAST PERFORMANCE
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns. This is
particularly true of international markets, which historically have been more
volatile than U.S. markets.
9
<PAGE> 54
Plain Talk About
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from the dividends that the fund earns from its holdings as well
as interest it receives from its money market and bond investments. Capital
gains are realized when the fund sells securities for higher prices than it paid
for them. These capital gains are either short-term or long-term depending on
whether the fund held the securities for less than or more than one year.
Plain Talk About
"BUYING A DIVIDEND"
Unless you are investing in a tax-deferred retirement account (such as an IRA),
it is not to your advantage to buy shares of a fund shortly before it makes a
distribution, because part of your investment will come back to you as a taxable
distribution. This is known as "buying a dividend." For example: on December 15,
you invest $5,000, buying 250 shares for $20 each. If the fund pays a
distribution of $1 per share on December 16, its share price would drop to $19
(not counting market change). You would still have only $5,000 (250 shares x $19
= $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you
would owe tax on the $250 distribution you received, even if you had reinvested
the dividends in more shares. To avoid "buying a dividend," check a fund's
distribution schedule before you invest.
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = ----------------------------
NUMBER OF SHARES OUTSTANDING
Daily net asset value, or NAV, is useful to you as a shareholder
because the NAV, multiplied by the number of Portfolio shares you own, gives you
the dollar amount you would have received had you sold all of your shares back
to the Portfolio that day.
To help determine its daily share price, the Portfolio calculates the
value of its foreign securities in U.S. dollars. The Portfolio uses the daily
exchange rate employed by Morgan Stanley Capital International in the
calculation of its own indexes. If Morgan Stanley's exchange rate is not
available, the Portfolio uses a rate according to policies set by the
Portfolio's Board of Directors.
The Portfolio's share price can be found daily in the mutual fund
listings of most major newspapers under the heading Vanguard Group. Different
newspapers use different abbreviations of the Portfolio's name, but the most
common is IntlGr.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each December, the Portfolio distributes to shareholders virtually all of its
income from interest and dividends, as well as any capital gains realized from
the sale of securities. You can receive distributions of income or capital gains
in cash, or you may have them automatically reinvested in more shares of the
Portfolio. In either case, distributions of dividends and capital gains that are
declared in December--even if paid to you in January--are taxed as if they had
been paid to you in December. Vanguard will process your dividend distribution
and send you a statement each year showing the tax status of all your
distributions.
- - The dividends and short-term capital gains that you receive are taxable to
you as ordinary dividend income. Any distributions of net long-term capital
gains by the Portfolio are taxable to you as long-term capital gains, no
matter how long you've owned shares in the Portfolio. Both dividends and
capital gains distributions are taxable to you whether received in cash or
reinvested in additional shares. Although the Portfolio does not seek to
realize any particular amount of capital gains during a year, such gains are
realized from time to time as byproducts of the ordinary investment
activities of the Portfolio. Consequently, distributions may vary
considerably from year to year.
- - If you sell or exchange shares of the Portfolio, any gain or loss you have is
a taxable event, which means that you may have a capital gain to report as
income, or a capital loss to report as a deduction, when you complete your
Federal income tax return.
- - Distributions of dividends or capital gains, and capital gains or losses from
your sale or exchange of Portfolio shares, may be subject to state and local
income taxes as well.
The Portfolio may "pass through" to shareholders any foreign
10
<PAGE> 55
income taxes it is required to pay. As a shareholder, you need to report your
"share" of these taxes as part of your gross income. You can treat the tax
either as an itemized deduction or as a foreign tax credit on your tax return.
The tax information in this prospectus is provided as general
information and will not apply to you if you are investing in a tax-deferred
account such as an IRA. You should consult your own tax adviser about the tax
consequences of an investment in the Portfolio.
THE PORTFOLIO AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 30
investment companies with more than 90 distinct investment portfolios and total
net assets of more than $180 billion. All of the Vanguard Funds share in the
expenses associated with business operations, such as personnel, office space,
equipment, and advertising.
Vanguard also provides marketing services to the Funds. Although
shareholders do not pay sales commissions or 12b-1 marketing fees, each Fund
pays its allocated share of The Vanguard Group's costs.
A list of the Fund's Directors and Officers, and their present
positions and principal occupations during the past five years, can be found in
the Statement of Additional Information.
INVESTMENT ADVISER
The Portfolio employs Schroder Capital Management International, Inc., 33 Gutter
Lane, London, England EC2V 8AS, as its investment adviser. Schroder Capital
manages the Portfolio subject to the control of the Officers and Directors of
the Fund.
Schroder Capital's base advisory fee is calculated using the
Portfolio's average net assets during the most recent fiscal quarter:
<TABLE>
<CAPTION>
-----------------------------------------
ASSETS MANAGED FEE
-----------------------------------------
<S> <C>
First $50 million 0.350%
Next $950 million 0.175
Assets over $1 billion 0.125
-----------------------------------------
</TABLE>
In addition, Schroder Capital's advisory fee is increased or decreased,
based on the cumulative total return performance of the Portfolio as compared to
the cumulative total return performance of the MSCI EAFE Index over the past 36
months.
Plain Talk About
VANGUARD'S UNIQUE
CORPORATE STRUCTURE
The Vanguard Group, Inc. is the only MUTUAL mutual fund company. It is owned
jointly by the Funds it oversees and by the shareholders in those Funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its Funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to Fund shareholders in
the form of lower operating expenses.
Plain Talk About
THE PORTFOLIO'S ADVISER
Schroder Capital Management International Inc., is part of a worldwide group of
banks and financial services companies known as The Schroder Group. The Group
manages more than $100 billion in assets. The manager responsible for overseeing
Schroder Capital's strategy for Vanguard International Growth Portfolio is:
RICHARD FOULKES, Executive Vice President of Schroder Capital; 28 years
with Schroder Capital; educated at the Sorbonne, France; M.A., Cambridge
University, England.
He has served in this capacity since the Portfolio's inception in 1981.
11
<PAGE> 56
For the Portfolio's first $1 billion in assets:
<TABLE>
<CAPTION>
-----------------------------------------------------------
DIFFERENCE BETWEEN PORTFOLIO PERFORMANCE FEE
AND MSCI EAFE INDEX ADJUSTMENT
-----------------------------------------------------------
<S> <C>
-12% and below -0.0750%
Between -6% and -12% -0.0375
Between -6% and +6% 0
Between +6% and +12% +0.0375
+12% and above +0.0750
-----------------------------------------------------------
</TABLE>
For the portion of the Portfolio's assets over $1 billion:
<TABLE>
<CAPTION>
-----------------------------------------------------------
DIFFERENCE BETWEEN PORTFOLIO PERFORMANCE FEE
AND MSCI EAFE INDEX ADJUSTMENT
-----------------------------------------------------------
<S> <C>
-12% and below -0.050%
Between -6% and -12% -0.025
Between -6% and +6% 0
Between +6% and +12% +0.025
+12% and above +0.050
-----------------------------------------------------------
</TABLE>
For the year ended August 31, 1995, the investment advisory fee paid to
Schroder Capital was $4.89 million, which included a base fee of $4.37 million
and, because the Portfolio's cumulative total return performance bettered that
of the MSCI EAFE Index over the past 36 months, an additional $518,000.
The agreement authorizes Schroder Capital to choose brokers or dealers
to handle the purchases and sales of the Portfolio's securities, and directs
Schroder Capital to use every effort to get the best available price and most
favorable execution from these brokers with respect to all transactions.
The Board of Directors may, without prior approval from shareholders,
change the terms of the advisory agreement or hire a new investment adviser,
either as a replacement for Schroder Capital or as an additional adviser.
However, no such change would be made before giving shareholders 30-days notice,
in writing.
GENERAL INFORMATION
The International Growth Portfolio is one of two Portfolios of Vanguard World
Fund, Inc. The other Portfolio is the U.S. Growth Portfolio. Vanguard World Fund
was originally formed as a corporation in 1959 and is now organized under the
laws of the State of Maryland. The Portfolios are combined under one corporation
for administrative purposes, but in virtually all respects operate like separate
corporations.
Shareholders of the International Growth Portfolio have rights and
privileges similar to those enjoyed by other corporate shareholders. For
example, shareholders will not be responsible for any liabilities of the
corporation. If any matters are to be voted on by shareholders (such as a change
in a fundamental investment objective or the election of directors), each share
outstanding at that point would be entitled to one vote. Although the Portfolio
does not usually hold an annual meeting, shareholders may request one under
certain circumstances, which are described in the Statement of Additional
Information.
12
<PAGE> 57
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to Fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to
do business with us.
The following sections of the prospectus briefly explain the many
services we offer you as a Vanguard International Growth Portfolio shareholder.
Booklets providing detailed information are available on the services marked
with a [BOOK]. Please call us to request copies.
SERVICES AND ACCOUNT FEATURES
We offer a variety of options designed to fit your financial planning needs,
including . . .
- - Automatic methods for depositing your paycheck or government check, and
moving money between Vanguard Fund accounts or between your Vanguard Fund
account and your bank account.
- - A cost-effective way to complement your Vanguard mutual fund shares with
individual stocks, bonds, and options.
TYPES OF ACCOUNTS
You can establish an account for yourself (or yourself and another party), a
minor child, a trust, or an organization, or as a third-party trustee retirement
investment. We also offer retirement accounts for individuals, self-employed
people, small businesses, partnerships, corporations, and tax-exempt
institutions.
DISTRIBUTION OPTIONS
You can receive your dividends and capital gains in cash, or reinvest them in
additional Portfolio shares.
BUYING SHARES
It's easy to open an account or add money to an existing account.
REDEEMING SHARES
You can withdraw money you have invested in the Portfolio by selling or
exchanging shares.
FUND AND ACCOUNT UPDATES
- - Our clear, concise Portfolio Summaries and tax statements help you keep track
of your Vanguard investments throughout the year as well as when you are
preparing your income tax returns.
- - Twice each year, you will receive comprehensive fund reports about Vanguard
International Growth Portfolio. These reports include an assessment of the
Portfolio's performance (and a comparison to its benchmark index) as well as
a complete listing of its holdings.
- - Vanguard Tele-Account(R) offers toll-free Fund and account information 24
hours a day from any TouchTone(TM) telephone.
- - You can use your personal computer to obtain share price, yield, and total
return -- as well as general investment information -- through Vanguard
Online(sm) and the World Wide Web.
13
<PAGE> 58
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to purchase, sell, or
exchange shares.
<TABLE>
<S> <C>
--------------------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS Automatically set up for this Portfolio unless you notify us
(SALES AND EXCHANGES) otherwise.
--------------------------------------------------------------------------------------------
VANGUARD DIRECT DEPOSIT Automatic method for depositing your paycheck or U.S. Gov-
SERVICE ernment payment (including Social Security and
[BOOK] Government pension checks) into your account.
--------------------------------------------------------------------------------------------
VANGUARD AUTOMATIC EXCHANGE Automatic method for moving a fixed amount of money from
SERVICE one Vanguard Fund account to another.*
[BOOK]
--------------------------------------------------------------------------------------------
VANGUARD FUND EXPRESS Electronic method for purchasing or selling shares:
[BOOK] transferring money between your Vanguard Fund account and an
account at your bank, savings and loan, or credit union --
on a systematic schedule or whenever you wish.*
--------------------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS Electronic method for transferring dividends and/or capital
[BOOK] gains distributions directly from your Vanguard Fund account
to your bank, savings and loan, or credit union account or to
another Vanguard Fund account.
--------------------------------------------------------------------------------------------
VANGUARD BROKERAGE SERVICES A way to trade stocks, bonds, and options on major exchang-
(VBS) es, Nasdaq, and other domestic over-the-counter markets at
[BOOK] reduced rates, and to buy and sell shares of non-Vanguard
mutual funds. Call VBS (1-800-992-8327) for additional in-
formation and the appropriate forms.
--------------------------------------------------------------------------------------------
</TABLE>
*Can be used to "dollar-cost average" [BOOK] or to contribute to an IRA or other
retirement plan.
TYPES OF ACCOUNTS
INDIVIDUAL OR OTHER ENTITY
Vanguard's account registration form can be used to establish a variety of
account types.
<TABLE>
<S> <C>
---------------------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE To open an account in the name of one (individual) or more
(joint tenants) people. $3,000 minimum initial investment.
---------------------------------------------------------------------------------------------
FOR A MINOR CHILD To open an account as an UGMA/UTMA (Uniform Gifts/
[BOOK] Transfers to Minors Act). Age of majority and other trans-
fer requirements are set by state law. $1,000 minimum initial
investment.
---------------------------------------------------------------------------------------------
FOR HOLDING TRUST ASSETS To register assets held in an existing trust. $3,000 minimum
[BOOK] initial investment.
---------------------------------------------------------------------------------------------
</TABLE>
INVESTOR INFORMATION 1-800-662-7477 - CLIENT SERVICES
1-800-662-2739 - TELE-ACCOUNT 1-800-662-6273
14
<PAGE> 59
Types of Accounts (continued)
<TABLE>
<S> <C>
----------------------------------------------------------------------------------------------
FOR THIRD-PARTY TRUSTEE To open an account as a retirement trust or plan based on an
RETIREMENT INVESTMENTS existing corporate or institutional plan. These accounts are
(Vanguard is not the custodian established by the custodian or trustee of the existing plan.
or trustee)
----------------------------------------------------------------------------------------------
FOR AN ORGANIZATION To open an account as a corporation, partnership, or other
entity. These accounts may require a corporate resolution or
other documents to name the individuals authorized to act.
$3,000 minimum initial investment.
----------------------------------------------------------------------------------------------
</TABLE>
RETIREMENT
These accounts must be established with a Vanguard adoption agreement -- not a
Vanguard account registration form -- and may require additional documentation.
To request the appropriate adoption agreement and forms or to receive answers to
your questions about investing for retirement, call Investor Information.
<TABLE>
<S> <C>
---------------------------------------------------------------------------------------------------
FOR AN INDIVIDUAL RETIREMENT To open a retirement account in the name of an individual.
ACCOUNT (IRA) IRAs can also be established through a regular contribution, a
(Vanguard Fiduciary Trust direct rollover from an employer's plan such as a 401(k), or
Company is the custodian) through an asset transfer or rollover from another financial
institution such as a bank or mutual fund company. $1,000 minimum
initial investment.
---------------------------------------------------------------------------------------------------
FOR A SIMPLIFIED EMPLOYEE To open a retirement account in the name of an employee.
PENSION PLAN ACCOUNT (SEP-IRA) SEPs allow employers to make deductible contributions directly
(Vanguard Fiduciary Trust to IRAs established by their employees. A SEP can be
Company is the custodian) established by self-employed individuals, small businesses,
partnerships, or corporations.
---------------------------------------------------------------------------------------------------
FOR A QUALIFIED RETIREMENT To open a retirement account that allows small business owners
PROGRAM ACCOUNT (and their employees) or self-employed individuals to make tax-
(Vanguard Fiduciary Trust deductible retirement contributions for themselves and their
Company can be the custodian) employees into (Keogh), Profit-Sharing, or Money Purchase Pension
Keogh plans.
---------------------------------------------------------------------------------------------------
FOR A 403(B)(7) CUSTODIAL To open a retirement account that allows employees of tax-
ACCOUNT (Vanguard Fiduciary exempt institutions (for example, schools or hospitals) to make
Trust Company is the custodian) pre-tax retirement contributions.
---------------------------------------------------------------------------------------------------
</TABLE>
DISTRIBUTION OPTIONS
You can receive distributions of dividends and/or capital gains in a number of
ways:
<TABLE>
<S> <C>
---------------------------------------------------------------------------------------------------
REINVESTMENT Dividends and capital gains are reinvested in additional shares
of the Portfolio.
---------------------------------------------------------------------------------------------------
DIVIDENDS IN CASH Dividends are paid by check and mailed to your account's
address of record, and capital gains are reinvested in addi-
tional shares of the Portfolio.
---------------------------------------------------------------------------------------------------
</TABLE>
INVESTOR INFORMATION 1-800-662-7477 - CLIENT SERVICES
1-800-662-2739 - TELE-ACCOUNT 1-800-662-6273
15
<PAGE> 60
DISTRIBUTION OPTIONS (CONTINUED)
<TABLE>
<S> <C>
DIVIDENDS AND CAPITAL GAINS Both dividends and capital gains are paid by check and mailed
IN CASH to your account's address of record.
</TABLE>
To electronically transfer cash dividends and/or capital gains to your bank,
savings and loan, or credit union account, or to another Vanguard Fund account,
see Vanguard Dividend Express under "Services and Account Features."
BUYING SHARES
The price you pay for your shares is the Portfolio's next-determined net asset
value after Vanguard receives your request, provided we receive your request
before 4:00 p.m. Eastern time (the close of trading on the New York Stock
Exchange). The Portfolio is offered on a no-load basis, meaning that you do not
pay sales commissions or 12b-1 marketing fees.
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
-------------------------------------------------------------------------
<S> <C> <C>
MINIMUM INVESTMENT $3,000 (regular account); $1,000 $100 by mail or exchange; $1,000
- ------------------ (IRAs and accounts for minors). by wire.
BY MAIL Complete and sign the application Mail your check with an Invest-
- ------- form. By-Mail form detached from
FIRST-CLASS mail to: your confirmation statement to
The Vanguard Group the address listed on the form.
P.O. Box 2600
Valley Forge, PA 19482 Make your check payable to: Make your check payable to:
The Vanguard Group--81. The Vanguard Group--81.
EXPRESS or REGISTERED mail to:
The Vanguard Group All purchases must be made in All purchases must be made in
455 Devon Park Drive U.S. dollars, and checks must be U.S. dollars, and checks must be
Wayne, PA 19087 drawn on U.S. banks. drawn on U.S. banks.
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
BY TELEPHONE Call Vanguard Tele-Account* 24 Call Vanguard Tele-Account* 24
- ------------ hours a day--or Client Services hours a day--or Client Services
during business hours--to exchange during business hours--to exchange
from another Vanguard Fund account from another Vanguard Fund account
with the same registration with the same registration
(name, address, and tax-payer (name, address, and tax-payer
I.D. number). I.D. number).
Use Vanguard Fund Express (see
"Services and Account Features")
to transfer assets from your bank
account. Call Client Services
before your first use to verify
that this option is in place.
*You must obtain a Personal Identification Number through Tele-Account at
least seven days before you request your first exchange.
IMPORTANT NOTE: Once a telephone transaction has been approved by you and a confirmation number assigned,
it cannot be revoked. We reserve the right to refuse any purchase.
</TABLE>
INVESTOR INFORMATION 1-800-662-7477 - CLIENT SERVICES
1-800-662-2739 - TELE-ACCOUNT 1-800-662-6273
16
<PAGE> 61
BUYING SHARES (CONTINUED)
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
------------------------------------------------------------------
<S> <C> <C>
BY WIRE Call Client Services to arrange your Call Client Services to arrange your
- ------- wire transaction. wire transaction.
Wire to: Wire transactions are not available Wire transactions are not available
CoreStates Bank, N.A. for retirement accounts. for retirement accounts.
ABA 031000011
CoreStates No 01019897
[Temporary Account Number]
Vanguard International Growth
Portfolio
[Account Registration]
Attn Vanguard
AUTOMATICALLY -- Vanguard offers a variety of ways
- ------------- that you can add to your account
automatically. See "Services and
Account Features."
</TABLE>
-----------------------------------------------------------------------------
Shares purchased by check or Vanguard Fund Express can be redeemed at any
time. However, while your redemption request will be processed as soon as it
is received, your redemption proceeds will not be available until payment for
your purchase is collected, which may take up to ten days.
-----------------------------------------------------------------------------
It is important that you call Vanguard before you invest a large dollar
amount by wire or check. Vanguard must consider the interests of all Portfolio
shareholders and so reserves the right to delay or refuse any purchase that may
disrupt the Portfolio's operation or performance.
REDEEMING SHARES
- --------------------------------------------------------------------------------
IMPORTANT TAX NOTE: Any sale or exchange of shares in a non-retirement account
could result in a taxable gain or a loss.
- --------------------------------------------------------------------------------
The ability to redeem (that is, sell or exchange) Portfolio shares by telephone
is automatically established for your account unless you tell us in writing that
you do not want this option.
To protect your account from unauthorized or fraudulent telephone
instructions, Vanguard follows specific security procedures. When we receive a
call requesting an account transaction, we require the caller to provide:
- Portfolio name.
- 10-digit account number.
- Name and address exactly as registered on that account.
- Social Security or Employer Identification number as registered on that
account.
If you call to sell shares, the sale proceeds will be made payable to
you, as the registered shareholder, and mailed to your account's address of
record.
If we follow reasonable security procedures, neither the Portfolio nor
Vanguard will be responsible for the authenticity of transaction instructions
received by telephone. We believe that these procedures are reasonable and that,
if we follow them, you bear the risk of any losses resulting from unauthorized
or fraudulent telephone transactions on your account. However, if we do not
follow these or other reasonable procedures, Vanguard may be liable for any
losses resulting from unauthorized or fraudulent transactions.
INVESTOR INFORMATION 1-800-662-7477 - CLIENT SERVICES
1-800-662-2739 - TELE-ACCOUNT 1-800-662-6273
17
<PAGE> 62
REDEEMING SHARES (CONTINUED)
HOW TO SELL SHARES
You may withdraw any part of your account, at any time, by selling shares;
however, the Portfolio reserves the right to close any non-retirement or
UGMA/UTMA account whose balance falls below the minimum initial investment.
The Portfolio will deduct a $10 annual fee if your non-retirement account
balance falls below $2,500 or if your UGMA/UTMA account balance falls below
$500. The fee is waived if your total Vanguard Fund account assets are $50,000
or more.
Sale proceeds are normally mailed within two business days after
Vanguard receives your request. The sale price of your shares will be the
Portfolio's next-determined net asset value after Vanguard receives all required
documents in good order.
Good order means that the request includes:
- Portfolio name and account number.
- Amount of the transaction (in dollars or shares).
- Signatures of all owners exactly as registered on the account.
- Signature guarantees (if required).
- Any supporting legal documentation that may be required.
- Any certificates you are holding for the account.
Sales or exchange requests received after the close of trading on the New
York Stock Exchange (generally 4:00 p.m. Eastern time) are processed at the next
business day's net asset value.
Some written requests require a signature guarantee from a bank, broker, or
other acceptable institution. A notary public cannot provide a signature
guarantee.
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one Vanguard Fund to purchase shares of
another.
Although every effort will be made to maintain the exchange privilege,
Vanguard reserves the right to revise or terminate the exchange privilege, limit
the amount of an exchange, or reject any exchange, at any time, without notice.
Because excessive exchanges can potentially disrupt the management of
the Portfolio and increase transaction costs, Vanguard has established a policy
of limiting exchange activity to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (at least
30 days apart) from the Portfolio during any 12-month period. "Substantive"
means either a dollar amount large enough to have a negative impact on the
Portfolio or a series of movements between Vanguard Funds.
Before you exchange into a new Vanguard Fund, please read its prospectus. For
a copy and for answers to questions you might have, please call Investor
Information.
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
BY TELEPHONE ALL TYPES EXCEPT RETIREMENT:
1-800-662-6273 Call Vanguard Tele-Account* 24 hours a day --
Vanguard Tele-Account or Client Services during business hours -- to
request a sale or exchange of shares. You can
1-800-662-2739 exchange shares from this Portfolio to open an
Client Services account in another Vanguard Fund or to add to
an existing Vanguard Fund account with an
identical registration.
RETIREMENT:
You can exchange -- but not sell -- shares by
calling Tele-Account or Client Services.
*You must obtain a Personal Identification
Number through Tele-Account at least seven days
before you request your first redemption.
INVESTOR INFORMATION 1-800-662-7477 - CLIENT SERVICES
1-800-662-2739 - TELE-ACCOUNT 1-800-662-6273
18
<PAGE> 63
REDEEMING SHARES (continued)
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
BY MAIL ALL TYPES EXCEPT RETIREMENT:
FIRST-CLASS mail to: Send a letter of instruction signed by all
The Vanguard Group registered account holders. Include the
Vanguard International Portfolio name and account number and (if you
Growth Portfolio are selling) a dollar amount or number of
P.O. Box 1120 shares OR (if you are exchanging) the name of
Valley Forge, PA 19482 the Fund you want to exchange into and a dollar
amount or number of shares.
EXPRESS or REGISTERED mail to:
The Vanguard Group RETIREMENT:
Vanguard International
Growth Portfolio Call Client Services (for IRAs) or Individual
455 Devon Park Drive Retirement Services (for SEP-IRAs 403(b)(7)
Wayne, PA 19087 custodial accounts, and Profit-Sharing
and Money Purchase Pension [Keogh] plans:
1-800-662-2003) for information on how
to request a distribution. Depending on your
account registration type, additional
documentation may be required.
AUTOMATICALLY ALL TYPES EXCEPT RETIREMENT:
Vanguard offers several ways to sell or
exchange shares automatically (see "Services
and Account Features"). Call Investor
Information for the appropriate booklet and
application if you did not elect a feature when
you opened your account.
It is important that you call Vanguard before you redeem a large dollar
amount. In protecting the interests of all Portfolio shareholders, Vanguard may
not be able to deliver your redemption proceeds immediately if the amount is
considered to be disruptive to the Portfolio's operation or performance.
Vanguard reserves the right to take up to seven days to deliver your redemption
proceeds.
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the United States
Securities and Exchange Commission. If you experience difficulty making a
telephone redemption during periods of drastic economic or market change, you
can send us your request by regular or express mail. Follow the instructions on
selling or exchanging shares by mail in the "Redeeming Shares" section.
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you a variety of statements to help you monitor your account
activity and to help you complete your tax returns. You will also receive annual
and semi-annual financial reports on the Portfolio's operation and performance.
CONFIRMATION STATEMENT Sent each time you purchase, exchange, or
redeem shares; confirms the date and the amount
of the transaction.
INVESTOR INFORMATION 1-800-662-7477 - CLIENT SERVICES
1-800-662-2739 - TELE-ACCOUNT 1-800-662-6273
19
<PAGE> 64
FUND AND ACCOUNT UPDATES (continued)
PORTFOLIO SUMMARY Mailed quarterly; shows the market value of
your account as of the close of the statement
period, as well as distributions, purchases,
exchanges, and redemptions for the current
calendar year.
FUND FINANCIAL REPORTS Mailed in April and October for this Portfolio.
TAX STATEMENTS Generally mailed in January; report previous
year's dividend and capital gains
distributions, proceeds from the sale of
shares, and distributions from IRAs or other
retirement accounts.
AVERAGE COST STATEMENT Issued quarterly for taxable accounts
(accompanies your Portfolio Summary); shows the
average cost of shares that you redeemed during
the previous quarter, using the average cost
single category method.
AUTOMATED TELEPHONE ACCESS
VANGUARD TELE-ACCOUNT Toll-free access to total return, share price,
1-800-662-6273 price change, and yield quotations through any
TouchTone telephone. Also provides your account
Any time, seven days a week, balance (in dollars and shares), last
from anywhere in the transaction, redemptions by check during the
continental United States last three months, and the latest dividend or
and Canada. capital gains distribution. Permits exchanges
and sales of Portfolio shares.
COMPUTER ACCESS
VANGUARD ONLINE Information via your personal computer on Fund
KEYWORD: vanguard share price, yield, and total return; offered
through America Online (AOL). To establish an
AOL account, call 1-800-238-6336.
VANGUARD ON THE An education-oriented website offering news and
WORLD WIDE WEB information about Vanguard Funds and
http://www.vanguard.com services, as well as interactive, easy-to-use
investment planning tools.
SHARES OF THE PORTFOLIO MAY ONLY BE SOLD IN THOSE STATES IN WHICH THEY ARE
REGISTERED. THE PORTFOLIO'S SHARES ARE CURRENTLY REGISTERED FOR SALE IN ALL 50
STATES, AND THE PORTFOLIO INTENDS TO MAINTAIN SUCH REGISTRATION.
INVESTOR INFORMATION 1-800-662-7477 - CLIENT SERVICES
1-800-662-2739 - TELE-ACCOUNT 1-800-662-6273
20
<PAGE> 65
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments, and
U.S. Treasury bills.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
COUNTRY RISK
The possibility that events such as political or financial troubles or natural
disasters will weaken a country's economy.
CURRENCY RISK
The possibility that an American's foreign investment will lose money because
of unfavorable exchange rates.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
marketing fees.
FIXED-INCOME SECURITIES
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
INTERNATIONAL STOCK FUND
A mutual fund that invests in the stocks of companies located outside the
United States.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a portfolio's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security or industry.
PRINCIPAL
The amount of your own money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 66
[THE VANGUARD GROUP LOGO]
HMS Vanguard was the flagship of Lord Nelson at the Battle of the Nile in 1798.
Vanguard was chosen as the name of The Vanguard Group because of the
significance of its traditional meaning: "the advance guard" or "leadership of a
new trend."
THE VANGUARD GROUP
Post Office Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
For information on our Funds, Fund services, and retirement accounts; requests
for literature
CLIENT SERVICES DEPARTMENT
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-662-2738
For information on your account, account transactions, account statements
VANGUARD BROKERAGE SERVICES
1-800-992-8327
For information on trading stocks, bonds, and options at reduced commissions
VANGUARD TELE-ACCOUNT(R)
1-800-662-6273 (ON-BOARD)
For 24-hour automated access to price and yield, information on your account,
certain transactions
ELECTRONIC ACCESS TO THE VANGUARD MUTUAL FUND EDUCATION AND INFORMATION CENTER
On America Online(R)
Keyword: vanguard
To Send E-Mail to Vanguard
[email protected]
On the World Wide Web
http://www.vanguard.com
(C) 1996 Vanguard Marketing Corporation, Distributor
PO8IN
<PAGE> 67
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[VANGUARD INTERNATIONAL GROWTH PORTFOLIO LOGO]
A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS -- APRIL 29, 1996
- --------------------------------------------------------------------------------
FUND INFORMATION: PARTICIPANT SERVICES DEPARTMENT -- 1-800-523-1188
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE AND
POLICIES
Vanguard International Growth Portfolio (the "Portfolio")
is an independent series of Vanguard World Fund, Inc. (the
"Fund"), an open-end diversified investment company. The
Portfolio seeks to provide long-term capital appreciation.
Dividend income is expected to be incidental to this
objective. The Fund is currently offering shares of two
Portfolios. This prospectus relates to Vanguard
International Growth Portfolio only. There is no assurance
that the Portfolio will achieve its stated objective.
Shares of the Fund are neither insured nor guaranteed by
any agency of the U.S. Government, including the FDIC.
- --------------------------------------------------------------------------------
IMPORTANT NOTE This Prospectus is intended exclusively for participants
in employer-sponsored retirement or savings plans, such as
tax-qualified pension and profit-sharing plans and 401(k)
thrift plans, as well as 403(b)7 custodial accounts for
non-profit educational and charitable organizations.
Another version of this Prospectus, containing information
on how to open a personal investment account with the
Portfolio, is available for individual investors. To
obtain a copy of that version of the Prospectus, please
call 1-800-662-7447.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT The Portfolio is an investment option under a retirement
or savings program sponsored by your employer. The
administrator of your retirement plan or your employee
benefits office can provide you with detailed information
on how to participate in your plan and how to elect the
Portfolio as an investment option. If you have any
questions about the Portfolio please contact Participant
Services at 1-800-523-1188. If you have any questions
about your plan account, contact your plan administrator
or the organization that provides recordkeeping services
for your plan.
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Portfolio before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Portfolio has been filed
with the Securities and Exchange Commission. This
Statement is dated April 29, 1996, and has been
incorporated by reference into this Prospectus. A copy may
be obtained without charge by writing to the Portfolio or
by calling our Participant Services Department.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Portfolio Expenses ................ 2 Who Should Invest ................ 6 Dividends, Capital Gains
Financial Highlights .............. 2 Implementation of Policies ....... 7 and Taxes ......................... 12
Yield and Total Return ............ 4 Investment Limitations ........... 8 The Share Price of The Portfolio... 12
Investment Objective .............. 4 Management of the Portfolio ...... 9 General Information ............... 13
Investment Policies ............... 4 Investment Adviser ............... 10 Service Guide ..................... 14
Investment Risks .................. 5 Performance Record ............... 11
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 68
PORTFOLIO
EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Portfolio. The
expenses and fees set forth in the table are for the 1995
fiscal year.
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
---------------------------------------------------------------------------------
Sales Load Imposed on Purchases........................................ None
Sales Load Imposed on Reinvested Dividends............................. None
Redemption Fees........................................................ None
Exchange Fees.......................................................... None
ANNUAL PORTFOLIO OPERATING EXPENSES
---------------------------------------------------------------------------------
Management & Administrative Expenses................................... 0.32%
Investment Advisory Fees............................................... 0.16
12b-1 Fees............................................................. None
Other Expenses
Distribution Costs.......................................... 0.02%
Miscellaneous Expenses...................................... 0.09
-----
Total Other Expenses................................................... 0.11
-----
TOTAL OPERATING EXPENSES...................................... 0.59%
=====
</TABLE>
The purpose of this table is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Portfolio.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period. As noted in the table above,
the Portfolio charges no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$6 $19 $33 $ 74
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
through each period, insofar as they relate to each of the
five years in the period ended August 31, 1995, have been
audited by Price Waterhouse LLP, independent accountants,
whose report thereon was unqualified. This information
should be read in conjunction with the Fund's financial
statements and notes thereto, which, together with the
remaining portions of the Fund's 1995 Annual Report to
Shareholders, are incorporated by reference in the
Statement of Additional Information and this Prospectus,
and which appear, along with the report of Price
Waterhouse LLP, in the Fund's 1995 Annual Report to
Shareholders. For a more complete discussion of the Fund's
performance, please see the Fund's 1995 Annual Report to
Shareholders which may be obtained without charge by
writing to the Fund or by calling Participant Services at
1-800-523-1188.
2
<PAGE> 69
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, OCT. 1,
1985 TO
-------------------------------------------------------------------------- AUG. 31,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD.... $14.36 $12.02 $10.15 $10.31 $11.81 $11.61 $10.45 $14.21 $11.67 $6.19
------ ------ ------ ------ ------ ------ ------ ------ ------ -------
INVESTMENT OPERATIONS
Net Investment
Income............... .20 .14 .12 .20 .18 .32 .13 .16 .12 .07
Net Realized and
Unrealized Gain
(Loss) on
Investments.......... .32 2.31 1.96 (.05) (.80) .31 2.26 (1.36) 3.29 5.41
------ ------ ------ ------ ------ ------ ------ ------ ------ -------
TOTAL FROM INVESTMENT
OPERATIONS......... .52 2.45 2.08 .15 (.62) .63 2.39 (1.20) 3.41 5.48
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income.... (.18) (.11) (.21) (.19) (.20) (.15) (.16) (.13) (.07) --
Distributions from
Realized
Capital Gains........ -- -- -- (.12) (.68) (.28) (1.07) (2.43) (.80) --
------ ------ ------ ------ ------ ------ ------ ------ ------ -------
TOTAL
DISTRIBUTIONS...... (.18) (.11) (.21) (.31) (.88) (.43) (1.23) (2.56) (.87) --
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD................. $14.70 $14.36 $12.02 $10.15 $10.31 $11.81 $11.61 $10.45 $14.21 $11.67
============================================================================================================================
TOTAL RETURN............. 3.76% 20.44% 21.06% 1.49% (5.11)% 5.25% 24.49% (9.92)% 32.01% 88.53%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)............. $3,354 $2,989 $1,477 $ 919 $ 846 $ 796 $ 550 $ 454 $ 607 $ 451
Ratio of Expenses to
Average Net Assets..... .59%+ .46% .59% .58% .67% .68% .64% .67% .66% .78%*
Ratio of Net Investment
Income to Average Net
Assets................. 1.53% 1.37% 1.27% 2.04% 1.80% 3.01% 1.27% 1.39% 1.00% 1.10%*
Portfolio Turnover
Rate................... 31% 28% 51% 58% 49% 45% 50% 71% 77% 39%
</TABLE>
* Annualized.
+ Effective in fiscal 1995, does not include expense reductions from directed
brokerage arrangements. The Ratio of Net Expenses to Average Net Assets is
.58%.
<TABLE>
<CAPTION>
IVEST FUND+
-------------
SEPT. 1 TO 30,
1985
------------------------------------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................................................................... $18.15
----------
INVESTMENT OPERATIONS
Net Investment Income................................................................................ .04
Net Realized and Unrealized Gain (Loss) on Investments............................................... (.23)
----------
TOTAL FROM INVESTMENT OPERATIONS................................................................... (.19)
----------
- ----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income................................................................. (.35)
Distributions from Realized Capital Gains............................................................ (1.48)
----------
TOTAL DISTRIBUTIONS................................................................................ (1.83)
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD......................................................................... $16.13
======================================================================================================================
TOTAL RETURN........................................................................................... (1.05)%
======================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)................................................................... $ 201
Ratio of Expenses to Average Net Assets................................................................ .76%*
Ratio of Net Investment Income to Average Net Assets................................................... 2.97%*
Portfolio Turnover Rate................................................................................ 30%
* Annualized.
+ Prior to October 1, 1985, the Fund consisted of one Portfolio and was known as Ivest Fund.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 70
YIELD AND TOTAL
RETURN From time to time the Portfolio may advertise its yield
and total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of the
Portfolio refers to the average annual compounded rates
of return over one-, five- and ten-year periods or for
the life of the Portfolio (as stated in the
advertisement) that would equate an initial amount
invested at the beginning of a stated period to the ending
redeemable value of the investment, assuming the
reinvestment of all dividend and capital gains
distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of the Portfolio is calculated by dividing net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on the Portfolio's securities and
is net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder
accounts. The yield calculation assumes that net
investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods differ
from the accounting methods used by the Portfolio to
maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid to an
investor's account.
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE
THE PORTFOLIO SEEKS
TO PROVIDE LONG-TERM
CAPITAL GROWTH
The Portfolio invests primarily in equity securities of
companies based outside of the United States. The
objective of the Portfolio is to provide long-term capital
appreciation. Dividend income is expected to be incidental
to this objective. There is no assurance that the
Portfolio will achieve its objective.
The investment objective of the Portfolio is fundamental,
and so cannot be changed without the approval of a
majority of its shareholders.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
THE PORTFOLIO INVESTS
PRIMARILY IN COMMON
STOCKS
The Portfolio invests chiefly in equity securities,
including common stocks, which offer favorable prospects
for growth, but little current income. The Portfolio is
managed without regard to tax ramifications.
The Portfolio invests primarily in growth-oriented equity
securities of seasoned companies located outside the
United States. The Portfolio seeks to diversify its assets
among as many as thirty foreign stock markets, including
Japan, the United Kingdom, Germany, France, Switzerland,
the Netherlands, Sweden, Australia, Hong Kong and
Singapore. Schroder Capital Management International,
adviser to the Portfolio, believes that both the selection
of individual stocks and the allocation of the Portfolio's
assets across foreign stock markets are important in
managing an international equity portfolio. Within each
country, the adviser seeks to invest in securities of
companies with consistent above-average earnings prospects
whose values are not yet recognized by the stock market.
Besides investing in equity securities, the International
Growth Portfolio may also enter into forward foreign
currency exchange contracts in order to protect against
fluctuations in exchange rates. See "Implementation of
Policies" for a description of
4
<PAGE> 71
such contracts. Investing in foreign stock markets poses
certain unique risks compared with investing in U.S.
stock markets. See "Investment Risks" for a description
of the risks involved.
The Portfolio may also utilize stock index futures
contracts and options to a limited extent. In addition,
although the Portfolio will normally remain fully invested
in equity securities, the Portfolio may temporarily invest
in certain short-term fixed income securities. See
"Implementation of Policies" for a description of these
and other investment practices of the Portfolio.
The Portfolio is responsible for voting the shares of all
securities it holds.
The investment policies described above are not
fundamental policies and therefore may be changed by the
Board of Directors without shareholder approval. However,
shareholders would be notified prior to any material
change in the Portfolio's policies.
- --------------------------------------------------------------------------------
INVESTMENT RISKS
THE PORTFOLIO IS SUBJECT
TO STOCK MARKET RISK
As a mutual fund investing in equity securities, the
Portfolio is subject to market risk -- i.e., the
possibility that stock prices in general will decline over
short or even extended periods. Stock markets tend to be
cyclical, with periods when stock prices generally rise
and periods when stock prices generally decline.
INTERNATIONAL STOCKS
MAY BE MORE VOLATILE
THAN U.S. STOCKS
Investments in foreign stock markets can be as volatile,
if not more volatile, than investments in U.S. markets. To
illustrate the volatility of foreign stock market returns
for the U.S. dollar-based investor, the following table
sets forth the extremes for foreign stock market returns
as well as the average return for the period from 1969 to
1994, as measured by the Morgan Stanley Capital
International Europe, Australia, Far East (EAFE) Index:
<TABLE>
<CAPTION>
AVERAGE ANNUAL INTERNATIONAL STOCK MARKET RETURNS
(1969-1994)
OVER VARIOUS TIME HORIZONS
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +69.9% +36.5% +22.8% +16.3%
Worst -23.2 + 1.5 + 7.0 +12.0
Average +15.0 +14.1 +16.0 +15.0
</TABLE>
As shown, over the period from 1969 to 1994, international
(non-U.S.) stocks have provided an average annual total
return, for 10 years, of +16.0%. By comparison, the annual
total return, on average, for U.S. stocks during this same
period was +12.4% (as measured by the Standard & Poor's
500 Composite Stock Price Index). Note, however, that the
period from 1969 to 1994 was a favorable one for foreign
stock market investing. As a result, the figures on total
return and stock market volatility are provided here only
as a guide to potential market risk, and may not be useful
for forecasting future returns in any particular period.
The table on international stock market returns should not
be viewed as a representation of future returns from
international stock markets of the Portfolio.
5
<PAGE> 72
The illustrated returns represent the historical
performance of unmanaged portfolios of securities (before
subtracting portfolio transaction costs and other
expenses of an investment portfolio), which may be a
poor guide to future returns. In addition, the Portfolio
is likely to differ in terms of portfolio composition
from the EAFE Index, and so the performance of the
Portfolio should not be expected to mirror the return
provided by the Index.
INTERNATIONAL STOCKS
ALSO EXPOSE INVESTORS
TO CURRENCY AND OTHER
RISKS
For U.S. investors, the returns of foreign investments,
such as those held by the Portfolio, are influenced by not
only the returns on foreign common stocks themselves, but
also by currency risk -- i.e., changes in the value of the
currencies in which the stocks are denominated. In a
period when the U.S. dollar generally rises against
foreign currencies, the returns on foreign stocks for a
U.S. investor may be diminished. By contrast, in a period
when the U.S. dollar generally declines, the returns on
foreign stocks may be enhanced.
Other risks and considerations of international investing
include the following: differences in accounting, auditing
and financial reporting standards; generally higher
commission rates on foreign portfolio transactions; the
smaller trading volumes and generally lower liquidity of
foreign stock markets, which may result in greater price
volatility; foreign withholding taxes payable on the
Portfolio's foreign securities, which may reduce dividend
income payable to shareholders; the possibility of
expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations; difficulty in
obtaining a judgment from a foreign court; political
instability which could affect U.S. investment in foreign
countries; and potential restrictions on the flow of
international capital.
THE PORTFOLIO IS
SUBJECT TO MANAGER
RISK
The investment adviser manages the Portfolio according to
the traditional methods of "active" investment management,
which involve the buying and selling of securities based
upon economic, financial and market analysis and
investment judgment. Manager risk refers to the
possibility that the Portfolio's investment adviser may
fail to execute the Portfolio's investment strategy
effectively. As a result, the Portfolio may fail to
achieve its stated objective.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST
LONG-TERM INVESTORS
SEEKING CAPITAL
APPRECIATION
The Portfolio is intended for investors who are seeking
long-term capital appreciation, and who do not need to
earn current income from their investment in the
Portfolio. Because of the risks associated with foreign
common stock investments, the Portfolio is intended to be
a long-term investment vehicle and is not designed to
provide investors with a means of speculating on
short-term stock market movements. Investors should be
able to tolerate sudden, sometimes substantial
fluctuations in the value of their investment. Investors
in the Portfolio should be cognizant of the unique risks
of international investing, including their exposure to
currency fluctuations. Investors who engage in excessive
account activity generate additional costs which are borne
by all of the Portfolio's shareholders. In order to
minimize such costs, the Portfolio has adopted the
following policies. The Portfolio reserves the right to
reject any purchase request (including exchange purchases
from other Vanguard portfolios) that is reasonably deemed
to be disruptive to efficient portfolio management, either
because of the timing of the investment or
6
<PAGE> 73
previous excessive trading by the investor. Additionally,
the Portfolio reserves the right to suspend the offering
of its shares.
Because of the risks involved, the Portfolio should not be
considered a complete investment program. Most investors
should maintain diversified holdings of securities with
different risk characteristics -- including common stocks,
bonds and money market instruments. Investors may wish to
purchase shares on a regular, periodic basis (dollar-cost
averaging), rather than investing in one lump sum, in
order to reduce the risk of investing all their monies in
common stocks at a particularly unfavorable time.
Investors may also wish to complement an investment in the
Portfolio with other types of common stock investments.
- --------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES
THE PORTFOLIO MAY
ENTER INTO FORWARD
CURRENCY CONTRACTS In addition to investing in growth-oriented common stocks,
the Portfolio follows a number of additional investment
practices to achieve its objective.
The Portfolio may enter into forward foreign currency
exchange contracts. Such contracts are used to protect the
Portfolio's securities against uncertainty in the level of
future foreign exchange rates. The Portfolio may not enter
into such contracts for speculative purposes.
A forward foreign currency exchange contract is an
obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts may
be bought or sold to protect the Portfolio to a limited
extent against adverse changes in exchange rates between
foreign currencies and the U.S. dollar. Such contracts,
which protect the value of a Portfolio's investment
securities against a decline in the value of a currency,
do not eliminate fluctuations in the underlying prices of
the securities. They simply establish an exchange rate at
a future date. Also, although such contracts tend to
minimize the risk of loss due to a decline in the value of
the hedged currency, at the same time they tend to limit
any potential gain that might be realized should the value
of such currency increase.
THE PORTFOLIO MAY
INVEST IN SHORT-TERM
FIXED INCOME
SECURITIES
Although the Portfolio normally seeks to remain fully
invested in equity securities, the Portfolio may invest in
certain short-term fixed income securities for temporary
defensive purposes. Such securities may be used to invest
uncommitted cash balances, to maintain liquidity to meet
shareholder redemptions, or to take a temporary defensive
position against potential stock market declines. These
securities include: obligations of the United States
Government and its agencies or instrumentalities;
commercial paper, bank certificates of deposit, and
bankers' acceptances; and repurchase agreements
collateralized by these securities.
THE PORTFOLIO MAY
LEND ITS SECURITIES
The Portfolio may lend its investment securities to
qualified institutional investors for either short-term or
long-term purposes of realizing additional net investment
income. Loans of securities by the Portfolio will be
collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. The collateral will equal
at least 100% of the current market value of the loaned
securities.
7
<PAGE> 74
PORTFOLIO TURNOVER IS
NOT EXPECTED TO
EXCEED 100% Although it generally seeks to invest for the long term,
the Portfolio retains the right to sell securities
irrespective of how long they have been held. It is
anticipated that the annual portfolio turnover rate of the
Portfolio will not exceed 100%. A turnover rate of 100%
would occur, for example, if all of the securities of the
Portfolio were replaced within a one-year period.
DERIVATIVE
INVESTING Derivatives are instruments whose values are linked to or
derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.
THE FUND MAY INVEST
IN DERIVATIVE SECURITIES
The Fund may invest in futures contracts and options, but
only to a limited extent. Specifically, a Portfolio of the
Fund may enter into futures contracts provided that not
more than 5% of its assets are required as a futures
contract deposit; in addition, a Portfolio may enter into
futures contracts and options transactions only to the
extent that obligations under such contracts or
transactions represent not more than 20% of the
Portfolio's assets.
Futures contracts and options may be used for several
common fund management strategies: to maintain cash
reserves while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher
investment returns when a specific futures contract is
priced more attractively than other futures contracts or
the underlying security or index.
FUTURES AND OPTIONS
POSE CERTAIN RISKS The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between the change in market value of the stocks held by
the Portfolio and the prices of futures and options; and
(ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing only
in those contracts whose behavior is expected to resemble
that of the Portfolio's underlying securities. The risk
that the Portfolio will be unable to close out a futures
position will be minimized by entering into such
transactions on a national exchange with an active and
liquid secondary market.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss (or gain) to the
investor. When investing in futures contracts, the
Portfolio will segregate cash or cash equivalents in the
amount of the underlying obligation.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
THE PORTFOLIO HAS
ADOPTED CERTAIN
FUNDAMENTAL
LIMITATIONS
The Portfolio has adopted certain limitations on its
investment practices. Specifically, the Portfolio will
not:
(a) with respect to 75% of its assets, invest more than 5%
of its assets in the securities of any single company,
excluding obligations of the U.S. Government;
(b) with respect to 75% of its assets, purchase more than
10% of the outstanding voting securities of any
issuer;
8
<PAGE> 75
(c) invest more than 5% of its assets in the securities of
companies that have a continuous operating history of
less than three years;
(d) invest more than 25% of its assets in any one
industry;
(e) borrow money, except from a bank and only for
temporary or emergency purposes to facilitate the
meeting of redemption requests (not for leverage); and
(f) pledge, mortgage or hypothecate assets to an extent
greater than 15% of the value of its gross assets.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information are fundamental and so may be changed only
with the approval of a majority of the Portfolio's
shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT
OF THE PORTFOLIO
VANGUARD
ADMINISTERS AND
DISTRIBUTES THE
PORTFOLIO
The Portfolio is a member of The Vanguard Group of
Investment Companies, a family of more than 30 investment
companies with more than 90 distinct investment portfolios
and total assets in excess of $170 billion. Through their
jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Portfolio and the other funds in the
Group obtain at cost virtually all of their corporate
management, administrative and distribution services.
Vanguard also provides investment advisory services on an
at-cost basis to certain Vanguard funds. As a result of
Vanguard's unique corporate structure, the Vanguard funds
have costs substantially lower than those of most
competing mutual funds. In 1994, the average expense ratio
(annual costs including advisory fees divided by average
total net assets) for the Vanguard Funds amounted to
approximately .30%, compared to an average of 1.05% for
the mutual fund industry (data provided by Lipper
Analytical Services).
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's total expenses, which
are allocated among the funds under methods approved by
the Board of Directors (Trustees) of each fund. In
addition, each fund bears its own direct expenses, such as
legal, auditing, and custodian fees.
Vanguard provides distribution and marketing services to
the funds. The funds are available on a no-load basis,
(i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its allocated share of the
Group's distribution costs.
- --------------------------------------------------------------------------------
9
<PAGE> 76
INVESTMENT
ADVISER Schroder Capital Management International Inc. ("Schroder
Capital"), 787 Seventh Avenue, New York, NY 10019 serves
as the adviser to the Portfolio. The adviser discharges
its responsibilities, subject to the control of the
Officers and Directors of the Portfolio.
SCHRODER CAPITAL
SERVES AS ADVISER TO
THE PORTFOLIO
Schroder Capital is a wholly-owned subsidiary of Schroders
PLC. Schroders PLC is the holding company parent of a
large worldwide group of banks and financial service
companies (referred to as "The Schroder Group") with
associated companies and branch and representative offices
located in twenty-four countries. The Schroder Group
specializes in providing investment management services,
with Group funds under management currently in excess of
$102 billion.
Richard Foulkes, Executive Vice President of Schroder
Capital, serves as Portfolio Manager for the Portfolio, a
position he has held since 1981. He is supported by
research teams in seven offices world-wide and by four
teams of regional specialists in their London Office.
The Portfolio pays Schroder Capital a basic advisory fee
calculated by applying varying percentage rates to the
average net assets of the Portfolio. The maximum rate is
.350 of 1% for the first $50 million of net assets. This
rate decreases to .175 of 1% on the next $950 million of
net assets and .125% on net assets in excess of $1
billion. This basic advisory fee is increased or decreased
by applying an adjustment formula based on the investment
performance of the Portfolio relative to the investment
record of the Morgan Stanley Capital International Europe,
Australia, Far East Index ("EAFE") over the preceding
36-month period as follows:
(a) On assets of the Portfolio of $1 billion or less:
<TABLE>
<S> <C> <C>
THREE-YEAR PERFORMANCE ANNUAL INCENTIVE (+) /
DIFFERENTIAL VS. EAFE PENALTY (-) FEE RATE
---------------------------- ------------------------
+12% or above +0.0750%
Between +6% and +12% +0.0375%
Between +6% and -6% -0-
Between -6% and -12% -0.0375%
-12% or below -0.0750%
</TABLE>
(b) On assets of the Portfolio of more than $1 billion:
<TABLE>
<S> <C> <C>
THREE-YEAR PERFORMANCE ANNUAL INCENTIVE (+) /
DIFFERENTIAL VS. EAFE PENALTY (-) FEE RATE
---------------------------- ------------------------
+12% or above +0.0500%
Between +6% and +12% +0.0250%
Between +6% and -6% -0-
Between -6% and -12% -0.0250%
-12% or below -0.0500%
</TABLE>
The incentive/penalty fee adjustment for assets in excess
of $1 billion will not be fully operable until the quarter
ending February 29, 1996, and until that date, the
incentive/penalty fee adjustment on assets in excess of $1
billion will be computed based on a comparison of the
investment performance of the Portfolio and that of
10
<PAGE> 77
the EAFE Index over the number of months that have
elapsed between March 1, 1993 and the end of the quarter
for which the fee is computed.
For the fiscal year ended August 31, 1995, the investment
advisory fee paid to Schroder Capital represented an
effective annual rate of .14 of 1% of the Portfolio's
average net assets before an increase of .02 of 1% based
on performance.
The investment advisory agreement with Schroder Capital
authorizes the adviser to select brokers or dealers to
execute purchases and sales of the Portfolio's securities,
and directs the adviser to use its best efforts to obtain
the best available price and most favorable execution with
respect to all transactions.
The Portfolio has authorized Schroder Capital to pay
higher commissions in recognition of brokerage services
felt necessary for the achievement of better execution,
provided the investment adviser believes this to be in the
best interest of the Portfolio. Although the Portfolio
does not market its shares through intermediary brokers or
dealers, the Portfolio may place orders for the Portfolio
with qualified broker-dealers who recommend the Portfolio
to clients if the Officers of the Fund believe that the
quality of the transaction and the commission are
comparable to what they would be with other qualified
brokerage firms.
The Board of Directors may, without the approval of
shareholders, provide for: (a) the employment of a new
investment adviser pursuant to the terms of a new advisory
agreement either as a replacement for an existing adviser
or as an additional adviser; (b) a change in the terms of
an advisory agreement; and (c) the continued employment of
an existing adviser on the same advisory contract terms
where a contract has been assigned because of a change in
control of the adviser. Any such change will only be made
upon not less than 30 days' prior written notice to
shareholders of the Portfolio which shall include
substantially the information concerning the adviser that
would have normally been included in a proxy statement.
- --------------------------------------------------------------------------------
PERFORMANCE
RECORD The table in this section shows the investment results for
the Portfolio for several periods throughout the
Portfolio's lifetime, both as Ivest Fund and as Vanguard
International Growth Portfolio. The results shown
represent "total return" investment performance, which
assumes the reinvestment of all capital gains and income
dividends for the indicated periods. Also included is
comparative information with respect to the Morgan Stanley
Capital International Europe, Australia, Far East Index
("EAFE"), a diversified portfolio of foreign stocks
commonly used as a benchmark of foreign stock market
activity; and the Consumer Price Index, a statistical
measurement of changes in the prices of goods and
services. The table does not make any allowance for
federal, state or local income taxes which shareholders
may pay on a current basis.
The results should not be considered a representation of
the total return from an investment made in the Portfolio
today. The periods shown were generally favorable ones for
stock market investing. This information is provided to
help you better
11
<PAGE> 78
understand the Portfolio and may not provide a basis for
comparison with other investments or mutual funds which
use a different method to calculate performance.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
VANGUARD CONSUMER
PERIODS INTERNATIONAL EAFE PRICE
ENDED 8/31/95 GROWTH PORTFOLIO INDEX INDEX
------------- ---------------- ----- --------
<S> <C> <C> <C>
3 Years 14.8% 12.5% 2.8%
5 Years 7.8 7.3 3.1
10 Years 16.3 15.7 3.5
Lifetime* 16.8 16.2 3.6
* September 30, 1981, to August 31, 1995.
</TABLE>
- --------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
THE PORTFOLIO PAYS
DIVIDENDS AND ANY
CAPITAL GAINS
ANNUALLY
Dividends consisting of virtually all of the ordinary
income of the Portfolio are declared and paid to
shareholders annually. Capital gains distributions, if
any, will also be made annually. All dividend and capital
gains distributions are automatically reinvested in
additional shares of the Portfolio.
In order to satisfy certain distribution requirements of
the Tax Reform Act of 1986, the Portfolio may declare
special year-end dividend and capital gains distributions
during December. The Portfolio intends to continue to
qualify for taxation as a "regulated investment company"
under the Internal Revenue Code so that it will not be
subject to federal income tax to the extent its income is
distributed to shareholders.
If you utilize the Portfolio as an investment option in an
employer-sponsored retirement savings plan, dividend and
capital gains distributions from the Portfolio will
generally not be subject to current taxation, but will
accumulate on a tax-deferred basis. In general, employer
sponsored retirement and savings plans are governed by a
complex set of tax rules. If you participate in such a
plan, consult your plan administrator, your plan's Summary
Plan Description, or a professional tax adviser regarding
the tax consequences of your participation in the plan and
of any plan contributions or withdrawals.
- --------------------------------------------------------------------------------
THE SHARE PRICE
OF THE PORTFOLIO The Portfolio's share price or "net asset value" is
calculated each business day after the close of regular
trading (generally 4:00 p.m. Eastern time) of the New York
Stock Exchange. Net asset value per share is computed by
adding up the total value of the Portfolio's investments
and other assets, subtracting any of its liabilities, or
debts, and then dividing by the number of outstanding
shares of the Portfolio.
Securities listed on a foreign exchange, as well as
American Depository Receipts ("ADRs"), which are traded on
U.S. exchanges, are valued at the latest quoted sale price
available before the assets are valued. All prices of
listed securities are taken from the exchange where the
security is primarily traded. Securities regularly traded
in the over-the-counter market for which market quotations
are readily available will be valued at the latest quoted
bid price. Securities may be valued on the basis of prices
provided by a pricing service when such prices are
believed to reflect the fair market value of such
securities. Other assets and securities for which
12
<PAGE> 79
no quotations are readily available will be valued in a
manner determined in good faith by the Board of
Directors to reflect their fair value.
For purposes of determining the Portfolio's net asset
value per share, all assets and liabilities initially
expressed in foreign currencies will be converted into
U.S. dollars using the quoted daily exchange rates
determined by Morgan Stanley Capital International (MSCI)
in the calculation of their various benchmarking indices.
This officially quoted daily exchange rate may be
determined by MSCI prior to or after the close of a
particular foreign securities market. If such quotations
are not available, the rate of exchange will be determined
in accordance with policies established in good faith by
the Board of Directors.
The Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of Vanguard.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION The Fund was organized as Ivest Fund, a Massachusetts
Corporation, in 1959. The Fund is now a Maryland
Corporation. The Fund is authorized to issue 550,000,000
shares with a par value of $1.00 per share. Currently, the
Fund is offering shares of two Portfolios with 250,000,000
shares allocated to the U.S. Growth Portfolio and
300,000,000 shares allocated to the International Growth
Portfolio.
The shares of each Portfolio of the Fund are fully paid
and non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no pre-emptive rights. The shares of each Portfolio
have non-cumulative voting rights, meaning that the
holders of more than 50% of the shares voting for the
election of Directors can elect 100% of the Directors if
they so choose.
The Fund will not hold annual meetings of shareholders
except as required by the Investment Company Act of 1940
and other applicable law. The Directors of the Fund will
call a meeting of shareholders for the purpose of voting
upon the question of removal of a Director or Directors if
such a meeting is requested in writing by the holders of
not less than 10% of the outstanding shares of the Fund.
All securities and cash of the Portfolio are held by
Morgan Guaranty Trust Company, New York, NY. The Vanguard
Group, Inc., Valley Forge, PA, serves as the Portfolio's
Transfer and Dividend Disbursing Agent. Price Waterhouse
LLP, serves as independent accountants for the Portfolio
and will audit its financial statements annually. The
Portfolio is not involved in any litigation.
- --------------------------------------------------------------------------------
13
<PAGE> 80
SERVICE GUIDE
PARTICIPATING
IN YOUR PLAN The Portfolio is available as an investment option in your
retirement or savings plan. The administrator of your plan
or your employee benefits office can provide you with
detailed information on how to participate in your plan
and how to elect the Portfolio as an investment option.
If you have any questions about the Portfolio, including
the Portfolio's investment objective, policies, risk
characteristics or historical performance, please contact
Participant Services at 1-800-523-1188.
If you have questions about your account, contact your
plan administrator or the organization which provides
recordkeeping services for your plan.
- --------------------------------------------------------------------------------
INVESTMENT OPTIONS
AND ALLOCATIONS You may be permitted to elect different investment
options, alter the amounts contributed to your plan, or
change how contributions are allocated among your
investment options in accordance with your plan's specific
provisions. See your plan administrator or employee
benefits office for more details.
- --------------------------------------------------------------------------------
TRANSACTIONS IN
FUND SHARES Contributions, exchanges or redemptions of the Portfolio's
shares are effective when received in "good order" by
Vanguard. "Good order" means that complete information on
the contribution, exchange or redemption and the
appropriate monies have been received by Vanguard.
- --------------------------------------------------------------------------------
MAKING EXCHANGES Your plan may allow you to exchange monies from one
investment option to another. However, the Fund reserves
the right to refuse any exchange purchase request. Check
with your plan administrator for details on the rules
governing exchanges in your plan. Certain investment
options, particularly company stock or guaranteed
investment contracts (GICs), may be subject to unique
restrictions.
Before making an exchange, you should consider the
following:
- If you are making an exchange to another Vanguard Fund
option, please read that Fund's prospectus. Contact
Participant Services at 1-800-523-1188 for a copy.
- Exchanges are accepted by Vanguard only as permitted by
your plan. Your plan administrator can explain how
frequently exchanges are allowed.
- --------------------------------------------------------------------------------
14
<PAGE> 81
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 82
<TABLE>
<S> <C> <C>
[VANGUARD INTERNATIONAL [FLAG LOGO]
GROWTH PORTFOLIO LOGO] [VANGUARD INTERNATIONAL
--------------------------- GROWTH PORTFOLIO LOGO]
THE VANGUARD GROUP
OF INVESTMENT I N S T I T U T I O N A L
COMPANIES
Vanguard Financial Center P R O S P E C T U S
P.O. Box 2900
Valley Forge, PA 19482 APRIL 29, 1996
INSTITUTIONAL PARTICIPANT
SERVICES DEPARTMENT: [VANGUARD GROUP LOGO]
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
I081
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 83
PART B
VANGUARD WORLD FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
APRIL 29, 1996
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectuses (dated April 29, 1996). To obtain the
Prospectuses please call:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies..................................................... 1
Yield and Total Return................................................................ 6
Purchase of Shares.................................................................... 6
Redemption of Shares.................................................................. 6
Dividends, Capital Gains and Taxes.................................................... 7
Investment Limitations................................................................ 7
Management of the Fund................................................................ 9
Investment Advisory Services.......................................................... 12
Portfolio Transactions................................................................ 16
Financial Statements.................................................................. 17
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the Fund's investment objective and
policies set forth in the Prospectus for each of the Fund's Portfolios.
FUTURES AND OPTIONS Each Portfolio may enter into stock futures contracts,
options, and options on futures contracts for the following reasons: to maintain
cash reserves while simulating full investment, to facilitate trading, to reduce
transactions costs, or to seek higher investment returns when a futures contract
is priced more attractively than the underlying equity security or index.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified future
time and at a specified price. Futures contracts which are standardized as to
maturity date and underlying financial instrument are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a U.S.
Government Agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin that
may range upward from less than 5% of the value of the contract being traded.
1
<PAGE> 84
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the market value of the underlying securities. Each Portfolio intends to use
futures contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to each Portfolio require that all of
its futures transactions constitute bona fide hedging transactions. Each
Portfolio will only sell futures contracts to protect securities it owns against
price declines or purchase contracts to protect against an increase in the price
of securities it intends to purchase. As evidence of this hedging interest, each
Portfolio expects that approximately 75% of its futures contract purchases will
be "completed;" that is, equivalent amounts of related securities will have been
purchased or are being purchased by each Portfolio upon sale of open futures
contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the exposure of a Portfolio's income to fluctuations in
the market value of the underlying securities, the use of futures contracts may
be a more effective means of hedging this exposure. While the Portfolio will
incur commission expenses in both opening and closing out futures positions,
these costs are lower than transaction costs incurred in the purchase and sale
of portfolio securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS Each Portfolio will not enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of the Portfolio's total assets. In addition, each Portfolio will
not enter into futures contracts to the extent that its outstanding obligations
to purchase securities under these contracts would exceed 20% of the Portfolio's
total assets.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, each Portfolio would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if the Portfolio
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. In
addition, each Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the ability to
effectively hedge it.
Each Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures contracts which are traded on
national futures exchanges and for which there appears to be a liquid secondary
market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if, at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses
2
<PAGE> 85
in excess of the amount invested in the contract. However, because the futures
strategies of each Portfolio are engaged in only for hedging purposes, the
investment advisers do not believe that the Portfolios are subject to the risks
of loss frequently associated with futures transactions. Each Portfolio would
presumably have sustained comparable losses if, instead of the futures contract,
it had invested in the underlying financial instrument and sold it after the
decline.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS Except for transactions each
Portfolio has identified as hedging transactions, each Portfolio is required for
federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on futures contracts held as of the end of the year
as well as those actually realized during the year. In most cases, any gain or
loss recognized with respect to a futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. Furthermore, sales of futures
contracts which are intended to hedge against a change in the value of
securities held by each Portfolio may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition.
In order for each Portfolio to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or foreign currencies, or other income derived with respect to its
business of investing in such stock, securities, or currencies. In addition,
gains realized on the sale or other disposition of securities held for less than
three months must be limited to less than 30% of the Portfolio's annual gross
income. It is anticipated that any net gain realized from the closing out of
futures contracts will be considered gain from the sale of securities and
therefore be qualifying income for purposes of the 90% requirement. In order to
avoid realizing excessive gains on securities held less than three months, each
Portfolio may be required to defer the closing out of futures contracts beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on futures contracts, which have been open for less than
three months as of the end of the Portfolio's fiscal year and which are
recognized for tax purposes, will not be considered gains on securities held,
less than three months for the purpose of the 30% test.
Each Portfolio will distribute to shareholders annually any net capital
gains which have been recognized for federal income tax purposes (including
unrealized gains at the end of the Portfolio's fiscal year) on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Portfolio's other investments and shareholders will be
advised on the nature of the payments.
FOREIGN INVESTMENTS The International Growth Portfolio seeks to diversify
its assets among various foreign stock markets. With respect to 65% of its
assets, the Portfolio will invest in the securities of at least three different
countries. Investors should recognize that investing in foreign companies
involves certain special considerations which are not typically associated with
investing in U.S. companies. Since the stocks of foreign companies are
frequently denominated in foreign currencies, and since the International Growth
Portfolio may temporarily hold uninvested reserves in bank deposits in foreign
currencies, the International Growth Portfolio will be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations,
and may incur costs in connection with conversions
3
<PAGE> 86
between various currencies. The investment policies of the International Growth
Portfolio permit it to enter into forward foreign currency exchange contracts in
order to hedge the Portfolio's holdings and commitments against changes in the
level of future currency rates. Such contracts involve an obligation to purchase
or sell a specific currency at a future date at a price set at the time of the
contract.
Special rules govern the Federal income tax treatment of certain
transactions denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules include the
following: (i) the acquisition of, or becoming the obligor under, a bond or
other debt instrument (including, to the extent provided in Treasury
regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option and similar financial instrument if such
instrument is not marked to market. The disposition of a currency other than the
U.S. dollar by a U.S. taxpayer is also treated as a transaction subject to the
special currency rules. However, foreign currency-related regulated futures
contracts and nonequity options are generally not subject to the special
currency rules if they are or would be treated as sold for their fair market
value at year-end under the marking-to-market rules applicable to other futures
contracts unless an election is made to have such currency rules apply. With
respect to transactions covered by the special rules, foreign currency gain or
loss is calculated separately from any gain or loss on the underlying
transaction and is normally taxable as ordinary gain or loss. A taxpayer may
elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts, futures contracts and options that
are capital assets in the hands of the taxpayer and which are not part of a
straddle. The Treasury Department has authority to issue regulations under which
certain transactions subject to the special currency rules that are part of a
"section 988 hedging transaction" (as defined in the Internal Revenue Code of
1986, as amended, and the Treasury regulations) will be integrated and treated
as a single transaction or otherwise treated consistently for purposes of the
Code. Any gain or loss attributable to the foreign currency component of a
transaction engaged in by a Portfolio which is not subject to the special
currency rules (such as foreign equity investments other than certain preferred
stocks) will be treated as capital gain or loss and will not be segregated from
the gain or loss on the underlying transaction. It is anticipated that some of
the non-U.S. dollar-denominated investments and foreign currency contracts the
International Growth Portfolio may make or enter into will be subject to the
special currency rules described above.
As foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
Although the International Growth Portfolio will endeavor to achieve most
favorable execution costs in its portfolio transactions, fixed commissions on
many foreign stock exchanges are generally higher than negotiated commissions on
U.S. exchanges. In addition, it is expected that the expenses for custodian
arrangements of the Portfolio's foreign securities will be somewhat greater than
the expenses for the custodian arrangements for handling the U.S. Growth
Portfolio's securities of equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from the companies comprising the International Growth
Portfolio. However, these foreign withholding taxes are not expected to have a
significant impact on the International Growth Portfolio, since the Portfolio's
investment objective is to seek long-term capital appreciation and any income
should be considered incidental.
4
<PAGE> 87
PORTFOLIO TURNOVER While the rate of portfolio turnover is not a limiting
factor when management deems changes appropriate, it is anticipated that the
annual turnover rate for each Portfolio will not normally exceed 100%. A rate of
turnover of 100% could occur, for example, if all of the securities held by a
Portfolio are replaced within a period of one year. The portfolio turnover rate
for each Portfolio for each of the fiscal years presented is set forth under
"Financial Highlights," in each Portfolio's Prospectus.
REPURCHASE AGREEMENTS Each Portfolio along with other members of the
Vanguard Group may invest in repurchase agreements with commercial banks,
brokers or dealers either for defensive purposes due to market conditions or to
generate income from its excess cash balances. A repurchase agreement is an
agreement under which the Portfolio acquires a money market instrument
(generally a security issued by the U.S. Government or an agency thereof, a
banker's acceptance or a certificate of deposit) from a commercial bank, broker
or dealer, subject to resale to the seller at an agreed upon price and date
(normally, the next business day). A repurchase agreement may be considered a
loan collateralized by securities. The resale price reflects an agreed upon
interest rate effective for the period the instrument is held by the Portfolio
and is unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by the Portfolio (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by the Fund's custodian bank until
repurchased. In addition, the Fund's Board of Directors will monitor repurchase
agreement transactions generally and will establish guidelines and standards for
review by the investment adviser of the creditworthiness of any bank, broker or
dealer party to a repurchase agreement. No more than an aggregate of 15% of the
Portfolio's assets, at the time of investment, will be invested in repurchase
agreements having maturities longer than seven days and securities subject to
legal or contractual restrictions on resale, or for which there are no readily
available market quotations.
LENDING OF SECURITIES Each Portfolio may lend its investment securities
for either short-term or long-term purposes to qualified institutional investors
who need to borrow securities in order to complete certain transactions, such as
covering short sales, avoiding failures to deliver securities or completing
arbitrage operations. By lending its investment securities, a Portfolio attempts
to increase its net investment income through the receipt of interest on the
loan. Any gain or loss in the market price of the securities loaned that might
occur during the term of the loan would be for the account of the Portfolio.
Each Portfolio may lend its investment securities to qualified brokers, dealers,
banks or other financial institutions, so long as the terms and the structure
and the aggregate amount of such loans are not inconsistent with the Investment
Company Act of 1940, or the Rules and Regulations or interpretations of the
Securities and Exchange Commission (the "Commission") thereunder, which
currently require that (a) the borrower pledge and maintain with the Portfolio
collateral consisting of cash, an irrevocable letter of credit or securities
issued or guaranteed by the United States Government having at all times not
less than 100% of the value of the securities loaned, (b) the borrower add to
such collateral whenever the price of the securities loaned rises (i.e. the
borrower "marks to the market" on a daily basis), (c) the loan be made subject
to termination by the Portfolio at any time and (d) the Portfolio receive
reasonable interest on the loan (which may include the Portfolio's investing any
cash collateral in interest bearing short-term investments), any distribution on
the loaned securities and any increase in their market value. The Portfolio will
not lend investment securities if as a result, the aggregate of such loans
exceeds 33 1/3% of the value of the Portfolio's total assets. Loan arrangements
made by the Portfolio will comply with all other applicable regulatory
requirements, including the rules of the New York Stock Exchange, which
presently require the borrower, after notice, to redeliver the securities within
the normal settlement time of three business days. All relevant facts and
circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Fund's Board of Directors.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in written contract and approved
by the investment company's Directors. In addition, voting rights may pass with
the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
5
<PAGE> 88
YIELD AND TOTAL RETURN
The yield of the U.S. Growth Portfolio of the Fund for the 30-day period
ended August 31, 1995, was 1.76%.
The average annual total return of each Portfolio of the Fund for certain
periods ended August 31, 1995, is set forth below:
<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
8/31/95 8/31/95 8/31/95
------------ ------------- --------------
<S> <C> <C> <C>
U.S. Growth Portfolio............... +22.75% +14.30% +12.92%
International Growth Portfolio...... + 3.76% + 7.82% +16.27%
</TABLE>
Total return is computed by determining the average compounded rates of
return over the periods set forth above that would equate an initial amount
invested at the beginning of the periods to the ending redeemable value of the
investment.
PURCHASE OF SHARES
The purchase price of shares of each Portfolio of the Fund is the net asset
value per share next determined after the order is received. The net asset value
per share is calculated as of the close of the New York Stock Exchange on each
day the Exchange is open for business. An order received prior to the close of
the Exchange will be executed at the price computed on the date of receipt; and
an order received after the close of the Exchange will be executed at the price
computed on the next day the Exchange is open.
Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts such as employee
benefit plans or under circumstances where certain economies can be achieved in
sales of a Portfolio's shares.
STOCK CERTIFICATES Your purchase will be made in full and fractional
shares of each Portfolio calculated to three decimal places. Shares are normally
held on deposit for shareholders by the Fund, which will send to shareholders a
statement of shares owned at the time of each transaction. This saves the
shareholders the trouble of safekeeping the certificates, and saves the Fund the
cost of issuing certificates. Share certificates are, of course, available at
any time upon written request at no additional cost to shareholders. No
certificates will be issued for fractional shares.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"), (ii) during any period when an emergency
exists as defined by the rules of the Commission as a result of which it is not
reasonably practicable for a Portfolio to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
No charge is made by a Portfolio for redemptions. Any redemption may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Portfolio.
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, a Portfolio may pay the redemption price in whole or
in part by a distribution in kind of readily marketable securities held by the
Portfolio in lieu of cash in conformity with applicable rules of the Commission.
Investors may incur brokerage charges on the sale of such securities so received
in payment of redemptions.
6
<PAGE> 89
SIGNATURE GUARANTEES To protect your account, the Fund and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Fund to verify the identity of a person who has authorized
a redemption from your account. Signature guarantees are required in connection
with: (1) redemptions involving more than $25,000 on the date of receipt by
Vanguard of all necessary documents; (2) all redemptions, regardless of the
amount involved, when the proceeds are to be paid to someone other than the
registered owner(s); and (3) share transfer requests. These requirements are not
applicable to redemptions in Vanguard's prototype plans except in connection
with: (1) distributions made when the proceeds are to be paid to someone other
than the plan participant; (2) certain authorizations to effect exchanges by
telephone; and (3) when proceeds are to be wired. These requirements may be
waived by the Fund in certain instances.
Signature guarantees can be obtained from a bank, broker or any other
guarantor that Vanguard deems acceptable. Notaries public are not acceptable
guarantors.
The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
DIVIDENDS, CAPITAL GAINS AND TAXES
The Fund's policy is to distribute annually substantially all of its net
investment income from each Portfolio, if any, together with any net realized
capital gains, after the close of the Fund's fiscal year. Any dividend or
capital gains distribution paid shortly after the purchase of shares by an
investor may have the effect of reducing the per share net asset value by the
per share amount of the dividend or distribution. Furthermore, such dividends or
distributions, although in effect a return of capital, are subject to income
taxes.
Unless the shareholder elects otherwise, dividends and capital gain
distributions are paid in additional shares which are credited to the
shareholder's account. Any dividend and distribution election will remain in
effect until the Fund's Transfer Agent is notified by the shareholder in writing
or by calling Customer Service to change the election at least three days prior
to the record date. An account statement is sent to shareholders whenever an
income dividend or capital gains distribution is paid.
INVESTMENT LIMITATIONS
Each Portfolio of the Fund is subject to the following restrictions which
may not be changed without the approval of the lesser of (i) 67 percent or more
of the voting securities present at a meeting if the holders of more than 50
percent of the outstanding voting securities of the Portfolio are present or
represented by proxy, or (ii) more than 50 percent of the outstanding voting
securities of the Portfolio. Each Portfolio will not:
(1) make investments in commodities except that each Portfolio may
invest in stock futures contracts, stock options, options on stock futures
contracts and, in the case of the International Growth Portfolio foreign
currency futures contracts and options, to the extent that not more than 5%
of the Portfolio's assets are used as initial margin deposit at any time
and not more than 20% of the Portfolio's assets are invested in futures
contracts and/or options at any time;
(2) make investments in real estate, although it may purchase and sell
securities of companies which deal in real estate or interests therein;
(3) each Portfolio of the Fund may lend its investment securities to
qualified brokers, dealers, banks or other financial institutions, so long
as the terms and the structure of such loans are not inconsistent with the
Investment Company Act of 1940, as amended, or the Rules and Regulations or
interpretations of the Securities and Exchange Commission thereunder, which
currently require that (a) the borrower pledge and maintain with the
Portfolio collateral consisting of cash, an
7
<PAGE> 90
irrevocable letter of credit or securities issued or guaranteed by the United
States Government having a value at all times not less than 100 percent of the
value of the securities loaned, (b) the borrower add to such collateral whenever
the price of the securities loaned rises (i.e. the borrower "marks to the
market" on a daily basis), (c) the loan be made subject to termination by the
Portfolio at any time and (d) the Portfolio receive reasonable interest on the
loan (which may include the Portfolio's investing any cash collateral in
interest bearing short-term investments), and distributions on the loaned
securities and any increase in their market value. Each Portfolio of the Fund
will not lend securities if, as a result, the aggregate of such loans exceeds
33 1/3% of the value of the Portfolio's total assets. Loan arrangements made by
the Fund will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange, which rules presently
require the borrower, after notice, to redeliver the securities within the
normal settlement time of five business days;
(4) engage in the business of underwriting securities issued by others
except to the extent that a Portfolio may technically be deemed to be an
underwriter under the Securities Act of 1933 in disposing of portfolio
securities;
(5) purchase securities on margin or make short sales except as
described above in (1);
(6) borrow except from banks and not in excess of the lesser of 10% of
its gross assets taken at cost (before such borrowings) or 33 1/3% of its
gross assets, less liabilities other than such borrowings, taken at market
or other fair value, and any borrowing may be undertaken only as a
temporary measure for extraordinary or emergency purposes to facilitate the
meeting of redemption requests (not for leverage); or pledge, mortgage or
hypothecate assets to an extent greater than 15% of the value of its gross
assets, taken at cost (as a matter of policy each Portfolio will limit any
such pledging, mortgaging or hypothecating to 10% of its assets);
(7) invest for the purpose of exercising control over or management of
any company;
(8) invest in securities of other investment companies, except as may
be acquired as a part of a merger, consolidation or acquisition of assets
or otherwise to the extent permitted by Section 12 of the 1940 Act. A
Portfolio will invest only in investment companies which have investment
objectives and investment policies consistent with those of the Portfolio;
(9) with respect to 75% of its assets, purchase securities of any
issuer (except obligations of the United States government and its
instrumentalities) if as a result the Fund would hold more than 10% of the
voting securities of the issuer, or more than 5% of the value of the
Portfolio's total assets would be invested in the securities of the issuer;
(10) purchase or retain securities of an issuer if an officer or
director of such issuer is an officer or director of the Fund or its
investment adviser and one or more of such officers or directors of the
Fund or its investment adviser owns beneficially more than 1/2% of the
shares or securities of such issuer and all such directors and officers
owning more than 1/2% of such shares or securities together own more than
5% of such shares or securities;
(11) purchase securities of any company which has (with predecessors)
a record of less than three years' continuous operation if as a result more
than 5% of the Portfolio's assets would be invested in securities of such
companies; or
(12) invest more than 25% of the value of its total assets in any one
industry; and
(13) purchase or otherwise acquire any security if, as a result more
than 15% of its net assets would be invested in securities that are
illiquid (this limitation applies to the Fund's investment in The Vanguard
Group, Inc.).
These investment limitations are considered at the time that investment
securities are purchased. Notwithstanding these limitations, the Fund may own
all or any portion of the securities of, or make loans to, or contribute to the
costs or other financial requirements of any company which will be wholly
8
<PAGE> 91
owned by the Fund and one or more other investment companies and is primarily
engaged in the business of providing, at-cost, management, administrative or
related services to the Fund and other investment companies. See "Management of
the Fund."
Although not fundamental policies subject to shareholder vote, as long as
the Fund's shares are registered for sale in certain states, a Portfolio will
not (i) invest in put, call, straddle or spread options, except as set forth
above in (1), (ii) invest in interests in oil, gas or other mineral exploration
or development programs, and (iii) pledge, mortgage or hypothecate assets to an
extent greater than 10% of the value of its net assets at market value.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for each Portfolio of the Fund and choose its Officers. The following is a list
of the Directors and Officers of the Fund and a statement of their present
positions and principal occupations during the past five years. As of November
1, 1995, the Directors and Officers of the Fund owned less than 1% of the Fund's
outstanding shares. The mailing address of the Directors and Officers of the
Fund is Post Office Box 876, Valley Forge, PA 19482.
<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman, Chief Executive JOHN C. SAWHILL, Director
Officer and Director *(1) President and Chief Executive Officer, The
Chairman, Chief Executive Officer, and Nature Conservancy; formerly, Director and
Director of The Vanguard Group, Inc., and Senior Partner, McKinsey & Co.; and
of each of the investment companies in The President, New York University; Director of
Vanguard Group; Director of The Mead Pacific Gas and Electric Company and NACCO
Corporation and General Accident Insurance. Industries.
JOHN J. BRENNAN, President & Director *(1) JAMES O. WELCH, JR., Director
President and Director of The Vanguard Retired Chairman of Nabisco Brands, Inc.,
Group, Inc., and of each of the other retired Vice Chairman and Director of RJR
investment companies in The Vanguard Group. Nabisco; Director of TECO Energy, Inc. and
Kmart Corporation.
ROBERT E. CAWTHORN, Director
Chairman and Chief Executive Officer, J. LAWRENCE WILSON, Director
Rhone-Poulenc Rorer, Inc.; Director of Sun Chairman and Chief Executive Officer of Rohm
Company, Inc. & Haas Company; Director of Cummins Engine
Company; and Trustee of Vanderbilt
BARBARA BARNES HAUPTFUHRER, Director University.
Director of The Great Atlantic and Pacific
Tea Company, ALCO Standard Corp., Raytheon RAYMOND J. KLAPINSKY, Secretary *
Company, Knight-Ridder, Inc., and Senior Vice President and Secretary of The
Massachusetts Mutual Life Insurance Co. and Vanguard Group, Inc.; Secretary of each of
Trustee Emerita of Wellesley College. the investment companies in The Vanguard
Group.
BRUCE K. MACLAURY, Director
President, The Brookings Institution; RICHARD F. HYLAND, Treasurer *
Director of the American Express Bank, Treasurer of The Vanguard Group, Inc., and of
Ltd., the St. Paul Companies, Inc., and each of the investment companies in The
Scott Paper Company. Vanguard Group.
BURTON G. MALKIEL, Director KAREN E. WEST, Controller *
Chemical Bank Chairman's Professor of Vice President of The Vanguard Group, Inc.;
Economics, Princeton University; Director Controller of each of the investment
of Prudential Insurance Co. of America, companies in The Vanguard Group.
Amdahl Corporation, Baker Fentress & Co., ---------------------------------------------
The Jeffrey Co. and Southern New England
Communications Company. *Officers of the Fund are "interested
persons" as defined in the Investment Company
ALFRED M. RANKIN, JR., Director Act of 1940.
Chairman, President and Chief Executive (1) Effective February 1, 1996, Mr. Brennan
Officer of NACCO Industries, Inc.; Director will succeed Mr. Bogle as Chief Executive
of The BFGoodrich Company and The Standard Officer of the Fund, The Vanguard Group, Inc.
Products Company. and each of the investment companies in The
Vanguard Group. Mr. Bogle will remain
Chairman and Director of the Fund, The
Vanguard Group, Inc. and each of the
investment companies in The Vanguard Group.
</TABLE>
9
<PAGE> 92
THE VANGUARD GROUP
Vanguard World Fund, Inc. is a member of The Vanguard Group of Investment
Companies. Through their jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other Funds in the Group obtain at-cost virtually
all of their corporate management, administrative and distribution services.
Vanguard also provides investment advisory services on an at-cost basis to
several of the Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services, furnishings and equipment.
Each fund pays its share of Vanguard's total expenses which are allocated among
the funds under methods approved by the Board of Directors (Trustees) of each
Fund. In addition, each Fund bears its own direct expenses such as legal,
auditing and custodian fees. In order to generate additional revenues for
Vanguard and thereby reduce the Funds' expenses, Vanguard also provides certain
administrative services to other organizations.
The Fund's officers are also officers and employees of Vanguard. No officer
or employee owns, or is permitted to own, any securities of any external adviser
for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-l under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
Vanguard was established and operates under a Funds' Service Agreement
which was approved by the shareholders of each of the Funds. The amounts which
each of the Funds have invested are adjusted from time to time in order to
maintain the proportionate relationship between each Fund's relative net assets
and its contribution to Vanguard's capital. At August 31, 1995, the Fund had
contributed capital of $823,000 to Vanguard, representing 4.1% of Vanguard's
capitalization. The Funds' Service Agreement provides as follows: (a) each
Vanguard Fund may invest up to .40% of its current assets in Vanguard, and (b)
there is no other limitation on the amount each Vanguard Fund may contribute to
Vanguard's capitalization.
MANAGEMENT Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended August 31, 1995, the Fund's allocated share of Vanguard's
actual net costs of operation relating to management and administrative services
(including transfer agency) totaled approximately $15,724,000.
DISTRIBUTION Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for the shares of
the Funds, in connection with any sales made directly to investors in the states
of Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon relative net assets. The remaining one
half of those expenses is allocated among the Funds based upon each Fund's sales
for the preceding 24 months relative to the total sales of the Funds
10
<PAGE> 93
as a Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of the average distribution expense rate for the Group, and
that no Fund shall incur annual distribution expenses in excess of 20/100 of 1%
of its average month-end net assets. During the fiscal year ended August 31,
1995, the Fund paid approximately $1,144,000 of the Group's distribution and
marketing expenses, which represented an effective annual rate of .02% of 1% of
the Fund's average net assets.
INVESTMENT ADVISORY SERVICES Vanguard also provides investment advisory
services to Vanguard Municipal Bond Fund, Vanguard California Tax-Free Fund,
Vanguard New Jersey Tax-Free Fund, Vanguard New York Insured Tax-Free Fund,
Vanguard Pennsylvania Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard
Florida Insured Tax-Free Fund, Vanguard Admiral Funds, Vanguard Bond Index Fund,
Vanguard Index Trust, Vanguard International Equity Index Fund, Vanguard
Balanced Index Fund, the Money Market, High-Grade Bond, and Equity Index
Portfolios of Vanguard Variable Insurance Fund, Vanguard Money Market Reserves,
Vanguard Institutional Portfolios, several portfolios of Vanguard Fixed Income
Securities Fund, Vanguard Tax-Managed Fund, the Aggressive Growth Portfolio of
Vanguard Horizon Fund, a portion of Vanguard/Windsor, a portion of
Vanguard/Morgan Growth Fund as well as several indexed separate accounts. These
services are provided on an at-cost basis from a money management staff employed
directly by Vanguard. The compensation and other expenses of this staff are paid
by the Funds utilizing these services.
REMUNERATION OF DIRECTORS AND OFFICERS The Fund pays each Director, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Fund's officers and employees are paid by Vanguard
which, in turn, is reimbursed by the Fund and each other Fund in the Group, for
its allocated share of Officers' and employees' salaries and retirement
benefits. The Fund's proportionate share of remuneration paid by Vanguard (and
reimbursed by the Fund) during the 1995 fiscal year to John C. Bogle, Chairman
and Chief Executive Officer was approximately $107,727 and to all Officers of
the Fund, as a group, was approximately $196,329.
Directors who are not Officers are paid an annual fee based on the number
of years of service on the Board upon retirement. The fee is equal to $1,000 for
each year of service (up to fifteen years) and each investment company member of
the Vanguard Group contributes a proportionate amount to this fee based on its
relative net assets. Under its retirement plan, Vanguard contributes annually an
amount equal to 10% of each eligible officer's annual compensation plus 5.7% of
that part of an eligible officer's compensation during the year, if any, that
exceeds the Social Security Taxable Wage Base then in effect. Under its thrift
plan, all eligible officers are permitted to make pre-tax contributions in an
amount up to 4% of total compensation, subject to federal tax limitations, which
are matched by Vanguard on a 100% basis. The Fund's proportionate share of
retirement contributions made by Vanguard under its retirement and thrift plans
on behalf of all Officers of the Fund, as a group, during the 1995 fiscal year
was approximately $6,000.
11
<PAGE> 94
The following table provides detailed information with respect to the
amounts paid or accrued for the Directors of the Fund, for the fiscal year ended
August 31, 1995.
VANGUARD WORLD FUND, INC.
DIRECTORS COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAME OF DIRECTORS FROM FUND PART OF FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS(2)
- ---------------------------- ------------ --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1)............ -- -- -- --
John J. Brennan(1).......... -- -- -- --
Barbara Barnes
Hauptfuhrer............... $2,442 $ 411 $15,000 $60,000
Robert E. Cawthorn.......... $2,442 $ 342 $13,000 $60,000
Bruce K. MacLaury........... $2,647 $ 405 $12,000 $55,000
Burton G. Malkiel........... $2,442 $ 274 $15,000 $60,000
Alfred M. Rankin, Jr. ...... $2,442 $ 216 $15,000 $60,000
John C. Sawhill............. $2,442 $ 257 $15,000 $60,000
James O. Welch, Jr. ........ $2,442 $ 316 $15,000 $60,000
J. Lawrence Wilson.......... $2,442 $ 228 $15,000 $60,000
</TABLE>
(1) As "Interested Directors," Messrs. Bogle and Brennan receive no compensation
for their service as Directors.
(2) The amounts reported in this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 34 Vanguard Funds
(27 in the case of Mr. MacLaury).
INVESTMENT ADVISORY SERVICES
THE U.S. GROWTH PORTFOLIO INVESTMENT ADVISORY AGREEMENT
The Fund entered into an investment advisory agreement with Lincoln Capital
Management Company (Lincoln) as of April 1, 1993, under which Lincoln manages
the investment and reinvestment of the assets included in the Fund's U.S. Growth
Portfolio and continuously reviews, supervises and administers the Fund's U.S.
Growth Portfolio. Lincoln will invest or reinvest such assets primarily in U.S.
securities. Lincoln discharges its responsibilities subject to the control of
the Officers and Directors of the Fund. Under this agreement the Fund pays
Lincoln an advisory fee at the end of each fiscal quarter, calculated by
applying a quarterly rate, based on the following annual percentage rates, to
the Portfolio's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
----------------------------------------------------- ----
<S> <C>
First $25 million.................................... .40 %
Next $125 million.................................... .35 %
Next $350 million.................................... .25 %
Next $500 million.................................... .20 %
Next $1.5 billion.................................... .15 %
Over $2.5 billion.................................... .10 %
</TABLE>
For the fiscal years ended August 31, 1993, 1994, and 1995 the Fund paid
advisory fees of $3,655,000, $3,688,000 and $4,523,000 respectively, to Lincoln.
The fee for the 1993 fiscal year included a fee waiver of $578,000.
12
<PAGE> 95
DESCRIPTION OF LINCOLN
Lincoln is an Illinois corporation in which a controlling interest is held
by the following persons: John W. Croghan, Chairman; J. Parker Hall III,
President; Kenneth R. Meyer, Executive Vice President; and Timothy H. Ubben,
Executive Vice President.
Because Lincoln provides only investment advisory services to the Fund and
has no control over the Fund's expenses, Lincoln has not undertaken to guarantee
expenses of the Fund. The Officers of the Fund have worked out alternative
arrangements with the state authorities which do not require an expense
guarantee.
The agreement with Lincoln continues until March 31, 1996. The agreement is
renewable thereafter, for successive one-year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Directors, including the
affirmative votes of a majority of the directors who are not parties to the
agreement or "interested persons" (as defined in the Investment Company Act of
1940) of any such party, cast in person at a meeting called for the purpose of
considering such approval. The agreement is automatically terminated if
assigned, and may be terminated without penalty at any time (1) by vote of the
Board of Directors of the Portfolio on sixty (60) days' written notice to
Lincoln, or (2) by Lincoln upon ninety (90) days' written notice to the Fund.
The Directors may make any of these changes without the approval of
shareholders, however, shareholders will receive 30 days' advance written notice
of any such changes.
THE INTERNATIONAL GROWTH PORTFOLIO INVESTMENT ADVISORY AGREEMENT
The Fund has entered into an investment advisory agreement dated as of
April 1, 1993 with Schroder Capital Management, Inc. ("Schroder Capital") under
which Schroder Capital, through its Schroder Capital Management International,
London, England branch, supervises and administers the International Growth
Portfolio's investment program. In this regard, it is the responsibility of
Schroder Capital to make decisions relating to the International Growth
Portfolio's investment in foreign securities and to place the International
Growth Portfolio's purchase and sale orders for such securities. Schroder
Capital will invest or reinvest the assets of the International Growth Portfolio
only in foreign (non-U.S.) securities. Schroder Capital discharges its
responsibilities subject to the control of the Officers and Directors of the
Fund.
As compensation for the services rendered by Schroder Capital under the
agreement, the Fund pays Schroder Capital a Basic Fee calculated by applying a
quarterly rate, based on the following annual percentage rates, to the average
value of the month-end net assets of the International Growth Portfolio for the
quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- ----
<S> <C>
First $50 million................................... .350%
Next $950 million................................... .175%
Over $1 billion..................................... .125%
</TABLE>
13
<PAGE> 96
The Basic Fee, as provided above, shall be increased or decreased by
applying an adjustment formula based on the investment performance of the
International Growth Portfolio relative to that of the Morgan Stanley Capital
Europe, Australia, Far East Index ("EAFE") as follows:
(a) On assets of the Portfolio of $1 billion or less:
<TABLE>
<CAPTION>
THREE-YEAR PERFORMANCE ANNUAL INCENTIVE (+)/
DIFFERENTIAL VS. EAFE PENALTY (-) FEE RATE
---------------------- ---------------------
<S> <C>
+12% or above........................... +0.0750%
Between +6% and +12%.................... +0.0375%
Between +6% and -6%..................... -0-
Between -6% and -12%.................... -0.0375%
-12% or below........................... -0.0750%
</TABLE>
(b) On assets of the Portfolio of more than $1 billion:
<TABLE>
<CAPTION>
THREE-YEAR PERFORMANCE ANNUAL INCENTIVE (+)/
DIFFERENTIAL VS. EAFE PENALTY (-) FEE RATE
---------------------- ---------------------
<S> <C>
+12% or above........................... +0.0500%
Between +6% and +12%.................... +0.0250%
Between +6% and -6%..................... -0-
Between -6% and -12%.................... -0.0250%
-12% or below........................... -0.0500%
</TABLE>
The incentive/penalty fee adjustment for assets in excess of $1 billion
will not be fully operable until the quarter ending February 29, 1996, and,
until that date, will be calculated according to certain transition rules. From
April 1, 1993 through November 30, 1993, the incentive/penalty fee on assets in
excess of $1 billion was not operable. For quarters ending after this period,
the incentive/penalty fee adjustment on assets in excess of $1 billion will be
computed based on a comparison of the investment performance of the Portfolio
and that of the EAFE Index over the number of months that have elapsed between
March 1, 1993 and the end of the quarter for which the fee is computed.
For the purpose of determining the fee adjustment for investment
performance, as described above, the net assets of the International Growth
Portfolio are averaged over the same period as the investment performance of the
International Growth Portfolio and the investment record of the EAFE Index are
computed.
The investment performance of the International Growth Portfolio for such
period, expressed as a percentage of the net asset value per share of the
International Growth Portfolio at the beginning of such period, shall be the sum
of: (i) the change in the net asset value per share of the International Growth
Portfolio during such period; (ii) the value of the cash distributions per share
of the International Growth Portfolio accumulated to the end of such period; and
(iii) the value of capital gains taxes per share paid or payable by the
International Growth Portfolio on undistributed realized long-term capital gains
accumulated to the end of such period. For this purpose, the value of
distributions per share of realized capital gains, of dividends per share paid
from investment income and of capital gains taxes per share paid or payable on
undistributed realized long-term capital gains shall be treated as reinvested in
shares of the International Growth Portfolio at the net asset value per share in
effect at the close of business on the record date for the payment of such
distributions and dividends and the date on which provision is made for such
taxes, after giving effect to such distributions, dividends and taxes. The
investment record of the EAFE Index for any period, expressed as a percentage of
the EAFE Index level at the beginning of such period, shall be the sum of (i)
the change in the level of the EAFE Index during such period and (ii) the value,
computed consistently with the EAFE Index, of cash distributions made by
companies whose securities comprise the EAFE Index accumulated to the end of
such period. For this purpose cash distributions on the securities which
comprise the EAFE Index shall be treated as reinvested in the EAFE Index at
least as frequently as the end of each calendar quarter following the payment of
the dividend.
14
<PAGE> 97
The foregoing notwithstanding, any computation of the investment performance of
the International Growth Portfolio and the investment record of the EAFE Index
shall be in accordance with any then applicable rules of the Securities and
Exchange Commission.
The Directors believe that the EAFE Index is an appropriate standard
against which the investment performance of the Fund's International Growth
Portfolio can be measured. The EAFE Index is the only index available which
covers the major international markets outside North America. The weighting of
securities in the EAFE Index is based on each stock's relative total market
value, that is, its market price per share times the number of shares
outstanding.
The agreement with Schroder Capital continues until March 31, 1996. The
agreement may be terminated prior to that date, or continued after March 31,
1996, in accordance with the same provisions applicable to the Fund's agreement
with Lincoln.
During the three fiscal years ending August 31, 1993, 1994 and 1995,
respectively, the Fund paid Schroder Capital the following advisory fees:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Basic Fee............................................... $1,851,000 $3,577,000 $4,369,000
Increase/(Decrease) for Performance Adjustment.......... (89,000) 195,000 518,000
---------- ---------- ----------
Total.............................................. $1,762,000 $3,772,000 $4,887,000
========== ========== ==========
</TABLE>
DESCRIPTION OF SCHRODER CAPITAL
Schroder Capital Management International ("Schroder Capital"), is the
London branch office of Schroder Capital. Schroder Capital is a wholly-owned
subsidiary of Schroders Incorporated, One State Street, New York, New York.
Schroders PLC is the holding company parent of a large world-wide group of
banks and financial service companies (referred to as "The Schroder Group") with
associated companies and branch and representative offices located in seventeen
countries.
The Schroder Group specializes in providing investment management services,
with Group funds under management currently in excess of $102 billion. Schroder
Capital Management International was established in London in 1979 to manage
international portfolios for U.S. institutions.
15
<PAGE> 98
PORTFOLIO TRANSACTIONS
The investment advisory agreements with Lincoln and Schroder Capital
authorize the investment advisers (with the approval of the Fund's Board of
Directors) to select the brokers or dealers that will execute the purchases and
sales of portfolio securities for the Fund and direct each investment adviser to
use its best efforts to obtain the best available price and most favorable
execution with respect to all transactions for each Portfolio of the Fund. Each
investment adviser has undertaken to execute each investment transaction at a
price and commission which provides the most favorable total cost or proceeds
reasonably obtainable under the circumstances.
In placing portfolio transactions, each investment adviser will use its
best judgment to choose the broker most capable of providing the brokerage
services necessary to obtain best available price and most favorable execution.
The full range and quality of brokerage services available will be considered in
making these determinations. In those instances where it is reasonably
determined that more than one broker can offer the brokerage services needed to
obtain the best available price and most favorable execution, consideration may
be given to those brokers which supply investment research statistical
information, and provide other services in addition to execution services to the
Portfolios and/or the investment adviser. Each investment adviser considers the
investment services it receives useful in the performance of its obligations
under the agreement but is unable to determine the amount by which such services
may reduce its expenses.
The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Directors, each investment adviser may cause the
Fund to pay a broker-dealer which furnishes brokerage and research services a
higher commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the investment adviser to the Fund and the other Funds in
the Group.
Currently, it is the Fund's policy that each investment adviser may at
times pay higher commissions in recognition of brokerage services felt necessary
for the achievement of better execution of certain securities transactions than
otherwise might not be available. An investment adviser will only pay such
higher commissions if it believes this to be in the best interest of the
Portfolio. Some brokers or dealers who may receive such higher commissions in
recognition of brokerage services related to execution of securities
transactions are also providers of research information to the investment
adviser and/or the Portfolios. However, the investment adviser has informed the
Fund that it will not pay higher commission rates specifically for the purpose
of obtaining research services.
The Fund's Board of Directors has authorized Schroder Capital to utilize
Schroders Asia Limited, an affiliated company 75% owned by the Schroder Group,
in the capacity of broker in connection with the execution of the International
Growth Portfolio transactions in Hong Kong securities; provided, however, that
Schroder Capital believes that doing so will result in an economic advantage (in
the form of lower execution costs or otherwise) being obtained for the
Portfolio. This authorization was made in accordance with Section 17(e) of the
Investment Company Act of 1940 and Rule 17e-1 which require the Fund's
non-interested Directors to approve the procedures under which such brokerage
allocation is to be made and to monitor such allocations on a continuing basis.
Except with respect to tender offers, it is not expected that any portion of the
commissions, fees, brokerage, or similar payments received by Schroders Asia
Limited in such transactions will be recaptured by the Portfolio. The Directors
have reviewed and intend to continue to review whether other recapture
opportunities are legally permissible and available and, if they appear to be,
determine whether it would be advisable for the Portfolio to seek to take
advantage of them.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, each Portfolio may place orders with qualified broker-dealers
who recommend the Fund and its Portfolios to clients, or who act as agent in the
purchase of shares of the
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Fund for their clients, and may, when a number of brokers and dealers can
provide comparable best price and execution on a particular transaction,
consider the sale of Fund shares by a broker or dealer in selecting among
qualified broker-dealers.
During the fiscal years ending August 31, 1993, 1994 and 1995 the Fund paid
$4,903,334, $6,863,785 and $6,681,209 in brokerage commissions, respectively.
Some securities considered for investment by the Portfolios may also be
appropriate for other Funds or clients served by the investment advisers. If
purchase or sale of securities consistent with the investment policies of the
Portfolio and one or more of these other Funds or clients served by the
investment advisers are considered at or about the same time, transactions in
such securities will be allocated among the Portfolios and the several Funds and
clients in a manner deemed equitable by the respective investment adviser.
Although there will be no specified formula for allocating such transactions,
the allocation methods used, and the results of such allocations, will be
subject to periodic review by the Fund's Board of Directors.
FINANCIAL STATEMENTS
Vanguard World Fund Financial Statements (comprised of the U.S. Growth and
International Growth Portfolios) for the year ended August 31, 1995, including
the financial highlights for each of the five years in the period ended August
31, 1995, appearing in the Vanguard World Fund 1995 Annual Report to
Shareholders, and the report thereon of Price Waterhouse LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. The Fund's 1995 Annual Report to
Shareholders is enclosed with this Statement of Additional Information.
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of The Vanguard Group, including
Vanguard World Fund, may from time to time, use one or more of the following
unmanaged indexes for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well
diversified list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES -- consists of more than 6,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard and Poor's 500 Index.
RUSSELL 3000 STOCK INDEX -- a diversified portfolio of approximately 3,000
common stocks accounting for over 90% of the market value of publicly traded
stocks in the U.S.
RUSSELL 2000 STOCK INDEX -- a subset of approximately 2,000 of the smallest
stocks contained in the Russell 3000; a widely-used benchmark for small
capitalization common stocks.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and
33 preferreds. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The index
is priced monthly.
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SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or greater.
LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
LEHMAN CORPORATE (Baa) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current
coupon high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the
average yield of four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial
issues. It is a value-weighted index calculated on price change only and does
not include income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ
Industrial Index.
COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers
High-Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Salomon Brothers
High-Grade Bond Index.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that
contains individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated Baa - or better. The Index has a market
value of over $4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB - or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE
INDEX -- is a market weighted index that contains individually priced U.S.
Treasury, agency, and corporate securities rated BBB - or better with maturities
between 5 and 10 years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB - or better with maturities greater than 10
years. The index has a market value of over $900 billion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of
small company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established
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in 1982. For years prior to 1982, the results of the Lipper Small Company Growth
category were estimated using the returns of the Funds that constituted the
Group at its inception.)
LIPPER BALANCED FUND AVERAGE -- an industry benchmark of average balanced
funds with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
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