<PAGE> 1
A MESSAGE TO SHAREHOLDERS
FELLOW SHAREHOLDER:
During the six months ended February 29, 1996, all of the world's major stock
markets posted positive returns. In this bullish environment, Vanguard's U.S.
Growth and International Growth Portfolios continued their streak of
outperforming both their unmanaged market index standards and their competitive
peer groups of mutual funds.
For the U.S. Portfolio, our total return (capital change plus reinvested
dividends) of +20.9% topped the +15.3% total return of the Standard & Poor's
500 Composite Stock Price Index, a remarkable feat since the Index counted
itself among the market leaders for the period.
With a return of +8.2%, our International Growth Portfolio also outpaced
the return of its index standard, as the MSCI EAFE* foreign market index
provided a return of +7.0%.
The table below presents the return of each Portfolio for the past six
months along with the returns of their customary benchmarks: (1) the average
mutual fund with similar investment policies; and (2) the unmanaged indexes
that reflect the broad equity markets in which they invest.
<TABLE>
<CAPTION>
- -------------------------------------------------------
TOTAL RETURN
--------------------
SIX MONTHS ENDED
FEBRUARY 29, 1996
- -------------------------------------------------------
<S> <C>
U.S. GROWTH PORTFOLIO +20.9%
- -------------------------------------------------------
AVERAGE GROWTH MUTUAL FUND + 9.9%
STANDARD & POOR'S 500 STOCK INDEX +15.3
=======================================================
INTERNATIONAL GROWTH PORTFOLIO + 8.2%
- -------------------------------------------------------
AVERAGE INTERNATIONAL MUTUAL FUND + 6.2%
MSCI EAFE INDEX + 7.0
- -------------------------------------------------------
</TABLE>
The total return for the U.S. Growth Portfolio is based on net asset values of
$18.83 per share on August 31, 1995, and $21.82 on February 29, 1996, with the
latter figure adjusted to take into account our annual dividend of $.29 per
share paid from net investment income, and a distribution of $.57 per share
from net realized capital gains. For the International Growth Portfolio, the
respective net asset values were $14.70 and $15.48, our annual income dividend
was $.20 per share, and distributions from net realized capital gains totaled
$.21 per share.
THE U.S. GROWTH PORTFOLIO
The great bull market in U.S. stocks continued during the past six months, with
the equity market rising by more than +15%. During this period, growth stocks
narrowly outpaced value stocks. More dramatic was the relative outperformance
of stocks with large market capitalizations over their small-cap brethren. The
giant blue-chip stocks, which comprise the Standard & Poor's 500 Index,
provided more than double the return of the small-cap Russell 2000 Index.
We are especially proud of our advantage over the average growth mutual
fund, as we exceeded its return of +9.9% by fully eleven percentage points. The
past six months clearly demonstrated that not all growth funds are created
equal. While many of our peers focus on smaller emerging companies, the U.S.
Growth Portfolio emphasizes seasoned growth stocks with strong records, leading
market positions, and reasonable valuations.
During the past six months, the large growth-oriented blue-chip stocks
that comprise the U.S. Growth Portfolio provided market-leading returns.
Indeed, we outpaced our peers primarily because of two factors: 1) our
traditional emphasis on high-quality large-cap stocks (90% of the Vanguard U.S.
Growth Portfolio compared to 57% for our peers); and 2) the superior individual
stock selection of our investment adviser, Lincoln Capital Management.
A report from our adviser, Lincoln Capital Management, describing the
Fund's investment operations during the period is presented on page 4 of this
report.
INTERNATIONAL GROWTH PORTFOLIO
International stocks provided strong total returns during the first half of our
fiscal year, as almost every country in the MSCI EAFE Index earned positive
returns when measured in U.S. dollars. In this
- ------------
*Morgan Stanley Capital International Europe, Australia, Far East Index.
1
<PAGE> 2
environment, the International Growth Portfolio posted a +8.2% return, which
exceeded the performance of the unmanaged EAFE Index by +1.2 percentage points.
As the table on the previous page illustrates, we also outpaced, by a slightly
larger margin, the +6.2% return earned by our average competitor during this
period.
Measured on a local currency basis, foreign market returns were even
higher (+10.1%), but the strength of the U.S. dollar relative to many of the
major foreign currencies lowered returns to U.S. shareholders. The negative
"currency impact" represents a reversal from our prior fiscal year period, when
a weak dollar added significantly to international returns.
Much of our recent success relative to our traditional benchmarks can be
attributed to our country weightings. The Portfolio's "double weighting" in
Hong Kong provided generous enhancements to our performance. Our underweighting
in the lagging Japanese market also augmented our returns relative to the EAFE
Index, which held more than 40% in Japan. We increased our position in Japanese
holdings during the period in order to take advantage of undervalued
opportunities in this region. As of February 29, 1996, Japanese holdings
accounted for roughly 29% of the net assets of the Portfolio (by far our
largest country weighting).
European bourses also performed strongly during the first half of the
fiscal year, with six of the 14 European countries in the EAFE Index providing
double-digit returns. Our significant emphasis on the Netherlands paid rich
dividends in a vibrant Dutch market.
The regular report from the International Growth Portfolio's adviser,
Schroder Capital Management, appears on page 5 of this report.
IN SUMMARY
To state the obvious, the first half of the fiscal year was another
extraordinarily bountiful period for shareholders in both the U.S. Growth
Portfolio and, to a lesser extent, the International Growth Portfolio.
Including our total returns for fiscal 1995, shareholders enjoyed enhancements
in value of +48% (U.S.) and +12% (International) during the full period. In
both cases, these gains were well ahead of the respective market averages and
most competitive funds.
Under these circumstances, what course of action should shareholders in
the U.S. Growth and International Growth Portfolios follow? In our 1995 Annual
Report, despite the potentially volatile global equity markets, we suggested
"staying the course," assuming that your fund holdings are part of a balanced
portfolio that also includes bonds and reserves. Today, you should recognize
that, despite the short-term risks of investing, the biggest long-term risks
are: (1) failing to invest in stocks at all; and (2) following an erratic and
ever-changing course. For our part, we intend to maintain our goal of long-term
capital growth that has been in place since we began operations. "Stay the
course" proved wise counsel six months ago; we reiterate it today.
We look forward to reporting to you on the full 1996 fiscal year in our
Annual Report six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board
/s/ JOHN J. BRENNAN
- ---------------------
John J. Brennan
President
March 22, 1996
Note: Mutual fund data provided by Lipper Analytical Services, Inc.
2
<PAGE> 3
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE PORTFOLIOS (PERIODS ENDED
DECEMBER 31, 1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
10 YEARS
----------------------------------
INCEPTION TOTAL CAPITAL INCOME
PORTFOLIO DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
-------------------- ------------ --------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. GROWTH 1/6/59 +38.44% +16.41% +12.99% +11.30% +1.69%
INTERNATIONAL GROWTH 9/30/81 +14.89 +10.58 +13.57 +12.04 +1.53
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
3
<PAGE> 4
REPORT FROM
LINCOLN CAPITAL MANAGEMENT COMPANY
The first half of the 1996 fiscal year represented a very powerful phase in the
present bull market for domestic equities. As noted in the Message to
Shareholders, the U.S. Growth Portfolio earned +20.9%, a gigantic return even
exceeding the +15.1% gain of the prior six months. Compared with expectations
six months ago, the recent surge was again fueled by rising earnings estimates
and lower interest rates, plus strong cash flows into stocks.
The U.S. Growth Portfolio's six-month return exceeded both the S&P/BARRA
Growth Index (+16.1%) and the S&P 500 Index (+15.3%) by roughly +5% and the
average growth mutual fund (+9.9%) by +11%. We ask now for your future
indulgence in remembering these nice results when we again, inevitably, enter a
period of lagging relative returns.
There's an old saying, show me a portfolio doing well and I'll show you
a big winner. Often, but not this time, true. We enjoyed strong dollar gains
from many stocks, led by PepsiCo, Philip Morris, Johnson & Johnson, Cisco
Systems, and Eli Lilly. No loser exceeded 1% of the Portfolio's net assets.
Compared with the S&P/BARRA Growth Index, we added value materially in
technology, health care, and consumer nondurables. The retail sector, however,
was a drag on relative performance.
Lincoln's ten-person equity team had an active six months, with 21 new
commitments (many mid-caps) and 9 eliminations.
The ten largest holdings are listed in the following table. New to the
list are Hewlett-Packard, Cisco Systems, and Walt Disney (the first two were
among the top 15 six months ago). Dropping back were Wal-Mart, General
Electric, and Procter & Gamble (this stock now ranks #11, still a major
holding).
<TABLE>
<CAPTION>
COMPANY BUSINESS
<S> <C> <C> <C>
1. PEPSICO #1 SNACK FOODS
2. PHILIP MORRIS #1 DIVERSIFIED CONSUMER
PRODUCTS CO.
3. HEWLETT PACKARD #1 ELECTRONIC INSTRUMENTS/PRINTERS
4. COCA-COLA #1 SOFT DRINKS
5. JOHNSON & JOHNSON #1 HEALTH CARE/
CONSUMER PRODUCTS
6. AT&T #1 COMMUNICATIONS CO.
7. INTEL #1 MICROPROCESSOR MANUFACTURER
8. WALT DISNEY #1 ENTERTAINMENT COMPANY
9. CISCO SYSTEMS #1 PROVIDER OF ROUTERS
10. AUTOMATIC DATA #1 PAYROLL SERVICE
</TABLE>
The top ten holdings are selling at a 10% price/earnings premium to the S&P 500
and the total Portfolio is at a 6% average premium, all based on
forward-looking earnings estimates. On August 31, 1995, U.S. Growth Portfolio's
valuations were more in line with the market. So, the Portfolio is not as
apparently cheap as it was six months ago. We continue to feel very good about
the earnings outlook for the largest commitments and consider the modest
multiple premium well-deserved.
Respectfully,
Dave Fowler and Parker Hall, Co-managers
Lincoln Capital Management Company
March 6, 1996
4
<PAGE> 5
REPORT FROM
SCHRODER CAPITAL MANAGEMENT INTERNATIONAL
Vanguard International Growth Portfolio rose in value by +8.2% during the first
half of fiscal 1996. This performance exceeded the MSCI EAFE Index which rose
by +7.0% over the same period.
Although the U.S. dollar rose, on average by +3% against the currencies
in which we invest, market returns in local currencies were strong enough to
produce satisfactory U.S. dollar returns to investors. The Hong Kong market was
the star performer, up +23% over the half year, with Sweden, Spain,
Switzerland, Singapore, Netherlands, and Belgium all showing double-digit
returns. Amongst emerging countries, the Indonesian and South African stock
markets also returned greater than +10% in U.S. dollar terms.
I have remarked in the past that most major international markets
entered a consolidation period after upward surges in 1993. The Dutch market
was the first outside of North America to emerge to a new high in mid-1995, and
in the past six months it has been followed by the UK, Germany, Switzerland,
and Singapore. Those that have not done so are either countries with
governments that are too weak to address sufficiently the problems that
confront them, Spain, France, and Italy being obvious examples, or countries
like Hong Kong and Malaysia where stock market peaks were so high that
insufficient time has elapsed to surpass previous levels.
Our emphasis on long-term reliability has paid off and stocks in Spain,
France, and Italy, for instance, have averaged in total only 6% of the
Portfolio in the past six months. By contrast, stocks in Netherlands, Germany,
and Switzerland have represented over 22% of the Portfolio and the UK another
15%.
The emphasis in the Portfolio on profit growth and good visibility of
future business trends is a powerful support at times when economic trends are
weak and uncertain. Continental Europe continues to struggle under the burden
of tight fiscal stances and high real interest rates, not to mention, in some
cases, high currency values when compared to competitor nations like the United
States. However, slow economic growth is not an impediment to stock markets if
interest rates are falling and there are reasonable expectations that growth
will pick up. As in the United States, companies are addressing their
business costs and, in most cases, profit margins are recovering. This is a
particular feature of several of the largest European positions in the
Portfolio, such as Veba, Philips Electronics, and Elf Aquitaine.
We have reduced our exposure to the UK over the past six months because
the business cycle is more advanced than in other major European countries.
Moreover, the UK is entering the run up to a parliamentary election, a period
during which there is a danger of excessive stimuli to promote a "feel good"
factor amongst consumers. The outlook for consumer stocks continues to be
excellent, but we are cautious elsewhere.
We have 29% of the Portfolio invested in Japan, where the mixture of
monetary policy and economic growth continues to look encouraging for stock
prices: consumer and business confidence is slowly recovering and monetary
policy is extremely loose. Over the past six months, we have repositioned the
Portfolio to benefit from the expected growth of Japanese consumer spending and
capital investment and 75% of your exposure is invested accordingly; the
remaining 25% is sensitive to exports which have been made more profitable by
the weakening trend of the yen.
The high growth markets of Asia represent 18% of the Portfolio. Many of
these have also been consolidating since the beginning of 1994 despite
continued strong corporate profit increases. Inflationary pressures and excess
domestic demand are ever present dangers in these countries, but we believe
that the long-term case for their inclusion in a diversified portfolio is
overwhelming.
The year has started well and I hope to be able to write of further
progress in six months' time.
Respectfully,
Richard Foulkes
Schroder Capital Management International
March 7, 1996
5
<PAGE> 6
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in the
U.S. GROWTH PORTFOLIO for the 25-year period ended February 29, 1996. During
the period illustrated, stock prices fluctuated widely; these results should
not be considered a representation of the dividend income or capital gain or
loss that may be realized from an investment made in the Portfolio today.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA* TOTAL INVESTMENT RETURN**
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Growth Portfolio S&P 500
Value with Income ---------------------------------- -------
August 31 Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Return
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1972 $ 8.14 -- $.10 $ 8.25 + 14.2% +1.5% +15.7% +15.5%
- ------------------------------------------------------------------------------------------------------------------------------------
1973 6.43 $ .13 .07 6.68 - 19.7 +0.7 -19.0 - 3.3
- ------------------------------------------------------------------------------------------------------------------------------------
1974 3.60 -- .10 3.80 - 44.0 +0.8 -43.2 -28.0
- ------------------------------------------------------------------------------------------------------------------------------------
1975 4.61 -- .04 4.93 + 28.2 +1.6 +29.8 +26.1
- ------------------------------------------------------------------------------------------------------------------------------------
1976 5.22 -- .06 5.66 + 13.3 +1.5 +14.8 +23.1
- ------------------------------------------------------------------------------------------------------------------------------------
1977 5.18 -- .09 5.71 - 0.7 +1.7 + 1.0 - 1.8
- ------------------------------------------------------------------------------------------------------------------------------------
1978 6.22 -- .10 6.99 + 20.0 +2.4 +22.4 +12.4
- ------------------------------------------------------------------------------------------------------------------------------------
1979 6.87 -- .15 7.92 + 10.5 +2.7 +13.2 +11.6
- ------------------------------------------------------------------------------------------------------------------------------------
1980 7.69 -- .22 9.16 + 11.9 +3.7 +15.6 +18.2
- ------------------------------------------------------------------------------------------------------------------------------------
1981 8.35 -- .23 10.23 + 8.5 +3.2 +11.7 + 5.4
- ------------------------------------------------------------------------------------------------------------------------------------
1982 7.94 -- .28 10.10 - 4.8 +3.5 - 1.3 + 3.2
- ------------------------------------------------------------------------------------------------------------------------------------
1983 12.02 -- .22 15.70 + 51.3 +4.2 +55.5 +44.0
- ------------------------------------------------------------------------------------------------------------------------------------
1984 10.29 1.86 .24 16.14 + 0.9 +1.9 + 2.8 + 6.1
- ------------------------------------------------------------------------------------------------------------------------------------
1985 11.57 .33 .31 19.38 + 16.4 +3.7 +20.1 +18.3
- ------------------------------------------------------------------------------------------------------------------------------------
1986 13.21 .82 .26 24.53 + 23.6 +3.0 +26.6 +39.1
- ------------------------------------------------------------------------------------------------------------------------------------
1987 12.74 1.94 .28 28.90 + 15.1 +2.7 +17.8 +34.5
- ------------------------------------------------------------------------------------------------------------------------------------
1988 7.17 3.26 .31 22.65 - 23.5 +1.9 -21.6 -17.8
- ------------------------------------------------------------------------------------------------------------------------------------
1989 10.01 -- .06 31.88 + 39.6 +1.1 +40.7 +39.2
- ------------------------------------------------------------------------------------------------------------------------------------
1990 10.38 -- .13 33.48 + 3.7 +1.3 + 5.0 - 5.0
- ------------------------------------------------------------------------------------------------------------------------------------
1991 13.69 -- .19 44.96 + 31.9 +2.4 +34.3 +26.9
- ------------------------------------------------------------------------------------------------------------------------------------
1992 14.71 -- .19 48.93 + 7.5 +1.3 + 8.8 + 7.9
- ------------------------------------------------------------------------------------------------------------------------------------
1993 14.71 .08 .18 49.76 + 0.5 +1.2 + 1.7 +15.2
- ------------------------------------------------------------------------------------------------------------------------------------
1994 15.52 -- .21 53.23 + 5.5 +1.5 + 7.0 + 5.5
- ------------------------------------------------------------------------------------------------------------------------------------
1995 18.83 -- .18 65.34 + 21.3 +1.5 +22.8 +21.4
- ------------------------------------------------------------------------------------------------------------------------------------
1996 (2/29) 21.82 .57 .29 78.94 + 19.2 +1.7 +20.9 +15.3
- ------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL +1,007.2% +1,598.9%
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +10.3% +12.3%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Adjusted for stock splits of 3-for-2 on April 7, 1972, and 1.537-for-1
upon the restructuring of the Portfolio on September 30, 1985.
** Includes reinvestment of income dividends and any capital gains
distributions for both the Portfolio and the Index.
Note: The initial net asset value was $7.13 on August 31, 1971. No adjustment
has been made for income taxes payable by shareholders on reinvested
income dividends and capital gains distributions.
6
<PAGE> 7
The following table illustrates the results of a single-share investment in
the INTERNATIONAL GROWTH PORTFOLIO since inception through February 29, 1996.
During the period illustrated, stock prices fluctuated widely; these results
should not be considered a representation of the dividend income or capital
gain or loss that may be realized from an investment made in the Portfolio
today.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA* TOTAL INVESTMENT RETURN**
- ----------------------------------------------------------------------------------------------------------------------------------
International Growth Portfolio EAFE Index
Value with Income ---------------------------------- -----------
August 31 Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Return
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (9/81) $ 3.95 -- -- $ 3.95 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
1982 3.73 -- -- 3.73 - 5.7% 0.0% - 5.7% - 4.7%
- ----------------------------------------------------------------------------------------------------------------------------------
1983 5.86 -- $.10 6.02 +57.1 +4.3 +61.4 + 31.0
- ----------------------------------------------------------------------------------------------------------------------------------
1984 6.07 $ .12 .09 6.46 + 5.7 +1.6 + 7.3 + 14.7
- ----------------------------------------------------------------------------------------------------------------------------------
1985 6.57 .38 .11 7.61 +15.7 +2.1 +17.8 + 32.3
- ----------------------------------------------------------------------------------------------------------------------------------
1986 11.67 .65 .09 15.14 +96.4 +2.5 +98.9 +103.7
- ----------------------------------------------------------------------------------------------------------------------------------
1987 14.21 .80 .07 19.99 +31.2 +0.8 +32.0 + 46.0
- ----------------------------------------------------------------------------------------------------------------------------------
1988 10.45 2.43 .13 18.01 -10.8 +0.9 - 9.9 - 6.2
- ----------------------------------------------------------------------------------------------------------------------------------
1989 11.61 1.07 .16 22.42 +22.7 +1.8 +24.5 + 22.4
- ----------------------------------------------------------------------------------------------------------------------------------
1990 11.81 .28 .15 23.60 + 4.0 +1.2 + 5.2 - 11.8
- ----------------------------------------------------------------------------------------------------------------------------------
1991 10.31 .68 .20 22.39 - 6.8 +1.7 - 5.1 - 0.3
- ----------------------------------------------------------------------------------------------------------------------------------
1992 10.15 .12 .19 22.72 - 0.4 +1.9 + 1.5 + 0.4
- ----------------------------------------------------------------------------------------------------------------------------------
1993 12.02 -- .21 27.50 +18.4 +2.7 +21.1 + 27.1
- ----------------------------------------------------------------------------------------------------------------------------------
1994 14.36 -- .11 33.12 +19.5 +0.9 +20.4 + 11.1
- ----------------------------------------------------------------------------------------------------------------------------------
1995 14.70 -- .18 34.32 + 2.4 +1.4 + 3.8 + 0.8
- ----------------------------------------------------------------------------------------------------------------------------------
1996 (2/29) 15.48 .21 .20 37.13 + 6.8 +1.4 + 8.2 + 7.0
- ----------------------------------------------------------------------------------------------------------------------------------
LIFETIME +840.0% +770.0%
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +16.8% + 16.2%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Adjusted for stock split of 2.908-for-1 upon the restructuring of the
Portfolio on September 30, 1985.
** Includes reinvestment of income dividends and any capital gains
distributions for both the Portfolio and the Index.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
7
<PAGE> 8
STATEMENT NET ASSETS
FINANCIAL STATEMENTS (unaudited)
February 29, 1996
<TABLE>
<CAPTION>
Market
Value
U.S. GROWTH PORTFOLIO Shares (000)+
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK (97.7%)
- --------------------------------------------------------------------------
BASIC MATERIALS (4.1%)
W.R. Grace & Co. 1,224,000 $ 84,456
Kimberly-Clark Corp. 440,000 33,605
Monsanto Co. 372,000 50,081
-------------
GROUP TOTAL 168,142
-------------
- --------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (4.9%)
The Boeing Co. 560,000 45,430
Duracell International, Inc. 630,000 32,524
General Electric Co. 910,000 68,705
Honeywell, Inc. 483,000 25,599
Illinois Tool Works, Inc. 423,000 27,865
-------------
GROUP TOTAL 200,123
-------------
- --------------------------------------------------------------------------
CONSUMER CYCLICAL (13.1%)
* Brinker International, Inc. 1,080,000 14,715
Carnival Cruise Lines, Inc. 953,000 26,803
The Walt Disney Co. 2,210,000 144,755
* Harrah's Entertainment, Inc. 730,000 19,801
* Kohls Corp. 310,000 19,181
Lowes Cos., Inc. 1,360,000 42,160
Mattel, Inc. 300,000 9,975
May Department Stores Co. 1,750,000 81,594
McDonald's Corp. 1,953,000 97,650
Wal-Mart Stores, Inc. 2,493,000 52,976
Warnaco Group 751,000 19,527
-------------
GROUP TOTAL 529,137
-------------
- --------------------------------------------------------------------------
CONSUMER STAPLES (20.3%)
The Coca-Cola Co. 2,080,000 167,960
Gillette Co. 1,673,000 90,551
PepsiCo, Inc. 3,136,000 198,352
Philip Morris Cos., Inc. 1,913,000 189,387
Procter & Gamble Co. 1,542,000 126,444
Unilever NV 352,000 47,344
Unilever PLC ADR 45,000 3,381
-------------
GROUP TOTAL 823,419
-------------
- --------------------------------------------------------------------------
DIVERSIFIED (.6%)
Alco Standard Corp. 501,000 23,735
- --------------------------------------------------------------------------
ENERGY (2.0%)
Enron Oil & Gas Co. 421,000 10,525
* Renaissance Energy Ltd. 1,424,000 36,074
* Talisman Energy, Inc. 1,478,000 32,862
------------
GROUP TOTAL 79,461
------------
- --------------------------------------------------------------------------
FINANCIAL (7.4%)
Aetna Life & Casualty Co. 260,000 19,662
American International
Group, Inc. 1,080,000 104,355
Chemical Banking Corp. 1,220,000 87,383
Federal National Mortgage Assn. 1,180,000 37,318
Household International, Inc. 138,000 9,280
Norwest Corp. 1,140,000 41,610
-------------
GROUP TOTAL 299,608
-------------
- --------------------------------------------------------------------------
HEALTH CARE (17.4%)
American Home Products Corp. 763,000 75,155
Cardinal Health, Inc. 341,000 20,545
* Forest Laboratories, Inc. 426,000 22,152
* HealthCare Compare Corp. 215,000 10,481
Johnson & Johnson 1,780,000 166,430
Eli Lilly & Co. 1,831,000 110,776
Merck & Co., Inc. 602,000 39,882
Pharmacia & Upjohn, Inc. 1,890,000 79,144
Pfizer, Inc. 1,170,000 77,074
* Pyxis Corp. 860,000 20,103
SmithKline Beecham Unit ADR 1,513,000 82,837
-------------
GROUP TOTAL 704,579
-------------
- --------------------------------------------------------------------------
TECHNOLOGY (23.5%)
Altera Corp. 300,000 19,575
AMP, Inc. 1,374,000 58,567
Automatic Data Processing, Inc. 3,500,000 135,625
* Cisco Systems, Inc. 3,022,000 143,167
First Data Corp. 204,000 14,127
General Motors Corp. Class E 1,489,000 85,059
Hewlett-Packard Co. 1,740,000 175,305
Informix Corp. 342,000 12,055
Intel Corp. 2,660,000 156,275
Molex, Inc. Class A 306,000 10,174
* Oracle Corp. 1,501,000 78,052
Reuters Holdings PLC ADR 730,000 46,994
Xilinx, Inc. 454,000 17,536
-------------
GROUP TOTAL 952,511
-------------
- --------------------------------------------------------------------------
UTILITIES (4.4%)
AT&T Corp. 2,490,000 158,426
MCI Communications Corp. 745,000 21,698
-------------
GROUP TOTAL 180,124
-------------
- --------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $2,736,906) 3,960,839
- --------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.3%)
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
--------
<S> <C> <C>
REPURCHASE AGREEMENT
Collaterized by U.S. Government
Obligations in a Pooled
Cash Account 5.42%, 3/1/96
(Cost $134,708) $134,708 134,708
- --------------------------------------------------------------------------
TOTAL INVESTMENTS (101.0%)
(Cost $2,871,614) 4,095,547
- --------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Market
Value
(000)+
- --------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (-1.0%)
- --------------------------------------------------------------------------
Other Assets--Note C $ 30,082
Liabilities (71,029)
-------------
(40,947)
- --------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------
Applicable to 185,809,343 outstanding
$1.00 per value shares
(authorized 500,000,000 shares) $4,054,600
- --------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $21.82
==========================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
AT FEBRUARY 29, 1996,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
---------- --------
<S> <C> <C>
PAID IN CAPITAL $2,754,343 $14.82
UNDISTRIBUTED NET
INVESTMENT INCOME 3,568 .02
ACCUMULATED NET
REALIZED GAINS 72,756 .39
UNREALIZED APPRECIATION
OF INVESTMENTS--NOTE E 1,223,933 6.59
- --------------------------------------------------------------------------
NET ASSETS $4,054,600 $21.82
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
INTERNATIONAL Value
GROWTH PORTFOLIO Shares (000)+
- --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.2%)
- --------------------------------------------------------------------------
ARGENTINA (.1%)
Compania Naviera Perez 576,300 $ 2,871
------------
- --------------------------------------------------------------------------
AUSTRALIA (1.1%)
Broken Hill Proprietary Ltd. 280,500 4,064
Comalco A 395,000 2,069
Lend Lease Corp. 245,000 3,762
M.I.M. Holdings Ltd. 1,750,000 2,235
Mayne Nickless Ltd. 794,289 4,112
News Corp. Ltd. 1,240,000 7,054
News Corp. Ltd. Pfd. 607,500 3,066
Normandy Mining Ltd. 3,871,315 7,104
Qantas Airways Ltd. 250,000 455
QNI Ltd. 2,500,000 5,123
WMC Ltd. 954,937 6,141
------------
GROUP TOTAL 45,185
------------
- --------------------------------------------------------------------------
BRAZIL (1.0%)
Electrobras (Centrais) Pfd. B 34,638,332 9,641
Telecom Brasileiras SA 147,460,000 6,217
Telecom Brasileiras SA Pfd. 313,665,755 16,378
USIMINAS ADR 440,000 4,675
USIMINAS Pfd. 4,612,149,000 5,013
------------
GROUP TOTAL 41,924
------------
- --------------------------------------------------------------------------
CANADA (2.8%)
Canadian Pacific Ltd. 1,650,000 32,326
Noranda Inc. 1,500,000 29,524
Nova Corp. 3,450,000 30,495
Royal Bank of Canada 1,200,000 27,447
-------------
GROUP TOTAL 119,792
-------------
- --------------------------------------------------------------------------
CHILE (.2%)
Compania de Telecomunicaciones
de Chile SA ADR 54,000 4,469
Sociedad Quimica Minera de
Chile ADR 60,000 3,045
------------
GROUP TOTAL 7,514
------------
- --------------------------------------------------------------------------
FINLAND (.4%)
Kymmene Oy 330,000 9,148
Repola Oy 370,000 7,327
------------
GROUP TOTAL 16,475
------------
- --------------------------------------------------------------------------
FRANCE (3.4%)
Cie. Generale Des Eaux 259,976 26,058
Primagaz Cie. 84,668 8,260
* Primagaz Cie. Warrants Exp. 6/30/98 7,697 122
* SGS-Thomson Microelectronics
NV ADR 230,000 8,481
Societe National Elf Aquitaine 1,070,999 73,933
Valeo SA 447,000 24,665
-------------
GROUP TOTAL 141,519
-------------
- --------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
INTERNATIONAL Value
GROWTH PORTFOLIO (continued) Shares (000)+
- --------------------------------------------------------------------------
<S> <C> <C>
GERMANY (8.4%)
Allianz AG Holdings 37,000 $ 70,944
Deutsche Bank AG 733,000 36,942
Friedrich Grohe AG Pfd. 18,747 4,503
Linde AG 60,000 36,048
Mannesmann AG 100,000 35,756
Siemens AG 70,000 39,937
Signalbau Huber AG NV Pfd. 7,404 650
SAP AG NVP 140,000 22,004
Veba AG 2,181,250 102,703
------------
GROUP TOTAL 349,487
------------
- --------------------------------------------------------------------------
HONG KONG (5.6%)
Cheung Kong Holdings Ltd. 5,580,000 38,794
Hong Kong Electric Holdings Ltd. 4,450,000 15,080
HSBC Holdings PLC 2,362,943 37,899
Hutchison Whampoa Ltd. 6,810,000 43,161
Sun Hung Kai Properties Ltd. 5,343,400 47,689
Swire Pacific Ltd. A 3,604,000 31,466
Wharf Holdings Ltd. 5,500,000 21,306
------------
GROUP TOTAL 235,395
------------
- --------------------------------------------------------------------------
INDONESIA (1.6%)
Indocement (Foreign) 2,062,000 8,212
Indofood Sukses Makmur
(Foreign) 4,493,400 23,083
PT Indosat ADR 528,000 19,734
* Telekomunikasi Indonesia ADR 480,000 15,060
------------
GROUP TOTAL 66,089
------------
- --------------------------------------------------------------------------
ITALY (1.8%)
Fiat SPA 7,000,000 22,032
Parmalat Finanziaria SPA 9,460,000 8,799
* Parmalat Finanziaria SPA
Warrants Exp. 7/17/99 1,545,200 796
Telecom Italia SPA 16,820,000 28,144
* Telecom Italia Mobile SPA 8,000,000 14,671
------------
GROUP TOTAL 74,442
------------
- --------------------------------------------------------------------------
JAPAN (28.8%)
Advantest Corp. 250,000 14,025
Anritsu Corp. 13,000 150
Bridgestone Corp. 2,330,000 36,334
Dai Nippon Printing Co., Ltd. 1,500,000 25,815
Daini Den Den Corp. 8,000 58,648
East Japan Railway 6,245 31,887
Eisai Co., Ltd. 350,000 6,390
Fanuc Co., Ltd. 60,000 2,601
Fuji Photo Film Co., Ltd. 1,830,000 51,853
Fujitsu Ltd. 1,320,000 13,555
Hirose Electronics Co., Ltd. 315,000 17,821
Hitachi Ltd. 4,600,000 46,363
Hoya Corp. 430,000 14,310
Ito-Yokado Co. 1,900,000 106,228
Japan Airport Terminal Co., Ltd. 160,000 1,947
Keyence Inc. 130,000 15,327
Kuraray Co., Ltd. 2,250,000 23,747
Kyocera Corp. 380,000 26,015
Mabuchi Motor 400,000 24,532
Makita Corp. 700,000 10,716
Matsushita Electric Industrial
Co., Ltd. 3,200,000 51,117
Mitsubishi Heavy Industries Ltd. 3,000,000 24,275
Mitsui & Co., Ltd. 6,450,000 54,767
Murata Manufacturing Co., Ltd. 2,000,000 65,798
NEC Corp. 1,100,000 13,074
Nippon Television Network 39,300 11,210
Omron Tateisi Electronics Co. 1,000,000 22,059
SMC Corp. 550,000 37,549
Sankyo Co., Ltd. 935,000 21,515
Seino Transportation Co., Ltd. 425,000 7,072
Sharp Corp. 800,000 12,475
Shin-Etsu Chemical Co., Ltd. 1,000,000 20,538
Showa Shell Sekiyu 2,760,000 25,456
Skylark Co., Ltd. 225,000 3,979
Sumitomo Electric Co. 3,000,000 38,794
Takeda Chemical Industries 3,900,000 62,670
Tokio Marine & Fire
Insurance Co., Ltd. 3,200,000 38,642
Tokyo Electron Inc. 635,000 25,480
Tokyo Ohka Kogyo Co., Ltd. 202,000 5,839
Toppan Printing Co. 1,450,000 18,888
Toray Industries, Inc. 2,200,000 14,245
Toyota Motor Corp. 2,350,000 50,723
Yamazaki Baking Co., Ltd. 400,000 7,112
Yasuda Fire & Marine
Insurance Co. 5,190,000 37,012
Yokohama Reito 211,000 2,729
-------------
GROUP TOTAL 1,201,282
-------------
- --------------------------------------------------------------------------
KOREA (1.1%)
Hyundai Engineering &
Construction Co. (Foreign) 76 4
Korea Electric Power Co. (Foreign) 441,050 16,063
Pohang Iron & Steel Co. 80,000 5,316
* Samsung Electronics Co. Ltd. GDR
1/2 Non-Voting Stock 218,390 11,465
* Samsung Electronics Co. Ltd. GDS
1/2 Voting Stock 16,191 1,473
Shinhan Bank (Foreign) 465,162 9,986
------------
GROUP TOTAL 44,307
------------
- --------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------
<S> <C> <C>
MALAYSIA (2.8%)
Genting Bhd. 4,047,000 $ 36,202
Malayan Banking Bhd. 4,333,000 39,610
Renong Bhd. 9,200,000 14,655
Tan Chong Motor Holdings Bhd. 2,242,000 3,131
Telekom Malaysia Bhd. 2,863,000 24,600
------------
GROUP TOTAL 118,198
------------
- --------------------------------------------------------------------------
MEXICO (.4%)
Apasco A 1,066,000 4,639
* Cemex SA NPV (CPO) 614,720 2,112
Cifra SA de CV Series C 4,309,000 4,959
* Grupo Carso ADS 162,000 2,052
* Grupo Carso Series A-1 340,000 2,153
------------
GROUP TOTAL 15,915
------------
- --------------------------------------------------------------------------
NETHERLANDS (9.1%)
Ceteco Holdings NV 122,262 5,015
* Delft Instruments 454,330 10,354
Getronics NV 565,512 32,305
Hagemeyer NV 248,818 15,197
Heineken NV 423,575 81,600
* KLM Royal Dutch Airlines NV 573,658 19,105
Internationale Nederlanden
Groep NV 936,975 62,237
Oce-Van Der Grinten NV 400,000 31,237
Philips Electronics NV
(non-voting) 2,150,000 89,502
Sphinx Gustavsberg NV 396,046 6,691
Otra NV 789,500 15,977
Ver Ned Uitgevers 635,000 10,381
-------------
GROUP TOTAL 379,601
-------------
- --------------------------------------------------------------------------
PHILIPPINES (1.4%)
Ayala Land Inc. B 19,933,437 27,056
Manila Electric B 460,000 4,274
Meralco GDR 304,312 13,085
Philippine Long Distance
Telephone Co. 267,000 15,772
------------
GROUP TOTAL 60,187
------------
- --------------------------------------------------------------------------
SINGAPORE (2.7%)
DBS Land Ltd. 3,948,000 15,516
Development Bank of
Singapore Ltd. (Foreign) 1,575,000 22,418
Keppel Corp., Ltd. 2,416,000 24,465
Mandarin Oriental Ltd.
(Registered) 4,311,369 5,648
Overseas Chinese
Banking Corp. (Foreign) 1,193,500 16,565
Singapore Press
Holdings Ltd. (Foreign) 796,320 16,071
Singapore International
Airlines Ltd. (Foreign) 1,268,000 12,750
-------------
GROUP TOTAL 113,433
-------------
- --------------------------------------------------------------------------
SWEDEN (2.8%)
Astra AB Series B 1,700,000 77,822
LM Ericsson Telephone Series B 1,232,000 26,739
Stora Kopparberg Series A 900,000 11,600
-------------
GROUP TOTAL 116,161
-------------
- --------------------------------------------------------------------------
SWITZERLAND (7.1%)
BBC Brown Boveri AG A (Bearer) 97,000 116,222
Ciba Geigy (Registered) 38,000 33,957
CS Holdings (Registered) 613,000 58,436
Nestle SA (Registered) 45,000 49,262
Roche Holdings Ltd. 5,000 38,882
-------------
GROUP TOTAL 296,759
-------------
- --------------------------------------------------------------------------
THAILAND (2.6%)
Bangkok Bank Public Co., Ltd.
(Foreign) 1,215,000 15,808
Electricity Generating Public Co.
Ltd. (Foreign) 654,100 2,595
Land and House Public Co. Ltd.
(Foreign) 990,000 19,635
Siam Cement Public Co., Ltd.
(Foreign) 269,000 14,000
Siam City Bank Public Co. Ltd.
(Foreign) 3,245,000 4,473
* TelecomAsia Corp. Public Co. Ltd.
(Foreign) 4,441,000 12,684
Thai Farmers Bank Public Co. Ltd.
(Foreign) 1,523,000 16,191
United Communication Industry
(Foreign) 1,550,000 22,011
-------------
GROUP TOTAL 107,397
-------------
- --------------------------------------------------------------------------
UNITED KINGDOM (13.0%)
Allied Domecq PLC 1,520,000 12,053
Asda Group PLC 18,000,000 28,521
Barclays PLC 2,200,000 25,522
Blue Circle Industries PLC 1,600,000 8,597
British Aerospace PLC 3,000,000 39,888
* British Aerospace PLC Warrants
Exp. 11/15/00 120,000 696
British Airways PLC 2,050,000 15,974
British Land Co., PLC 5,880,000 35,332
British Petroleum Co., PLC 4,487,000 37,094
British Steel PLC 7,000,000 19,664
Burton Group PLC 14,900,000 30,338
Cable and Wireless PLC 4,000,000 27,250
</TABLE>
11
<PAGE> 12
STATEMENTS OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
INTERNATIONAL Value
GROWTH PORTFOLIO (continued) Shares (000)+
- --------------------------------------------------------------------------
<S> <C> <C>
Courtaulds PLC 2,750,200 $ 18,441
De La Rue Co. PLC 972,200 11,044
ECC Group
(English China Clays) PLC 1,650,000 8,715
Enterprise Oil PLC 2,000,000 11,727
Glaxo Wellcome PLC 1,639,700 22,667
Grand Metropolitan PLC 2,200,000 14,583
National Power PLC 1,200,000 8,818
Peninsular & Oriental Steam
Navigation Co. Pfd. 1,700,000 13,585
Rank Organisation Ltd. PLC 6,465,000 47,903
Rexam PLC 1,750,000 9,725
Smith (David S.) Holdings PLC 2,600,000 12,140
Thorn EMI PLC 1,300,000 32,380
United News & Media PLC 2,500,000 24,647
Vodafone Group PLC 4,400,000 15,493
Zeneca Group PLC 600,000 11,528
------------
GROUP TOTAL 544,325
------------
- --------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $3,342,353) 4,098,258
- --------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.6%)
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
---------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.42%, 3/1/96
(Cost $110,976) $110,976 110,976
- --------------------------------------------------------------------------
TOTAL INVESTMENTS (100.8%)
(Cost $3,453,329) 4,209,234
- --------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.8%)
- --------------------------------------------------------------------------
Other Assets--Notes C and F 235,321
Liabilities--Note F (269,471)
-------------
(34,150)
- --------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------
Applicable to 269,693,080 outstanding
$1.00 par value shares
(authorized 550,000,000 shares) $4,175,084
- --------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $15.48
==========================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
ADR--American Depository Receipt.
ADS--American Depository Share.
GDR--Global Depository Receipt.
GDS--Global Depository Share.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
AT FEBRUARY 29, 1996,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
---------- -------
<S> <C> <C>
PAID IN CAPITAL $3,325,324 $12.33
OVERDISTRIBUTED NET
INVESTMENT INCOME--NOTE D (728) --
ACCUMULATED NET REALIZED
GAINS--NOTES D AND E 74,195 .27
UNREALIZED APPRECIATION--
NOTE E:
INVESTMENT SECURITIES 755,905 2.80
FOREIGN CURRENCIES AND
FORWARD CURRENCY
CONTRACTS 20,388 .08
- --------------------------------------------------------------------------
NET ASSETS $4,175,084 $15.48
- --------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
U.S. GROWTH INTERNATIONAL
PORTFOLIO GROWTH PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
February 29, 1996 February 29, 1996
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends(1) . . . . . . . . . . . . . . . . . . . $ 25,552 $ 17,044
Interest . . . . . . . . . . . . . . . . . . . . . 5,222 3,238
- -------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . 30,774 20,282
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee . . . . . . . . . . . . . . . . . . . $2,891 $2,615
Performance Adjustment . . . . . . . . . . . . . -- 2,891 653 3,268
------- ------
The Vanguard Group--Note C
Management & Administrative . . . . . . . . . . 4,445 5,185
Marketing and Distribution . . . . . . . . . . . 321 4,766 382 5,567
------- ------
Taxes (other than income taxes) . . . . . . . . . . 134 148
Custodian Fees . . . . . . . . . . . . . . . . . . 9 1,368
Auditing Fees . . . . . . . . . . . . . . . . . . . 4 4
Shareholders' Reports . . . . . . . . . . . . . . . 56 95
Annual Meeting and Proxy Costs . . . . . . . . . . 42 58
Directors' Fees and Expenses . . . . . . . . . . . 6 7
- -------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . 7,908 10,515
Expenses Paid Indirectly--Note C . . . . . (187) (398)
- -------------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . 7,721 10,117
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . 23,053 10,165
- -------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . 95,542 95,987
Foreign Currencies and Forward Currency Contracts . -- 57,045
- -------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . 95,542 153,032
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . 535,934 143,484
Foreign Currencies and Forward Currency Contracts . -- (19,922)
- -------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . 535,934 123,562
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . $654,529 $286,759
===================================================================================================================
</TABLE>
(1)Dividends for the International Growth Portfolio are net of foreign
withholding taxes of $2,384,000.
13
<PAGE> 14
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
U.S. GROWTH INTERNATIONAL
PORTFOLIO GROWTH PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED Year Ended SIX MONTHS ENDED Year Ended
FEBRUARY 29, 1996 August 31, 1995 FEBRUARY 29, 1996 August 31, 1995
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . $ 23,053 $ 38,281 $ 10,165 $ 46,145
Realized Net Gain (Loss) . . . . . . . . . . 95,542 91,924 153,032 (16,215)
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . 535,934 388,046 123,562 82,767
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . 654,529 518,251 286,759 112,697
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . (49,433) (24,203) (47,384) (38,607)
Realized Net Gain . . . . . . . . . . . . . (97,162) -- (49,753) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . (146,595) (24,203) (97,137) (38,607)
- ----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . 558,959 688,919 613,456 754,485
--In Lieu of Cash Distributions . 131,833 23,081 90,187 36,111
--Exchange . . . . . . . . . . . 167,922 278,467 282,713 368,755
Redeemed --Regular . . . . . . . . . . . . (206,954) (326,198) (184,357) (323,043)
--Exchange . . . . . . . . . . . (94,144) (132,698) (170,182) (545,911)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . . 557,616 531,571 631,817 290,397
- ----------------------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . 1,065,550 1,025,619 821,439 364,487
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . 2,989,050 1,963,431 3,353,645 2,989,158
- ----------------------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . $4,054,600 $2,989,050 $4,175,084 $3,353,645
==================================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . $.29 $.18 $.20 $.18
Realized Net Gain . . . . . . . . . $.57 -- $.21 --
- ----------------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . 35,084 57,733 59,023 80,730
Issued in Lieu of Cash Distributions 6,578 1,504 6,000 2,719
Redeemed . . . . . . . . . . . . . (14,592) (27,003) (23,475) (63,495)
- ----------------------------------------------------------------------------------------------------------------------------------
27,070 32,234 41,548 19,954
- ----------------------------------------------------------------------------------------------------------------------------------
(3) Undistributed (Overdistributed)
Net Investment Income--Note D . . $ 3,568 $ 29,948 $ (728) $ 35,617
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
U.S. GROWTH PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended August 31,
SIX MONTHS ENDED --------------------------------------------------
For a Share Outstanding Throughout Each Period FEBRUARY 29, 1996 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . $18.83 $15.52 $14.71 $14.71 $13.69 $10.38
-------- ------- ------ ------ ------ -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . .12 .25 .20 .21 .19 .20
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . . . 3.73 3.24 .82 .05 1.02 3.30
-------- ------- ------ ------ ------ -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . 3.85 3.49 1.02 .26 1.21 3.50
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . (.29) (.18) (.21) (.18) (.19) (.19)
Distributions from Realized Capital Gains . . . . . . . . (.57) -- -- (.08) -- --
-------- ------- ------ ------ ------ -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . (.86) (.18) (.21) (.26) (.19) (.19)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . $21.82 $18.83 $15.52 $14.71 $14.71 $13.69
=================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . +20.85% +22.75% +6.98% +1.69% +8.83% +34.28%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . $4,055 $2,989 $1,963 $1,954 $1,441 $747
Ratio of Expenses to Average Net Assets . . . . . . . . . . . .45%*+ .47%+ .52% .49% .49% .56%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . . . 1.31%* 1.59% 1.30% 1.50% 1.52% 1.82%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . 42%* 32% 47% 37% 24% 30%
Average Commission Rate Paid . . . . . . . . . . . . . . . . $.0484++ -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Effective in fiscal 1995, does not include expense reductions from
directed brokerage arrangements (see Note C). The Ratio of Net
Expenses to Average Net Assets was .44% for both periods.
++ Represents total commissions paid on portfolio securities divided by
the total number of shares purchased or sold on which commissions were
charged. This disclosure is required by the SEC beginning in 1996.
15
<PAGE> 16
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
INTERNAITONAL GROWTH PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended August 31,
SIX MONTHS ENDED -----------------------------------------------------
For a Share Outstanding Throughout Each Period FEBRUARY 29, 1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . $14.70 $14.36 $12.02 $10.15 $10.31 $11.81
------- ------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . .04 .20 .14 .12 .20 .18
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . . . 1.15 .32 2.31 1.96 (.05) (.80)
------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . 1.19 .52 2.45 2.08 .15 (.62)
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . (.20) (.18) (.11) (.21) (.19) (.20)
Distributions from Realized Capital Gains . . . . . . . . (.21) -- -- -- (.12) (.68)
------- ------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . (.41) (.18) (.11) (.21) (.31) (.88)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . $15.48 $14.70 $14.36 $12.02 $10.15 $10.31
==================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . +8.18% +3.76% +20.44% +21.06% +1.49% -5.11%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . $4,175 $3,354 $2,989 $1,477 $919 $846
Ratio of Expenses to Average Net Assets . . . . . . . . . . . .55%*+ .59%+ .46% .59% .58% .67%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . . . .60%* 1.53% 1.37% 1.27% 2.04% 1.80%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . 24%* 31% 28% 51% 58% 49%
Average Commission Rate Paid . . . . . . . . . . . . . . . . $.0197++ -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Effective in fiscal 1995, does not include expense reductions from
directed brokerage arrangements (see Note C). The Ratios of Net
Expenses to Average Net Assets were .53% and .58%.
++ Represents total commissions paid on portfolio securities divided by
the total number of shares purchased or sold on which commissions were
charged. This disclosure is required by the SEC beginning in 1996.
NOTES TO FINANCIAL STATEMENTS
Vanguard World Fund is registered under the Investment Company Act of 1940 as a
diversified open-end investment company and consists of the U.S. Growth and
International Growth Portfolios. The International Growth Portfolio invests in
securities of foreign issuers which may subject the Portfolio to investment
risks not normally associated with investing in securities of United States
corporations.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Market values for securities listed on U.S. exchanges
are based upon the latest quoted sales prices for such securities on the
appropriate exchange as of the close of the New York Stock Exchange
(generally 4:00 PM) on the valuation date; such securities not traded on
the valuation date are valued at the mean of the latest
16
<PAGE> 17
quoted bid and asked prices. Securities listed on foreign exchanges are
valued at the latest quoted sales prices. Securities not listed are valued
at the latest quoted bid prices. Temporary cash investments are valued at
cost which approximates market value.
2. FOREIGN CURRENCY: Securities and other assets and liabilities denominated
in foreign currencies are translated into U.S. dollars at the bid prices
of those currencies against U.S. dollars last quoted by major banks as of
5:00 PM Geneva Time on the valuation date.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on securities from the
portion arising from changes in market prices of securities. Such
fluctuations are included in realized net gains (losses) and unrealized
appreciation (depreciation) on investment securities. Changes in the value
of other assets and liabilities resulting from changes in foreign exchange
rates are recorded as unrealized foreign currency gains (losses) until
settled in cash, at which time realized foreign currency gains (losses)
are recognized.
3. FORWARD CURRENCY CONTRACTS: The International Growth Portfolio enters into
forward currency contracts to protect the value of securities and related
receivables and payables against changes in future foreign exchange rates.
Risks associated with such contracts include movement in the value of the
foreign currency relative to the U.S. dollar and the ability of the
counterparties to fulfill their obligations under the contracts.
Fluctuations in the value of such contracts are recorded as unrealized
appreciation (depreciation) until terminated, at which time realized gains
(losses) are recognized.
4. FEDERAL INCOME TAXES: Each Portfolio of the Fund intends to continue to
qualify as a regulated investment company and distribute all of its
taxable income. Accordingly, no provision for Federal income taxes is
required in the financial statements.
5. REPURCHASE AGREEMENTS: Each Portfolio of the Fund, along with other
members of The Vanguard Group of Investment Companies, transfers
uninvested cash balances into a Pooled Cash Account, the daily aggregate
of which is invested in repurchase agreements secured by U.S. Government
obligations. Securities pledged as collateral for repurchase agreements
are held by a custodian bank until maturity of the repurchase agreements.
Provisions of each agreement require that the market value of the
collateral is sufficient in the event of default; however, in the event of
default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
6. OTHER: Dividend income and distributions to shareholders are recorded on
the ex-dividend date. Security transactions are accounted for on the date
the securities are purchased or sold. Costs used in determining realized
gains (losses) on the sale of investment securities are those of specific
securities sold.
B. U.S. GROWTH PORTFOLIO: Under the terms of a contract which expires March
31, 1997, the Portfolio pays Lincoln Capital Management Company an investment
advisory fee calculated at an annual percentage rate of average net assets. For
the six months ended February 29, 1996, the investment advisory fee represented
an effective annual rate of .16 of 1% of the Portfolio's average net assets.
INTERNATIONAL GROWTH PORTFOLIO: Under the terms of a contract which expires
March 31, 1997, the Portfolio pays Schroder Capital Management International an
investment advisory fee calculated at an annual percentge rate of average net
assets. The basic fee thus computed is subject to quarterly adjustments based
on performance relative to the Morgan Stanley Capital International Europe,
Australia, and Far East Index. For the six months ended February 29, 1996, the
investment advisory
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS (continued)
fee represented an effective annual base rate of .14 of 1% of the Portfolio's
average net assets before an increase of $653,000 (an annual rate of .04 of 1%)
based on performance.
C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing, and distribution services. The costs of such
services are allocated to the Fund under methods approved by the Board of
Directors. At February 29, 1996, the Fund had contributed capital of $871,000
to Vanguard (included in Other Assets), representing 4.4% of Vanguard's
capitalization. The Fund's directors and officers are also directors and
officers of Vanguard.
Vanguard has requested the Fund's investment advisers to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate or credit to the Fund a portion of the commissions
generated. Such rebates or credits are used solely to reduce the Fund's
administrative expenses. For the six months ended February 29, 1996, directed
brokerage arrangements reduced the expenses of the U.S. Growth and
International Growth Portfolios by $187,000 (an annual rate of .01 of 1% of
average net assets) and $398,000 (an annual rate of .02 of 1% of average net
assets), respectively.
D. During the six months ended February 29, 1996, purchases and sales of
investment securities other than U.S. Government securities and temporary cash
investments were:
<TABLE>
<CAPTION>
- -------------------------------------------------------
(000)
-----------------------------
Portfolio Purchases Sales
- -------------------------------------------------------
<S> <C> <C>
U.S. GROWTH $1,226,634 $706,602
INTERNATIONAL GROWTH 1,077,893 419,867
- -------------------------------------------------------
</TABLE>
During the six months ended February 29, 1996, the International Growth
Portfolio realized net foreign currency gains of $874,000 which increased
distributable net income for tax purposes; accordingly such gains have been
reclassified from accumulated net realized gains to undistributed net income.
E. At February 29, 1996, net unrealized appreciation of investment securities
for financial reporting and Federal income tax purposes was:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(000)
-----------------------------------------------
Net
Appreciated Depreciated Unrealized
Portfolio Securities Securities Appreciation
- ----------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GROWTH $1,233,335 $ (9,402) $1,223,933
INTERNATIONAL GROWTH 832,840 (76,935) 755,905
- ----------------------------------------------------------------------
</TABLE>
Under the terms of open forward currency contracts at February 29, 1996, the
International Growth Portfolio was obligated to deliver foreign currency in
exchange for U.S. dollars as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(000)
----------------------------------------------
Net
Contract Foreign U.S. Unrealized
Settlement Date Currency Dollars Appreciation
- ----------------------------------------------------------------------
<S> <C> <C> <C>
3/15/96 SWISS FRANCS 130,000 $108,589 $ 2,789
3/22/96 JAPANESE YEN 50,000,000 476,778 17,731
- ----------------------------------------------------------------------
</TABLE>
At February 29, 1996, the International Growth Portfolio had net unrealized
foreign currency losses of $132,000 resulting from the translation of other
assets and liabilities.
F. The market value of International Growth Portfolio securities on loan to
broker/dealers at February 29, 1996, was $179,891,000 for which the Portfolio
had received cash collateral of $189,960,000.
18
<PAGE> 19
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President and Chief Executive Officer
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.; Director of Westinghouse Electric Corporation.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd. and The St. Paul Companies, Inc.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and
The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co. and
NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
KAREN E. WEST, CONTROLLER; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
ROBERT A. DISTEFANO F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Information Technology Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
19
<PAGE> 20
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money
Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income
Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible
Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Funds
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Portfolio
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[THE VANGUARD GROUP LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1-(800) 662-7447 1-(800) 662-2739
</TABLE>
This Report has been prepared for shareholders and may be distributed
to others only if preceded or accompanied by a current prospectus.
All Funds in the Vanguard Family are offered by prospectus only.
Q232-2/96
