<PAGE> 1
================================================================================
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. 72 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 72 [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 December 12, 1997 pursuant to paragraph (b) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
WE HAVE ELECTED TO REGISTER AN INDEFINITE NUMBER OF SECURITIES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24f-2 OF THE INVESTMENT COMPANY ACT OF
1940. WE FILED OUR RULE 24f-2 NOTICE FOR THE FISCAL YEAR ENDED AUGUST 31, 1997,
WITH THE COMMISSION ON NOVEMBER 28, 1997.
================================================================================
<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............................... Portfolio Expenses
Item 3. Condensed Financial Information........ Financial Highlights
Item 4. General Description of Registrant...... The Portfolio's Objective Investment
Strategy; Investment Policies; General
Information
Item 5. Management of the Fund................. The Portfolio and Vanguard; Investment
Adviser
Item 5A. Management's Discussion of Fund
Performance............................ Herein incorporated by reference to
Registrant's Annual Report to
Shareholders dated August 31, 1997
filed with the Securities & Exchange
Commission's EDGAR system on October
20, 1997
Item 6. Capital Stock and Other Securities..... Investing with Vanguard; Buying Shares;
Redeeming Shares; Share Price;
Dividends, Capital Gains and Taxes;
General Information
Item 7. Purchase of Securities Being Offered... Cover Page; Investing with Vanguard;
Buying Shares
Item 8. Redemption or Repurchase............... Redeeming Shares
Item 9. Pending Legal Proceedings.............. Not Applicable
</TABLE>
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
- ------------- ---------------------------------------
<S> <C> <C>
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 Registrant........... 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. Calculation of Performance Data........ Yield & Total Return
Item 23. Financial Statements................... Financial Statements
</TABLE>
<PAGE> 3
VANGUARD U.S. GROWTH PORTFOLIO
Prospectus
December 12, 1997
This prospectus contains financial data for the Fund through the fiscal year
ended August 31, 1997.
[GRAPHIC OF SHIP]
[VANGUARD LOGO]
<PAGE> 4
VANGUARD U.S. GROWTH PORTFOLIO
A Growth Stock Mutual Fund
<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 Strategy 5
Investment Policies 7
Investment Limitations 8
Investment
Performance 8
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 13
Types of Accounts 14
Distribution Options 15
Buying Shares 15
Redeeming Shares 17
Portfolio and Account
Updates 19
Glossary Inside Back Cover
</TABLE>
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 the
stocks 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 (dated December 12, 1997) containing more
information about the Portfolio is, by reference, part of this prospectus and
may be obtained without charge by writing to Vanguard, calling our Investor
Information Department at 1-800-662-7447, or visiting the Securities and
Exchange Commission's website (http://www.sec.gov).
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategy 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> 5
PORTFOLIO PROFILE Vanguard U.S. Growth Portfolio
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 4-8)
The 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 also
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 10)
Paid annually in December.
INVESTMENT ADVISER (page 11)
Lincoln Capital Management Company,
Chicago, Ill.
INCEPTION DATE: January 6, 1959
NET ASSETS AS OF 8/31/97: $7.45 billion
PORTFOLIO'S EXPENSE RATIO FOR THE
YEAR ENDED 8/31/97: 0.42%
LOADS, 12B-1 MARKETING FEES: None
SUITABLE FOR IRAS: Yes
MINIMUM INITIAL INVESTMENT: $3,000; $1,000 for IRAs and custodial accounts for
minors
NEWSPAPER ABBREVIATION: USGro
VANGUARD FUND NUMBER: 023
CUSIP NUMBER: 921910105
QUOTRON SYMBOL: VWUSX.Q
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 RETURNS--
PERIODS ENDED AUGUST 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
-----------------------------------
<S> <C> <C> <C>
U.S. Growth Portfolio 32.5% 17.3% 14.1%
S&P 500 Index 40.7 19.8 13.9
</TABLE>
QUARTERLY RETURNS (%) 1988-1997 (intended to show volatility of returns)
[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> 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.
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 1997 was
0.42%, or $4.20 per $1,000 of average net assets. The average growth equity
mutual fund had expenses in 1996 of 1.50%, or $15.00 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 based upon those incurred in the fiscal year ended August 31, 1997.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
<S> <C>
Management and Administrative Expenses: 0.25%
Investment Advisory Expenses: 0.14%
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): 0.42%
====
</TABLE>
The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes that (1)
the Portfolio provides a return of 5% a year and (2) 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>
$4 $13 $24 $53
---------------------------------------------
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 7
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended August 31, 1997. 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,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 22.62 $ 18.83 $ 15.52 $ 14.71 $ 14.71
-----------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .27 .26 .25 .20 .21
Net Realized and Unrealized Gain (Loss)
on Investments 6.73 4.39 3.24 .82 .05
-----------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 7.00 4.65 3.49 1.02 .26
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.26) (.29) (.18) (.21) (.18)
Distributions from Realized Capital Gains (1.62) (.57) -- -- (.08)
-----------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.88) (.86) (.18) (.21) (.26)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 27.74 $ 22.62 $ 18.83 $ 15.52 $ 14.71
==============================================================================================================================
TOTAL RETURN 32.50% 25.28% 22.75% 6.98% 1.69%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 7,445 $ 4,544 $ 2,989 $ 1,963 $ 1,954
Ratio of Total Expenses to
Average Net Assets 0.42% 0.43% 0.47% 0.52% 0.49%
Ratio of Net Investment Income to
Average Net Assets 1.13% 1.32% 1.59% 1.30% 1.50%
Portfolio Turnover Rate 35% 44% 32% 47% 37%
Average Commission Rate Paid $ .0493 $ .0492 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
1992 1991 1990 1989 1988
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.69 $ 10.38 $ 10.01 $ 7.17 $ 12.74
INVESTMENT OPERATIONS
Net Investment Income .19 .20 .14 .11 .10
Net Realized and Unrealized Gain (Loss)
on Investments 1.02 3.30 .36 2.79 (2.10)
-----------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.21 3.50 .50 2.90 (2.00)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.19) (.19) (.13) (.06) (.31)
Distributions from Realized Capital Gains -- -- -- -- (3.26)
-----------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.19) (.19) (.13) (.06) (3.57)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 14.71 $ 13.69 $ 10.38 $ 10.01 $ 7.17
==============================================================================================================================
TOTAL RETURN 8.83% 34.28% 5.03% 40.72% (21.62)%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 1,441 $ 747 $ 339 $ 184 $ 130
Ratio of Total Expenses to
Average Net Assets 0.49% 0.56% 0.74% 0.95% 0.88%
Ratio of Net Investment Income to
Average Net Assets 1.52% 1.82% 1.77% 1.44% 1.23%
Portfolio Turnover Rate 24% 30% 49% 48% 38%
Average Commission Rate Paid N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a historical measure of dividend income, and total return is a
measure of past dividend income (assuming that it has been reinvested) plus
realized and unrealized 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 1997 with a net asset value (price) of $22.62 per
share. During the year, the Portfolio earned $.27 per share from investment
income (interest and dividends) and $6.73 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 $7.00 per share, $1.88 per share was returned to
shareholders in the form of dividend and capital gains distributions.
The earnings ($7.00 per share) less distributions ($1.88 per share) resulted
in a share price of $27.74 at the end of the year, an increase of $5.12 per
share (from $22.62 at the beginning of the period to $27.74 at the end of the
period). Assuming that the shareholder had reinvested the distributions in the
purchase of more shares, total return from the Portfolio was 32.50% for the
year.
As of August 31, 1997, the Portfolio had $7.45 billion in net assets; an
expense ratio of 0.42% ($4.20 per $1,000 of net assets); and net investment
income amounting to 1.13% of its average net assets. It sold and replaced
securities valued at 35% of its total net assets.
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 hopes of a greater
increase in share price or who prefer a higher portion of the fund's returns to
come as capital gains (which may be taxed at lower rates than dividend income).
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.
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.
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 [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.
[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 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.
INVESTMENT STRATEGY
This section explains how the investment adviser pursues the Portfolio's
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
strategy is not fundamental and can be changed by the Portfolio's Board of
Directors without shareholder approval. However, before making any important
change in its strategy, the Portfolio will give shareholders 30 days' notice,
in writing.
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.
[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, that the gap between best and worst tends to
narrow over the long term.
<TABLE>
<CAPTION>
U.S. STOCK MARKET RETURNS (1926-1996)
- --------------------------------------------------------------------------------
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 12.7 10.4 10.8 10.8
- --------------------------------------------------------------------------------
</TABLE>
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.
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-capitalization, or large-cap, funds as those holding
stocks of companies with a median market value of their outstanding shares
exceeding $5 billion. Mid-cap funds hold stocks of companies with an average
market value between $1 billion and $5 billion. Small-cap funds hold stocks of
companies with a median market value of less than $1 billion. Historically,
large-cap funds have exhibited lower volatility than mid-cap and small-cap
funds.
5
<PAGE> 10
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 diversification is the percentage of total net assets represented by its
ten largest holdings. The average U.S. equity mutual fund has about 30% 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.
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1996. For example, while the average return on stocks for all of the
5-year periods was 10.4%, 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.
[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.
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 39% of the
Portfolio's total net assets) as of August 31, 1997, follow.
1. Intel Corp.
2. Monsanto Co.
3. Philip Morris Cos. Inc.
4. Cisco Systems, Inc.
5. Procter & Gamble Co.
6. The Coca-Cola Co.
7. Pfizer, Inc.
8. Bristol-Myers Squibb Co.
9. American Home Products Co.
10. Microsoft Corp.
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.
6
<PAGE> 11
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
all domestic stock funds is 79%.
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 companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stock may not be as liquid as the stock of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than in the United
States. These factors, among others, could negatively impact the returns
Americans receive from a foreign investment. For more information about foreign
investment risk, see the Statement of Additional Information.
The Portfolio is run by Lincoln according to traditional methods of active
investment management, which means securities are bought and sold according to
Lincoln's judgments about companies and their financial prospects, within the
context of the stock market and the economy in general.
[FLAG] THE PORTFOLIO IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT
LINCOLN MAY DO A POOR JOB OF 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 five years has been about 39%. (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 common stocks of growth companies, the Portfolio may follow
a number of investment policies to achieve its objective.
The Portfolio may invest up to 20% of its assets in securities of companies
based outside the United States. These securities may be traded in U.S. or
foreign markets.
[FLAG] THE PORTFOLIO IS SUBJECT TO COUNTRY RISK, WHICH IS THE POSSIBILITY THAT
POLITICAL EVENTS (SUCH AS A WAR), FINANCIAL PROBLEMS (SUCH AS GOVERNMENT
DEFAULT), OR NATURAL DISASTERS (SUCH AS AN EARTHQUAKE) WILL WEAKEN A
COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN THAT COUNTRY TO LOSE MONEY.
The Fund may also invest in derivatives.
[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 other liquid portfolio securities in the amount
of the obligation underlying the futures contract. Only a limited percentage of
the Portfolio's assets--
7
<PAGE> 12
5%--may be applied towards the deposits required in futures contracts, and the
value of all futures contracts in which the Portfolio acquires an interest
cannot exceed 20% of the Portfolio's total assets.
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 reduce the Portfolio's transaction costs by buying futures instead of
actual stocks.
- - To add value to the Portfolio 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, the Portfolio has adopted fundamental limitations on some of its
investment policies. Some of these limitations are that the Portfolio may 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 temporary or emergency purposes to meet shareholder
requests to redeem shares.
- - Buy any security if, as a result, more than 15% of the Portfolio's assets
would be invested in securities that are not readily convertible to cash.
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.
A complete list of applicable investment limitations can be found in the
Statement of Additional Information; these are fundamental and may be changed
only by approval of a majority of the Portfolio's shareholders.
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.
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.
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.
8
<PAGE> 13
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 8/31/97
[BAR GRAPH]
U.S. GROWTH PORTFOLIO S&P 500 INDEX
1 Year 32.5% 40.7%
3 Years 26.8% 26.6%
5 Years 17.3% 19.8%
10 Years 14.1% 13.9%
20 Years 15.9% 16.2%
25 Years 10.9% 13.0%
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.
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 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 Funds. Different newspapers
use different abbreviations of the Portfolio's name, but the most common is
USGRO.
9
<PAGE> 14
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. The 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
it 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. In addition, the Portfolio may occasionally be required
to make supplemental dividend or capital gains distributions at some other time
during the year. 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--if paid to you by the end of 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. Long-term gains may be
taxed at different rates depending on how long the Portfolio held the
securities. 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
by-products 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.
- - 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.
10
<PAGE> 15
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, 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
Lincoln Capital Management Company, an investment advisory firm founded in 1967,
currently manages more than $46 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 responsible for
overseeing the implementation of Lincoln's strategy for Vanguard U.S. Growth
Portfolio are:
J. PARKER HALL III, Chief Executive Officer and Managing Director of
Lincoln; has worked in investment management since 1957; with Lincoln since
1971; B.A., Swarthmore College; M.B.A., Harvard Business School.
DAVID M. FOWLER, Executive Vice President and Managing Director of Lincoln;
has worked in investment management since 1972; with Lincoln since 1984; B.S.,
Loyola University; M.B.A., Northwestern University.
Both have served in this capacity since Lincoln became the Portfolio's
adviser in August 1987.
THE PORTFOLIO AND VANGUARD
The Portfolio is part of Vanguard World Fund, which in turn is a member of The
Vanguard Group, a family of more than 30 investment companies with more than 95
distinct investment portfolios and total net assets of more than $310 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 calculated by applying a quarterly rate,
based on the following annual percentage rates, to the Portfolio's average
month-end assets for the quarter:
<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, 1997, the investment advisory fee paid to
Lincoln was $8.47 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 get the best available price and most
favorable execution from these brokers with respect to all transactions.
At times, Lincoln may choose brokers who charge higher commissions in the
interest of obtaining better execution of a transaction. If more than one broker
can obtain the best available price and favorable execution of a transaction,
then Lincoln is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to Lincoln or the Portfolio.
However, Lincoln will not pay higher commissions specifically
11
<PAGE> 16
for the purpose of obtaining research services. The Portfolio may direct Lincoln
to use a particular broker for certain transactions in exchange for commission
rebates or research services provided to the Portfolio.
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.
GENERAL INFORMATION
The U.S. Growth Portfolio is one of two Portfolios of Vanguard World Fund, Inc.
The other 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 for investment management purposes operate like
separate companies.
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. Annual meetings will not be held by the Portfolio
except as required by the Investment Company Act of 1940. A meeting will be
scheduled to vote on the removal of a director if the holders of at least 10% of
the Portfolio's shares request a meeting in writing.
12
<PAGE> 17
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 [BOOK GRAPHIC].
Please call us to request copies.
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares.
<TABLE>
<S> <C>
TELEPHONE REDEMPTIONS Automatically set up for this Portfolio
(SALES AND EXCHANGES) unless you notify us otherwise.
VANGUARD DIRECT DEPOSIT Automatic method for depositing your
SERVICE paycheck or U.S. government payment
[BOOK GRAPHIC] (including Social Security and government
pension checks) into your account.
VANGUARD AUTOMATIC EXCHANGE Automatic method for moving a fixed amount
SERVICE of money from one Vanguard fund account to
[BOOK GRAPHIC] another.*
VANGUARD FUND EXPRESS Electronic method for buying or selling
[BOOK GRAPHIC] shares. You can transfer 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
[BOOK GRAPHIC] and/or capital gains distributions directly
from your Vanguard fund account to your
bank, savings and loan, or credit union
account.
VANGUARD BROKERAGE SERVICES A cost-effective way to trade stocks, bonds,
(VBS) and options on major exchanges, the Nasdaq,
[BOOK GRAPHIC] 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.
</TABLE>
*Can be used to "dollar-cost average" [BOOK GRAPHIC] or to contribute to an IRA
or other retirement plan.
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
13
<PAGE> 18
TYPES OF ACCOUNTS
INDIVIDUAL OR OTHER ENTITY
Vanguard's account registration form can be used to establish a variety of
nonretirement accounts.
<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
[BOOK GRAPHIC] Gifts/Transfers to Minors Act). Age of
majority and other requirements are set by
state law. $1,000 minimum initial
investment.
FOR HOLDING TRUST ASSETS To invest assets held in an existing trust.
[BOOK GRAPHIC] $3,000 minimum initial investment.
FOR THIRD-PARTY TRUSTEE To open an account as a retirement trust or
RETIREMENT INVESTMENTS plan based on an existing corporate or
(Vanguard is not the custodian institutional plan. These accounts are
or trustee.) 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.
</TABLE>
RETIREMENT
You establish these accounts with a Vanguard adoption agreement--not a Vanguard
account registration form. To request the appropriate adoption agreement and
forms, or to ask questions about investing for retirement, call Investor
Information at 1-800-662-7447. For retirement plan details, call Individual
Retirement Services at 1-800-662-2003.
<TABLE>
<S> <C>
FOR AN INDIVIDUAL RETIREMENT To open a retirement account in the name of
ACCOUNT (IRA) an individual. IRAs can be established with
(Vanguard Fiduciary Trust a contribution, a direct rollover from an
Company is the custodian.) employer's plan, such as a 401(k), or 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
PENSION PLAN ACCOUNT (SEP-IRA) an employee. SEPs allow employers to make
(Vanguard Fiduciary Trust deductible contributions directly to IRAs
Company is the custodian.) established by their employees. A SEP can be
established by people who are self-employed,
small-business owners, partnerships, or
corporations.
FOR A SAVINGS INCENTIVE MATCH To open a retirement account in the name of
PLAN FOR EMPLOYEES ACCOUNT an employee. Created as part of the Small
(SIMPLE IRA) Business Job Protection Act of 1996, SIMPLEs
(Vanguard Fiduciary Trust replace SAR-SEPs. SIMPLEs are exclusively
Company is the custodian.) for employers that had 100 or fewer
employees in the most recent calendar year
and that do not maintain another
employer-sponsored retirement plan. A SIMPLE
can be established by people who are
self-employed, small business owners,
partnerships, or corporations. Salary
reduction contributions may be made by the
employee, with matching or nonmatching
contributions from the employer.
</TABLE>
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
14
<PAGE> 19
FOR A QUALIFIED RETIREMENT To open a retirement account that allows
PROGRAM ACCOUNT small-business owners or people who are
(Vanguard Fiduciary Trust self-employed to make tax-deductible
Company can be the trustee.) retirement contributions for themselves and
their employees into Profit-Sharing and
Money Purchase Pension (Keogh) plans.
FOR A 403(b)(7) CUSTODIAL ACCOUNT To open a retirement account that allows
(Vanguard Fiduciary Trust employees of tax-exempt institutions (for
Company is the custodian.) example, schools or hospitals) to make
pretax retirement contributions.
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
automatically reinvested in additional
shares of the Portfolio unless you request a
different distribution method.
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.
DIVIDENDS AND CAPITAL GAINS Both dividends and capital gains are paid by
IN CASH check and mailed 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, see Vanguard Dividend Express under
"Services and Account Features."
If you have elected to receive dividends and/or capital gain distributions in
cash and the postal service is unable to make delivery to your address of
record, your distribution option will be changed to reinvestment. No interest
will accrue on amounts represented by uncashed distribution checks.
BUYING SHARES
You buy your shares at the Portfolio's next-determined net asset value after
Vanguard receives your request, provided we receive your request before the
close of trading on the New York Stock Exchange (generally 4 p.m. Eastern time).
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 (IRAs and $100 by mail or exchange; $1,000 by wire.
custodial accounts for minors).
BY MAIL Complete and sign the application form. Mail your check with an Invest-By-Mail form
[ENVELOPE GRAPHIC] detached from your confirmation statement to
the address listed on the form.
FIRST-CLASS mail to:
The Vanguard Group
P.O. Box 2600 Make your check payable to: The Vanguard Make your check payable to: The Vanguard
Valley Forge, PA 19482 Group-23 Group-23
</TABLE>
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
15
<PAGE> 20
BUYING SHARES (continued)
<TABLE>
<S> <C> <C>
EXPRESS or REGISTERED mail to: All purchases must be made in U.S. dollars, All purchases must be made in U.S. dollars,
The Vanguard Group and checks must be drawn on U.S. banks. and checks must be drawn on U.S. banks.
455 Devon Park Drive
Wayne, PA 19087
</TABLE>
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
<S> <C> <C>
BY TELEPHONE Call Vanguard Tele-Account* 24 hours a Call Vanguard Tele-Account* 24 hours a
[PHONE RECEIVER GRAPHIC] day--or Client Services during business day--or Client Services during business
1-800-662-6273 hours--to exchange from another Vanguard hours--to exchange from another Vanguard
Vanguard Tele-Account(R) fund account with the same registration fund account with the same registration
(name, address, taxpayer I.D., and account (name, address, taxpayer I.D., and account
1-800-662-2739 type). type).
Client Services
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.
</TABLE>
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>
<S> <C> <C>
BY WIRE Call Client Services to arrange your wire Call Client Services to arrange your wire
[WIRE GRAPHIC] transaction. transaction.
Wire to:
CoreStates Bank, N.A. Wire transactions are not available for Wire transactions are not available for
ABA 031000011 retirement accounts. retirement accounts.
CoreStates No 01019897
[Temporary Account Number]
Vanguard U.S. Growth Portfolio
[Account Registration]
Attention: Vanguard
AUTOMATICALLY -- Vanguard offers a variety of ways that you
[CIRCLE OF ARROWS GRAPHIC] can add to your account automatically. See
"Services and Account Features."
</TABLE>
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
IMPORTANT NOTE: If you buy Portfolio shares through a registered broker-dealer
or investment adviser, the broker-dealer or adviser may charge you a service
fee.
It is important that you call Vanguard before you invest a large dollar
amount by wire or check. We must consider the interests of all Portfolio
shareholders and so reserve the right to delay or refuse any purchase that will
disrupt the Portfolio's operation or performance.
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
16
<PAGE> 21
REDEEMING SHARES
IMPORTANT TAX NOTE: Any sale or exchange of shares in a nonretirement 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:
[CHECK MARK] Portfolio name.
[CHECK MARK] 10-digit account number.
[CHECK MARK] Name and address exactly as registered on that account.
[CHECK MARK] 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.
HOW TO SELL SHARES
You may withdraw any part of your account, at any time, by selling shares. 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:
[CHECK MARK] Portfolio name and account number.
[CHECK MARK] Amount of the transaction (in dollars or shares).
[CHECK MARK] Signatures of all owners exactly as registered on the
account.
[CHECK MARK] Signature guarantees (if required).
[CHECK MARK] Any supporting legal documentation that may be required.
[CHECK MARK] 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 p.m. Eastern time) are processed at the next
business day's net asset value. No interest will accrue on amounts represented
by uncashed redemption checks.
The Portfolio reserves the right to close any nonretirement or UGMA/UTMA
account whose balance falls below the minimum initial investment. The Portfolio
will deduct a $10 annual fee if your nonretirement account balance falls below
$2,500 or if your UGMA/UTMA account balance falls below $500. The fee is waived
if your total Vanguard account assets are $50,000 or more.
Some written requests require a signature guarantee from a bank, broker, or
other acceptable financial institution. A notary public cannot provide a
signature guarantee.
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
17
<PAGE> 22
REDEEMING SHARES (continued)
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one Vanguard fund to purchase shares of
another.
Although we make every effort 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
Fund and increase transaction costs, Vanguard limits exchange activity to TWO
SUBSTANTIVE EXCHANGE REDEMPTIONS (at least 30 days apart) from the Fund during
any 12-month period. "Substantive" means either a dollar amount large enough to
have a negative impact on the Fund or a series of movements between Vanguard
funds.
Before you exchange into a new Vanguard fund, be sure to read its
prospectus. For a copy and for answers to questions you might have, call
Investor Information.
<TABLE>
<CAPTION>
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
<S> <C>
BY TELEPHONE ALL TYPES EXCEPT RETIREMENT:
[TELEPHONE RECEIVER] Call Vanguard Tele-Account* 24 hours a
1-800-662-6273 day--or Client Services during business
Vanguard Tele-Account hours--to sell or exchange 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.
1-800-662-2739 RETIREMENT:
Client Services 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.
BY MAIL ALL TYPES EXCEPT RETIREMENT:
[ENVELOPE]
FIRST-CLASS mail to: Send a letter of instruction signed by all
The Vanguard Group registered account holders. Include the
Vanguard U.S. Growth Portfolio Portfolio name and account number and (if
P.O. Box 1120 you are selling) a dollar amount or number
Valley Forge, PA 19482 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. To
exchange into an account with a different
registration (including a different name,
address, or taxpayer identification number),
you must provide the guaranteed signature of
all current account owners on your written
EXPRESS or REGISTERED mail to: instructions.
The Vanguard Group
Vanguard U.S. Growth Portfolio RETIREMENT:
455 Devon Park Drive
Wayne, PA 19087 For information on how to request
distributions from:
- IRAs--call Client Services.
- SEP-IRAs, SIMPLE-IRAs, 403(b)(7)
custodial accounts, and Profit-Sharing
and Money Purchase Pension (Keogh)
Plans--call Individual Retirement Plans
at 1-800-662-2003.
Depending on your account registration type,
additional documentation may be required.
</TABLE>
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
18
<PAGE> 23
<TABLE>
<CAPTION>
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
<S> <C>
EXCHANGING SHARES ONLINE You may use your personal computer to
[COMPUTER] exchange shares of most Vanguard funds by
accessing Vanguard's website
(http://www.vanguard.com). To establish this
service for your account, you must first
register through our website. We will then
send to you, by mail, an account access
password that will enable you to make
on-line exchanges.
The Vanguard funds that you cannot purchase
or sell through on-line exchange are
VANGUARD INDEX TRUST, VANGUARD BALANCED
INDEX FUND, VANGUARD INTERNATIONAL EQUITY
INDEX FUND, VANGUARD REIT INDEX PORTFOLIO,
VANGUARD TOTAL INTERNATIONAL PORTFOLIO, AND
VANGUARD GROWTH AND INCOME PORTFOLIO
(formerly known as Vanguard Quantitative
Portfolios). These funds do permit online
exchanges within IRAs and other retirement
accounts.
AUTOMATICALLY ALL TYPES EXCEPT RETIREMENT:
[GRAPHIC OF ARROWS Vanguard offers several ways to sell or
IN A CIRCLE] exchange shares automatically (see "Services
and Account Features"). Call Investor
Information for the appropriate booklet and
application if you did not elect this
feature when you opened your account.
</TABLE>
It is important that you call Vanguard before you redeem a large dollar amount.
We must consider the interests of all Portfolio shareholders and so reserve the
right to delay your redemption proceeds--up to seven days--if the amount will
disrupt the Portfolio's operation or performance.
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.
PORTFOLIO AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you clear, concise account and tax statements to help you keep
track of your Vanguard U.S. Growth Portfolio account throughout the year as well
as when you are preparing your income tax returns.
In addition, you will receive financial reports about the Portfolio twice a
year. These comprehensive reports include an assessment of the Portfolio's
performance (and a comparison to its industry benchmark), an overview of the
markets, a report from the adviser, as well as a listing of its holdings and
other financial statements.
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
19
<PAGE> 24
PORTFOLIO AND ACCOUNT UPDATES (continued)
<TABLE>
<S> <C>
CONFIRMATION STATEMENT Sent each time you buy, sell, or exchange
shares; confirms the trade date and the
amount of your transaction.
PORTFOLIO SUMMARY Mailed quarterly; shows the market value of
[BOOK GRAPHIC] your account at the close of the statement
period, as well as distributions, purchases,
sales, and exchanges 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 distributions, proceeds from
the sale of shares, and distributions from
IRAs or other retirement accounts.
AVERAGE COST STATEMENT Issued quarterly for taxable accounts
[BOOK GRAPHIC] (accompanies your Portfolio Summary); shows
the average cost of shares that you redeemed
during the calendar year, using the average
cost single category method.
AUTOMATED TELEPHONE ACCESS
VANGUARD TELE-ACCOUNT Toll-free access to Vanguard fund and
1-800-662-6273 account information--as well as some
Any time, seven days a week, transactions--through any Touch-Tone(TM)
from anywhere in the continental telephone. Tele-Account provides total
United States and Canada. return, share price, price change, and yield
[BOOK GRAPHIC] quotations for all Vanguard funds; gives
your account balances and history (e.g.,
last transaction, latest dividend
distribution); and allows you to sell or
exchange fund shares.
COMPUTER ACCESS
VANGUARD ON THE Use your personal computer to visit
WORLD WIDE WEB Vanguard's education-oriented website, which
http://www.vanguard.com provides timely news and information about
Vanguard funds and services; an on-line
"university" that offers a variety of mutual
fund classes; and easy-to-use, interactive
tools to help you create your own investment
and retirement strategies.
</TABLE>
Investor Information 1-800-662-7447 - Client Services 1-800-662-2739 -
Tele-Account 1-800-662-6273
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
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,
U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements,
commercial paper, and banker's acceptances.
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 investments.
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.
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, with the ending 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
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, PA 19482
<TABLE>
<S> <C> <C>
INVESTOR INFORMATION VANGUARD BROKERAGE ELECTRONIC ACCESS TO THE
DEPARTMENT SERVICES VANGUARD MUTUAL FUND
1-800-662-7447 (SHIP) 1-800-992-8327 EDUCATION AND INFORMATION
TEXT TELEPHONE: For information on trading CENTER
1-800-952-3335 stocks, bonds, and options World Wide Web
For information on our funds, at reduced commissions http://www.vanguard.com
fund services, and retirement
accounts; requests for VANGUARD TELE-ACCOUNT(R) E-mail
literature 1-800-662-6273 (ON-BOARD) [email protected]
For 24-hour automated access
CLIENT SERVICES DEPARTMENT to price and yield, information
1-800-662-2739 (CREW) on your account, certain
TEXT TELEPHONE: transactions
1-800-662-2738
For information on your
account, account transactions,
account statements
</TABLE>
(C) 1997 Vanguard Marketing
Corporation, Distributor
P023N
<PAGE> 27
VANGUARD
U.S. GROWTH
PORTFOLIO
Institutional Prospectus
December 12, 1997
This prospectus contains financial data for the Fund through the fiscal year
ended August 31, 1997.
[GRAPHIC OF SHIP]
[A member of the Vanguard Group logo]
<PAGE> 28
VANGUARD U.S. GROWTH PORTFOLIO A Growth Stock Mutual Fund
<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 Strategy 5
Investment Policies 7
Investment Limitations 8
Investment
Performance 8
Share Price 9
Dividends, Capital
Gains, and Taxes 10
The Portfolio and
Vanguard 10
Investment Adviser 11
General Information 12
Investing
with Vanguard
- - For Plan Participants 13
- - For Other
Institutional Investors 13
Accessing Fund
Information
by Computer 14
Prospectus Postscript 15
Risk Quiz 16
Glossary Inside Back Cover
</TABLE>
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 the
stocks 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.
IMPORTANT NOTE
This prospectus is intended for institutional clients and for participants in
employer-sponsored retirement or savings plans. Another version -- for investors
who would like to open a personal investment account -- can be obtained by
calling Vanguard at 1-800-662-7447.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
A Statement of Additional Information (dated December 12, 1997) containing more
information about the Portfolio is, by reference, part of this prospectus and
may be obtained without charge by contacting Vanguard (see back cover) or
visiting the Securities and Exchange Commission's website (http://www.sec.gov).
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategy 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> 29
PORTFOLIO PROFILE
VANGUARD U.S. GROWTH PORTFOLIO
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 - 8)
The 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 also
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 10)
Paid annually in December. In participant accounts, all distributions are
automatically reinvested.
INVESTMENT ADVISER (page 11)
Lincoln Capital Management Company, Chicago, Ill.
INCEPTION DATE: January 6, 1959
NET ASSETS AS OF 8/31/97: $7.45 billion
PORTFOLIO'S EXPENSE RATIO FOR THE YEAR ENDED 8/31/97: 0.42%
NEWSPAPER ABBREVIATION: USGro
VANGUARD FUND NUMBER: 080 (for plan participants), 023 (for all other investors)
CUSIP NUMBER: 921910105
QUOTRON SYMBOL: VWUSX.Q
AVERAGE ANNUAL TOTAL RETURNS --
PERIODS ENDED AUGUST 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
U.S. Growth Portfolio 32.5% 17.3% 14.1%
S&P 500 Index 40.7 19.8 13.9
</TABLE>
QUARTERLY RETURNS (%) 1988 - 1997
(intended to show volatility of returns)
[GRAPH]
[PLOT POINTS TO COME]
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> 30
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 U.S. Growth Portfolio's expense ratio in fiscal year 1997 was
0.42%, or $4.20 per $1,000 of average net assets. The average growth equity
mutual fund had expenses in 1996 of 1.50%, or $15.00 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>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
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 based upon those incurred in the fiscal year ended August 31, 1997.
<TABLE>
ANNUAL FUND OPERATING EXPENSES
<S> <C> <C>
Management and Administrative Expenses: 0.25%
Investment Advisory Expenses: 0.14%
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): 0.42%
=====
</TABLE>
The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes that (1)
the Portfolio provides a return of 5% a year and (2) you redeem your investment
at the end of each period.
<TABLE>
<CAPTION>
---------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------------
<S> <C> <C> <C>
$4 $13 $24 $53
---------------------------------------------------------
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 31
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended August 31, 1997. 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 calling Vanguard (see back cover).
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $22.62 $18.83 $15.52 $14.71 $14.71 $13.69 $10.38 $10.01 $ 7.17 $12.74
----------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .27 .26 .25 .20 .21 .19 .20 .14 .11 .10
Net Realized and Unrealized
Gain (Loss) on Investments 6.73 4.39 3.24 .82 .05 1.02 3.30 .36 2.79 (2.10)
----------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 7.00 4.65 3.49 1.02 .26 1.21 3.50 .50 2.90 (2.00)
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.26) (.29) (.18) (.21) (.18) (.19) (.19) (.13) (.06) (.31)
Distributions from Realized Capital
Gains (1.62) (.57) -- -- (.08) -- -- -- -- (3.26)
----------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.88) (.86) (.18) (.21) (.26) (.19) (.19) (.13) (.06) (3.57)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $27.74 $22.62 $18.83 $15.52 $14.71 $14.71 $13.69 $10.38 $10.01 $7.17
- ----------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 32.50% 25.28% 22.75% 6.98% 1.69% 8.83% 34.28% 5.03% 40.72% (21.62)%
- ----------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $7,445 $4,544 $2,989 $1,963 $1,954 $1,441 $747 $339 $184 $130
Ratio of Total Expenses to
Average Net Assets 0.42% 0.43% 0.47% 0.52% 0.49% 0.49% 0.56% 0.74% 0.95% 0.88%
Ratio of Net Investment Income to
Average Net Assets 1.13% 1.32% 1.59% 1.30% 1.50% 1.52% 1.82% 1.77% 1.44% 1.23%
Portfolio Turnover Rate 35% 44% 32% 47% 37% 24% 30% 49% 48% 38%
Average Commission Rate Paid $.0493 $.0492 N/A N/A N/A N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a historical measure of dividend income, and total return is a
measure of past dividend income (assuming that it has been reinvested) plus
realized and unrealized 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 1997 with a net asset value (price) of $22.62 per
share. During the year, the Portfolio earned $.27 per share from investment
income (interest and dividends) and $6.73 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 $7.00 per share, $1.88 per share was returned to
shareholders in the form of dividend and capital gains distributions.
The earnings ($7.00 per share) less distributions ($1.88 per share) resulted
in a share price of $27.74 at the end of the year, an increase of $5.12 per
share (from $22.62 at the beginning of the period to $27.74 at the end of the
period). Assuming that the shareholder had reinvested the distributions in the
purchase of more shares, total return from the Portfolio was 32.50% for the
year.
As of August 31, 1997, the Portfolio had $7.45 billion in net assets; an
expense ratio of 0.42% ($4.20 per $1,000 of net assets); and net investment
income amounting to 1.13% of its average net assets. It sold and replaced
securities valued at 35% of its total net assets.
3
<PAGE> 32
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 hopes of a greater
increase in share price or who prefer a higher portion of the fund's returns to
come as capital gains (which may be taxed at lower rates than dividend income).
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.
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.
- --------------------------------------------------------------------------------
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 [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.
[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 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 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> 33
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. If you own shares of the Portfolio as an investment
option in an employer-sponsored retirement or savings plan, your plan
dictates the rules governing exchanges. Contact your plan administrator
for details.
- - The Portfolio reserves the right to stop offering shares at any time.
INVESTMENT STRATEGY
This section explains how the investment adviser pursues the Portfolio's
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
strategy is not fundamental and can be changed by the Portfolio's Board of
Directors without shareholder approval. However, before making any important
change in its strategy, the Portfolio will give shareholders 30 days' notice, in
writing.
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.
[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, that the gap between best and worst tends to
narrow over the long term.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926 - 1996)
- -----------------------------------------------------------------
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 12.7 10.4 10.8 10.8
- -----------------------------------------------------------------
</TABLE>
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.
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-capitalization, or large-cap, funds as those holding stocks of
companies with a median market value of their outstanding shares exceeding $5
billion. Mid-cap funds hold stocks of companies with an average market value
between $1 billion and $5 billion. Small-cap funds hold stocks of companies with
a median market value of less than $1 billion. Historically, large-cap funds
have exhibited lower volatility than mid-cap and small-cap funds.
5
<PAGE> 34
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 diversification is the percentage of total net assets represented by its
ten largest holdings. The average U.S. equity mutual fund has about 30% 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.
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1996. For example, while the average return on stocks for all of the
5-year periods was 10.4%, 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.
[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.
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 39% of the
Portfolio's total net assets) as of August 31, 1997, follow.
1. Intel Corp.
2. Monsanto Co.
3. Philip Morris Cos. Inc.
4. Cisco Systems, Inc.
5. Procter & Gamble Co.
6. The Coca-Cola Co.
7. Pfizer, Inc.
8. Bristol-Myers Squibb Co.
9. American Home Products Co.
10. Microsoft Corp.
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.
6
<PAGE> 35
The Portfolio is run by Lincoln according to traditional methods of active
investment management, which means securities are bought and sold according to
Lincoln's judgments about companies and their financial prospects, within the
context of the stock market and the economy in general.
[FLAG] THE PORTFOLIO IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT
LINCOLN MAY DO A POOR JOB OF 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 five years has been about 39%. (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 common stocks of growth companies, the Portfolio may follow
a number of investment policies to achieve its objective.
The Portfolio may invest up to 20% of its assets in securities of companies
based outside the United States. These securities may be traded in U.S. or
foreign markets.
[FLAG] THE PORTFOLIO IS SUBJECT TO COUNTRY RISK, WHICH IS THE POSSIBILITY THAT
POLITICAL EVENTS (SUCH AS A WAR), FINANCIAL PROBLEMS (SUCH AS GOVERNMENT
DEFAULT), OR NATURAL DISASTERS (SUCH AS AN EARTHQUAKE) WILL WEAKEN A
COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN THAT COUNTRY TO LOSE MONEY.
The Fund may also invest in derivatives.
[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 other liquid portfolio securities in the amount
of the obligation underlying the futures contract. Only a limited percentage of
the Portfolio's assets -- 5% -- may be applied towards the deposits required in
futures contracts, and the value of all futures contracts in which the Portfolio
acquires an interest cannot exceed 20% of the Portfolio's total assets.
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 reduce the Portfolio's transaction costs by buying futures instead
of actual stocks.
- - To add value to the Portfolio 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.
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. The average turnover rate for all domestic stock
funds is 79%.
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 companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stock may not be as liquid as the stock of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than in the United
States. These factors, among others, could negatively impact the returns
Americans receive from a foreign investment. For more information about foreign
investment risk, see the Statement of Additional Information.
7
<PAGE> 36
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.
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 LIMITATIONS
To reduce risk, the Portfolio has adopted fundamental limitations on some of its
investment policies. Some of these limitations are that the Portfolio may 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 temporary or emergency purposes to meet
shareholder requests to redeem shares.
- - Buy any security if, as a result, more than 15% of the Portfolio's
assets would be invested in securities that are not readily convertible
to cash.
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.
A complete list of applicable investment limitations can be found in the
Statement of Additional Information; these are fundamental and may be changed
only by approval of a majority of the Portfolio's shareholders.
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.
8
<PAGE> 37
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 8/31/97
[BAR GRAPH]
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS 20 YEARS 25 YEARS
<S> <C> <C> <C> <C> <C> <C>
U.S. Growth Portfolio 32.5% 26.8% 17.3% 14.1% 15.9% 10.9%
S&P 500 Index 40.7% 26.6% 19.8% 13.9% 16.2% 13.0%
</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 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.
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 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 Funds. Different newspapers use
different abbreviations of the Portfolio's name, but the most common is USGro.
9
<PAGE> 38
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. The 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
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, 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.
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. In addition, the Portfolio may occasionally be required
to make supplemental dividend or capital gains distributions at some other time
during the year.
If you own shares of the Portfolio as an investment option in an
employer-sponsored retirement or savings plan, these dividend and capital gains
distributions will be reinvested in additional Portfolio shares and accumulate
on a tax-deferred basis. You will not owe taxes on these distributions until you
begin withdrawals. You should consult your plan administrator, your plan's
Summary Plan Document, or your own tax adviser about the tax consequences of an
investment in the Portfolio and of any plan withdrawals.
If your Vanguard U.S. Growth Portfolio investment is not part of an
employer-sponsored plan, you can receive distributions of income or capital
gains in cash, or you may have them automatically reinvested in more shares of
the Portfolio. Both dividend and capital gains distributions -- whether received
in cash or reinvested in additional shares -- are subject to federal (and
possibly state and local) income taxes, no matter how long you have held the
shares in the Portfolio. You should consult your own tax adviser about other tax
consequences of an investment in the Portfolio.
THE PORTFOLIO AND VANGUARD
The Portfolio is part of Vanguard World Fund, which in turn is a member of The
Vanguard Group, a family of more than 30 investment companies with more than 95
distinct investment portfolios and total net assets of more than $310 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.
10
<PAGE> 39
PLAIN TALK ABOUT
THE PORTFOLIO'S ADVISER
Lincoln Capital Management Company, an investment advisory firm founded in 1967,
currently manages more than $46 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 responsible for
overseeing the implementation of Lincoln's strategy for Vanguard U.S. Growth
Portfolio are:
J. PARKER HALL III, Chief Executive Officer and Managing Director of Lincoln;
has worked in investment management since 1957; with Lincoln since 1971; B.A.,
Swarthmore College; M.B.A., Harvard Business School.
DAVID M. FOWLER, Executive Vice President and Managing Director of Lincoln;
has worked in investment management since 1972; with Lincoln since 1984; B.S.,
Loyola University; M.B.A., Northwestern University.
Both have served in this capacity since Lincoln became the Portfolio's
adviser in August 1987.
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 calculated by applying a quarterly rate,
based on the following annual percentage rates, to the Portfolio's average
month-end assets for the quarter:
<TABLE>
<CAPTION>
ASSETS MANAGED FEE
--------------------------------------------
<S> <C> <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, 1997, the investment advisory fee paid to
Lincoln was $8.47 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 get the best available price and most
favorable execution from these brokers with respect to all transactions.
At times, Lincoln may choose brokers who charge higher commissions in the
interest of obtaining better execution of a transaction. If more than one broker
can obtain the best available price and favorable execution of a transaction,
then Lincoln is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to Lincoln or the Portfolio.
However, Lincoln will not pay higher commissions specifically for the purpose of
obtaining research services. The Portfolio may direct Lincoln to use a
particular broker for certain transactions in exchange for commission rebates or
research services provided to the Portfolio.
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.
11
<PAGE> 40
GENERAL INFORMATION
The U.S. Growth Portfolio is one of two Portfolios of Vanguard World Fund, Inc.
The other 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 for investment management purposes operate like
separate companies.
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. Annual meetings will not be held by the Portfolio
except as required by the Investment Company Act of 1940. A meeting will be
scheduled to vote on the removal of a director if the holders of at least 10% of
the Portfolio's shares request a meeting in writing.
12
<PAGE> 41
INVESTING WITH VANGUARD
FOR PLAN PARTICIPANTS
Vanguard U.S. Growth Portfolio is an investment option in your retirement or
savings plan. Your plan administrator 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 or Vanguard, including
the Portfolio's investment objective, strategy, or risks, contact
Vanguard's Participant Services Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan
administrator or the organization that provides recordkeeping services
for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Portfolio's shares are processed
as soon as they have been received by Vanguard in good order. Good order means
that your request includes complete information on your contribution, exchange,
or redemption, and that Vanguard has received the appropriate assets.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. However,
because excessive exchanges can potentially disrupt the management of the
Portfolio and increase its transaction costs, Vanguard reserves the right to
refuse any exchange request. In addition, certain investment options,
particularly funds made up of company stock or investment contracts, may be
subject to unique restrictions. Contact your plan administrator for details on
the exchange policies that apply to your plan.
Before making an exchange, you should consider the following:
- - Before you exchange to another Vanguard fund available in your plan,
you should read that fund's prospectus. Contact Participant Services,
toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Your plan
administrator can explain how frequently exchanges are allowed.
FOR OTHER INSTITUTIONAL INVESTORS
If you have questions about Vanguard U.S. Growth Portfolio, including how to
establish an account, call Vanguard, toll-free, at 1-800-523-1036.
If you have questions about an existing account, contact your Vanguard
account administrator.
TRANSACTIONS
Purchases, exchanges, or redemptions of the Portfolio's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your purchase, exchange, or
redemption, and that Vanguard has received the appropriate assets. The price of
shares bought, exchanged, or sold
13
<PAGE> 42
INVESTING WITH VANGUARD (continued)
will be the Portfolio's next-determined net asset value after Vanguard has
processed your request, provided your request has been received before the close
of trading on the New York Stock Exchange (generally 4 p.m. Eastern time).
Vanguard must consider the interests of all Portfolio shareholders and
so reserves the right to:
- - Delay or reject any purchase or exchange request that may disrupt the
Portfolio's operation or performance.
- - Revise or terminate the exchange privilege or limit the amount of an
exchange, at any time, without notice.
- - Take up to seven days to deliver your redemption proceeds.
- - Pay redemption proceeds -- in whole or in part -- through a
distribution in kind of readily marketable securities.
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ON THE Use your personal computer to visit
WORLD WIDE WEB Vanguard's education-oriented website,
http://www.vanguard.com which provides timely news and
information about Vanguard funds and
services; an online "university" that
offers a variety of mutual fund classes;
and easy-to-use, interactive tools to
help you create your own investment and
retirement strategies.
14
<PAGE> 43
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about
Vanguard U.S. Growth Portfolio, including its investment objective, risks,
strategy, 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 the 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 strategy? (page 5)
- - Who should invest in the Portfolio? (page 4)
- - The risks associated with the Portfolio? (pages 4 - 8)
- - 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)
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
Reading this prospectus will help you to decide whether the 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.
15
<PAGE> 44
ABOUT THE QUIZ
Knowing your risk tolerance is important when you are making an investment
decision. To give you a general idea of your comfort level with investing,
circle the response that most closely matches your personal situation. Keep in
mind, though, that there is no "foolproof" way to accurately gauge your risk
tolerance. Scoring for the quiz is below.
HOW TO SCORE THE QUIZ
Use the number of your answer as the number of points scored. For instance, if
you chose answer #3 to a question, that's worth three points. Add up your points
and check below for the type of investor you are. (Note: If you chose answer #1
or #2 to Question C, subtract five points from your total score.)
- - If you scored between 0 and 25 points, you are considered a
conservative investor.
- - If you scored between 26 and 32 points, you are considered a moderate
investor.
- - If you scored between 33 and 35 points, you are considered an
aggressive investor.
A SIMPLE RISK QUIZ
A. I HAVE BEEN INVESTING IN STOCK AND BOND MUTUAL FUNDS (OR IN INDIVIDUAL
STOCKS OR BONDS) FOR . . .
1. Less than a year
2. 1 - 2 years
3. 3 - 4 years
4. 5 - 9 years
5. 10 years or more
B. WHEN IT COMES TO INVESTING IN STOCK OR BOND MUTUAL FUNDS (OR INDIVIDUAL
STOCKS OR BONDS), I WOULD SAY I'M . . .
1. A very inexperienced investor
2. A somewhat inexperienced investor
3. A somewhat experienced investor
4. An experienced investor
5. A very experienced investor
C. I AM COMFORTABLE WITH INVESTMENTS THAT MAY LOSE MONEY FROM TIME TO TIME IF
THEY OFFER THE POTENTIAL FOR HIGHER RETURNS.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
D. I WILL KEEP AN INVESTMENT EVEN IF IT LOSES 10% OF ITS VALUE OVER THE COURSE
OF A YEAR.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
E. IN ADDITION TO MY LONG-TERM INVESTMENTS, I HAVE EMERGENCY SAVINGS EQUAL TO
____ MONTHS OF MY TAKE-HOME PAY.
1. Zero
2. One
3. Two
4. Three
5. Four or more
F. I FIND IT EASY TO PAY MY MONTHLY BILLS FROM MY CURRENT PAY.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
G. OVERALL, MY PERSONAL FINANCIAL SITUATION IS SECURE.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
16
<PAGE> 45
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,
U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements,
commercial paper, and banker's acceptances.
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 investments.
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.
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, with the ending 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> 46
[The Vanguard Group logo]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482
For Participants in
Employer-Sponsored Plans
PARTICIPANT SERVICES CENTER
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
For information on the Vanguard funds in your plan, Monday through Friday 8:30
a.m. to 9 p.m., Eastern time
FOR OTHER INSTITUTIONAL INVESTORS
1-800-523-1036
For information on Vanguard funds and services
ELECTRONIC ACCESS TO THE VANGUARD MUTUAL FUND
EDUCATION AND INFORMATION CENTER
World Wide Web
http://www.vanguard.com
E-mail
[email protected]
(C) 1997 Vanguard Marketing
Corporation, Distributor
I023N
<PAGE> 47
VANGUARD
INTERNATIONAL GROWTH
PORTFOLIO
Prospectus
December 12, 1997
This prospectus contains financial data for the Portfolio through the fiscal
year ended August 31, 1997.
[GRAPHIC OF SHIP]
[VANGUARD LOGO]
<PAGE> 48
VANGUARD INTERNATIONAL GROWTH PORTFOLIO
An International Stock Mutual Fund
<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 Strategy 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 13
Investing
with Vanguard 14
Services and
Account Features 14
Types of Accounts 15
Distribution Options 16
Buying Shares 17
Redeeming Shares 18
Portfolio and
Account Updates 21
Prospectus Postscript 23
Risk Quiz 24
Glossary Inside Back Cover
</TABLE>
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 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 (dated December 12, 1997) containing more
information about the Portfolio is, by reference, part of this prospectus and
may be obtained without charge by writing to Vanguard, calling our Investor
Information Department at 1-800-662-7447, or visiting the Securities and
Exchange Commission's website (http://www.sec.gov).
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategy 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 other 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> 49
PORTFOLIO PROFILE VANGUARD INTERNATIONAL GROWTH PORTFOLIO
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 dividend income.
- - Investors unwilling to accept significant fluctuations in share price.
RISKS OF THE PORTFOLIO (pages 4-8)
The 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.
INVESTMENT ADVISER (page 11)
Schroder Capital Management International, London, England.
INCEPTION DATE: September 30, 1981
NET ASSETS AS OF 8/31/97: $7.1 billion
PORTFOLIO'S EXPENSE RATIO FOR THE YEAR ENDED 8/31/97: 0.57%
LOADS, 12b-1 MARKETING FEES: None
SUITABLE FOR IRAS: Yes
MINIMUM INITIAL INVESTMENT: $3,000; $1,000 for IRAs and custodial accounts for
minors
NEWSPAPER ABBREVIATION: IntlGr
VANGUARD FUND NUMBER: 081
CUSIP NUMBER: 921910204
QUOTRON SYMBOL: VWIGX.Q
ACCOUNT FEATURES (page 14)
- - Telephone Redemption
- - Vanguard Direct Deposit Service(tm)
- - Vanguard Automatic Exchange Service(sm)
- - Vanguard Fund Express(R)
- - Vanguard Dividend Express(sm)
AVERAGE ANNUAL TOTAL RETURNS --
PERIODS ENDED AUGUST 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
-------------------------------
<S> <C> <C> <C>
International Growth
Portfolio 15.8% 14.6% 8.4%
MSCI EAFE Index 9.4 11.0 5.5%
</TABLE>
QUARTERLY RETURNS (%) 1988 - 1997 (intended to show volatility of returns)
[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> 50
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
1997 was 0.57%, or $5.70 per $1,000 of average net assets. The average actively
managed international equity mutual fund had expenses in 1996 of 1.70%, or
$17.00 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:
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
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 based upon those incurred in the fiscal year ended August 31, 1997.
ANNUAL PORTFOLIO OPERATING EXPENSES
<TABLE>
<S> <C> <C>
Management and Administrative Expenses: 0.30%
Investment Advisory Expenses: 0.17%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.03%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.07%
----
Total Other Expenses: 0.10%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.57%
====
</TABLE>
The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes that (1)
the Portfolio provides a return of 5% a year and (2) you redeem your investment
at the end of each period.
<TABLE>
<CAPTION>
-----------------------------------------------
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------
<S> <C> <C> <C>
$6 $18 $32 $71
-----------------------------------------------
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 51
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended August 31, 1997. 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 calling our Investor Information
Department.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.13 $ 14.70 $ 14.36 $ 12.02 $ 10.15 $ 10.31 $ 11.81 $ 11.61 $ 10.45 $ 14.21
--------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .19 .19 .20 .14 .12 .20 .18 .32 .13 .16
Net Realized and
Unrealized Gain (Loss)
on Investments 2.28 1.65 .32 2.31 1.96 (.05) (.80) .31 2.26 (1.36)
--------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 2.47 1.84 .52 2.45 2.08 .15 (.62) .63 2.39 (1.20)
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.19) (.20) (.18) (.11) (.21) (.19) (.20) (.15) (.16) (.13)
Distributions from
Realized Capital Gains (.55) (.21) -- -- -- (.12) (.68) (.28) (1.07) (2.43)
--------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.74) (.41) (.18) (.11) (.21) (.31) (.88) (.43) (1.23) (2.56)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $ 17.86 $ 16.13 $ 14.70 $ 14.36 $ 12.02 $ 10.15 $ 10.31 $ 11.81 $ 11.61 $ 10.45
====================================================================================================================================
TOTAL RETURN 15.84% 12.72% 3.76% 20.44% 21.06% 1.49% - 5.11% 5.25% 24.49% - 9.92%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $ 7,089 $ 4,997 $ 3,354 $ 2,989 $ 1,477 $ 919 $ 846 $ 796 $ 550 $ 454
Ratio of Total Expenses to
Average Net Assets 0.57% 0.56% 0.59% 0.46% 0.59% 0.58% 0.67% 0.68% 0.64% 0.67%
Ratio of Net Investment
Income to Average
Net Assets 1.26% 1.35% 1.53% 1.37% 1.27% 2.04 1.80 3.01 1.27 1.39%
Portfolio Turnover Rate 22% 22% 31% 28% 51% 58% 49% 45% 50% 71%
Average Commission
Rate Paid $ .0015 $ .0223 N/A N/A N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a historical measure of dividend income, and total return is a
measure of past dividend income (assuming that it has been reinvested) plus
realized and unrealized 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 1997 with a net asset value (price) of $16.13 per
share. During the year, the Portfolio earned $.19 per share from investment
income (interest and dividends) and $2.28 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 $2.47 per share, $.74 per share was
returned to shareholders in the form of dividend and capital gains
distributions. The earnings ($2.47 per share) less distributions ($.74 per
share) resulted in a share price of $17.86 at the end of the year, an increase
of $1.73 per share (from $16.13 at the beginning of the period to $17.86 at the
end of the period). Assuming the shareholder had reinvested the distributions in
the purchase of more shares, the total return from the Portfolio was 15.84% for
the year.
As of August 31, 1997, the Portfolio had $7.09 billion in net assets; an
expense ratio of 0.57% ($5.70 per $1,000 of net assets); and net investment
income amounting to 1.26% of its average net assets. It sold and replaced
securities valued at 22% of its total net assets.
3
<PAGE> 52
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 hopes of a greater
increase in share price, or who prefer a higher portion of the fund's returns to
come as capital gains (which may be taxed at lower rates than dividend income).
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.
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 [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.
[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
4
<PAGE> 53
as disruptive to the efficient management of the Portfolio. 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.
INVESTMENT STRATEGY
This section explains how the investment adviser pursues the Portfolio's
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
strategy is not fundamental and can be changed by the Portfolio's Board of
Directors without shareholder approval. However, before making any important
change in its strategy, 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 long-term growth stocks; the remaining third
may be invested in stocks that pursue shorter-term opportunities.
[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, Australasia, Far
East (MSCI EAFE) Index, a widely used barometer of international 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, that the gap between best and worst tends to narrow over the
long term.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969 - 1996)
- ------------------------------------------------------------
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 13.9 15.8 14.9
- ------------------------------------------------------------
</TABLE>
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.
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 companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stocks may not be as liquid as the stocks of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than in the United
States. These factors, among others, could negatively impact the returns that
Americans receive from a foreign investment. For more information, see the
Portfolio's Statement of Additional Information.
5
<PAGE> 54
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1996. 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 15.8%, compared to 13.2% 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 because the International Growth Portfolio does
not hold the same securities held in the MSCI EAFE Index or any other market
index, the performance of the Portfolio will not mirror the returns of any
particular index.
[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 (SCMI), 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. SCMI
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.
[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, SCMI analyzes and ranks the
companies in that country that, SCMI believes, offer the potential for
above-average earnings growth. SCMI considers on-site evaluations a vital part
of the security selection process, visiting more than 6,000 companies in more
than 20 countries each year. The companies chosen by SCMI reflect a wide variety
of countries and industries.
6
<PAGE> 55
The top ten holdings (which amounted to 28% of the Portfolio's total net
assets) as of August 31, 1997, follow.
COMPANY COUNTRY
1. Novartis AG (Reg) Switzerland
2. ING Groep NV Netherlands
3. ABB AG (BER) Switzerland
4. Takeda Chemical Industries Ltd. Japan
5. Fuji Photo Film Co., Ltd. Japan
6. Elf Aquitaine SA France
7. Philips Electronics NV Netherlands
8. Veba AG Germany
9. British Petroleum Co., PLC United Kingdom
10. Murata Manufacturing 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 SCMI according to traditional methods of active
investment management, which means securities are bought and sold according to
SCMI's judgments about companies and their financial prospects, and about
foreign stock markets and economies in general.
[FLAG] THE PORTFOLIO IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT
SCMI 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 43%. (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. SCMI 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-rate funds to generate capital gains that
must be distributed to shareholders as taxable income. The average turnover rate
for all international stock funds is 56%.
7
<PAGE> 56
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.
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.
[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.
[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 other liquid portfolio securities
in the amount of the obligation underlying the futures or options contract. Only
a limited percentage of the Portfolio's assets -- 5% -- may be applied towards
the deposits required on futures contracts, and the value of all futures
contracts in which the Portfolio acquires an interest cannot exceed 20% of the
Portfolio's total assets.
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 reduce the Portfolio's transaction costs by buying futures instead of
actual stocks.
- - To add value to the Portfolio 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, the Portfolio has adopted fundamental limitations on some of its
investment policies. Some of these limitations are that the Portfolio may 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.
8
<PAGE> 57
- - Borrow money, except for temporary or emergency purposes to meet
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.
A complete list of applicable investment limitations can be found in the
Statement of Additional Information; these 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 8/31/97
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Growth 15.8% 10.6% 14.6% 8.4%
MSCI EAFE Index 9.4% 6.0% 11.0% 5.5%
</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, Australasia, Far East (MSCI 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 p.m. Eastern time)
on the New York Stock Exchange. Net asset value per
9
<PAGE> 58
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.
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 Funds. Different newspapers use
different abbreviations of the Portfolio's name, but the most common is INTLGR.
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.
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.
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. In addition, the Portfolio may occasionally be required
to make supplemental dividend or capital gains distributions at some other time
during the year. 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. Long-term
gains may be taxed at different rates depending on how long the Portfolio
held the securities. 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 by-products of the ordinary investment activities of the
Portfolio. Consequently, distributions may vary considerably from year to
year.
10
<PAGE> 59
- - 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 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 Portfolio is part of Vanguard World Fund, which in turn is a member of The
Vanguard Group, a family of more than 30 investment companies with more than 95
distinct investment portfolios and total net assets of more than $310 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, 33 Gutter Lane,
London, England EC2V 8AS, as its investment adviser. SCMI manages the Portfolio
subject to the control of the officers and Directors of the Fund.
SCMI is paid an advisory fee calculated by applying a quarterly rate, based on
the following annual percentage rates, to the Portfolio's average month-end
assets for the 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>
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.
11
<PAGE> 60
PLAIN TALK ABOUT
THE PORTFOLIO'S ADVISER
Schroder Capital Management International (SCMI) is part of a worldwide group of
banks and financial services companies known as The Schroder Group. The Group
manages more than $150 billion in assets. The manager responsible for overseeing
SCMI's strategy for Vanguard International Growth Portfolio is:
RICHARD FOULKES, Executive Vice President and Deputy Chairman of SCMI; with
SCMI since 1968; educated at the Sorbonne, France; M.A. from Cambridge
University, England.
He has served in this capacity since the Portfolio's inception in 1981.
In addition, SCMI'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.
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, 1997, the investment advisory fee paid to SCMI
was $10.22 million, which included a base fee of $8.24 million and, because the
Portfolio's cumulative total return performance bettered that of the MSCI EAFE
Index over the past 36 months, an additional $1.98 million.
The advisory agreement authorizes SCMI to choose brokers or dealers to handle
the purchases and sales of the Portfolio's securities, and directs SCMI to use
every effort to get the best available price and most favorable execution from
these brokers with respect to all transactions.
At times, SCMI may choose brokers who charge higher commissions in the
interest of obtaining better execution of a transaction. If more than one broker
can obtain the best available price and favorable execution of a transaction,
then SCMI is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to SCMI or the Portfolio. However,
SCMI will not pay higher commissions specifically for the purpose of obtaining
research services. The Portfolio may direct SCMI to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Portfolio.
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 SCMI or as an additional adviser. However, no such change
would be made before giving shareholders 30 days' notice, in writing.
12
<PAGE> 61
GENERAL INFORMATION
The International Growth Portfolio is one of two Portfolios of Vanguard World
Fund, Inc. The other 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 for investment management purposes operate like
separate companies.
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. Annual meetings will
not be held by the Portfolio except as required by the Investment Company Act of
1940. A meeting will be scheduled to vote on the removal of a Director if the
holders of at least 10% of the Portfolio's shares request a meeting in writing.
13
<PAGE> 62
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
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
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares.
TELEPHONE REDEMPTIONS Automatically set up for this Portfolio unless you
(SALES AND EXCHANGES) notify us otherwise.
VANGUARD DIRECT DEPOSIT Automatic method for depositing your paycheck or U.S.
SERVICE government payment (including Social Security and
[BOOK] government pension checks) into your account.
VANGUARD AUTOMATIC Automatic method for moving a fixed amount of money
EXCHANGE SERVICE from one Vanguard fund account to another.*
[BOOK]
VANGUARD FUND EXPRESS Electronic method for buying or selling shares. You
[BOOK] can transfer 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
[BOOK] capital gains distributions directly from your
Vanguard fund account to your bank, savings and loan,
or credit union account.
Vanguard Brokerage A cost-effective way to trade stocks, bonds, and
Services (VBS) options on major exchanges, Nasdaq, and other
[BOOK] 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" [BOOK] or to contribute to an IRA or other
retirement plan.
14
<PAGE> 63
TYPES OF ACCOUNTS
INDIVIDUAL OR OTHER ENTITY
Vanguard's account registration form can be used to establish a variety of
nonretirement accounts.
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
[BOOK] 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 To invest assets held in an existing trust. $3,000
[BOOK] minimum initial investment.
FOR THIRD-PARTY TRUSTEE To open an account as a retirement trust or plan
RETIREMENT INVESTMENTS based on an existing corporate or institutional plan.
(Vanguard is not the These accounts are established by the custodian or
custodian or trustee.) 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
You establish these accounts with a Vanguard adoption agreement -- not a
Vanguard account registration form. To request the appropriate adoption
agreement and forms, or to ask questions about investing for retirement, call
Investor Information at 1-800-662-7447. For retirement plan details, call
Individual Retirement Services at 1-800-662-2003.
FOR AN INDIVIDUAL RETIREMENT To open a retirement account in the name of
ACCOUNT (IRA) an individual. IRAs can be established with
(Vanguard Fiduciary Trust a contribution, a direct rollover from an
Company is the custodian.) employer's plan such as a 401(k), or an
asset transfer or roll-over 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
PENSION PLAN ACCOUNT (SEP-IRA) an employee. SEPs allow employers to make
(Vanguard Fiduciary Trust deductible contributions directly to IRAs
Company is the custodian.) established by their employees. A SEP can be
established by people who are self-employed,
small-business owners, partnerships, or
corporations.
FOR A SAVINGS INCENTIVE MATCH To open a retirement account in the name of
PLAN FOR EMPLOYEES ACCOUNT an employee. Created as part of the Small
(SIMPLE IRA) Business Job Protection Act of 1996, SIMPLEs
(Vanguard Fiduciary Trust replace SAR-SEPs. SIMPLEs are exclusively
Company is the custodian.) for employers that had 100 or fewer
employees in the most recent calendar year
and that do not maintain another
employer-sponsored retirement plan. A
SIMPLE can be established by people who are
self-employed, small-business owners,
partnerships, or corporations. Salary
reduction contributions may be made by the
employee, with matching or nonmatching
contributions from the employer.
15
<PAGE> 64
Investor Information 1-800-662-7447 -- Client Services 1-800-662-2739 --
Tele-Account 1-800-662-6273
TYPES OF ACCOUNTS (continued)
FOR A QUALIFIED RETIREMENT To open a retirement account that allows
PROGRAM ACCOUNT small-business owners or people who are
(Vanguard Fiduciary Trust self-employed to make tax-deductible
Company can be the trustee.) retirement contributions for themselves and
their employees into Profit-Sharing and
Money Purchase Pension (Keogh) plans.
FOR A 403(b)(7) CUSTODIAL ACCOUNT To open a retirement account that allows
(Vanguard Fiduciary Trust employees of tax-exempt institutions (for
Company is the custodian.) example, schools or hospitals) to make
pretax 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
automatically 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.
DIVIDENDS AND CAPITAL GAINS Both dividends and capital gains are paid by
in Cash 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, see Vanguard Dividend Express under
"Services and Account Features."
If you have elected to receive dividends and/or capital gain distributions in
cash and the postal service is unable to make delivery to your address of
record, your distribution option will be changed to reinvestment. No interest
will accrue on amounts represented by uncashed distribution checks.
16
<PAGE> 65
BUYING SHARES
You buy your shares at the Portfolio's next-determined net asset value after
Vanguard receives your request, provided we receive your request before the
close of trading on the New York Stock Exchange (generally 4 p.m. Eastern time).
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 custodial accounts for minors).
Complete and sign the application form.
Make your check payable to: The Vanguard Group - 81
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 - 81
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]
1-800-662-6273
Vanguard Tele-Account(R)
1-800-662-2739
Client Services
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, taxpayer I.D., and account type).
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, taxpayer I.D., and account type).
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.
Investor Information 1-800-662-7447 Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
17
<PAGE> 66
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
BUYING SHARES (continued)
BY WIRE
Wire to:
CoreStates Bank, N.A.
ABA 031000011
CoreStates No 01019897
[Temporary Account Number]
Vanguard International
Growth Portfolio
[Account Registration]
Attn Vanguard
AUTOMATICALLY
[AUTOMATIC ARTWORK]
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.
Vanguard offers a variety of ways that you can add to your account
automatically. See "Services and Account Features."
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
IMPORTANT NOTE: If you buy Portfolio shares through a registered broker-dealer
or investment adviser, the broker-dealer or adviser may charge you a service
fee.
It is important that you call Vanguard before you invest a large dollar
amount by wire or check. We must consider the interests of all Portfolio
shareholders and so reserve the right to delay or refuse any purchase that will
disrupt the Portfolio's operation or performance.
REDEEMING SHARES
IMPORTANT TAX NOTE: Any sale or exchange of shares in a nonretirement 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:
X Portfolio name.
X 10-digit account number.
X Name and address exactly as registered on that account.
X 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.
18
<PAGE> 67
REDEEMING SHARES (continued)
HOW TO SELL SHARES
You may withdraw any part of your account, at any time, by selling shares. 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 p.m. Eastern time) are processed at the
next business day's net asset value. No interest will accrue on amounts
represented by uncashed redemption checks.
The Portfolio reserves the right to close any nonretirement or
UGMA/UTMA account whose balance falls below the minimum initial investment. The
Portfolio will deduct a $10 annual fee if your nonretirement account balance
falls below $2,500 or if your UGMA/UTMA account balance falls below $500. The
fee is waived if your total Vanguard account assets are $50,000 or more.
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 we make every effort 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 limits 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, be sure to read its
prospectus. For a copy and for answers to questions you might have, call
Investor Information.
Investor Information 1-800-662-7447 -- Client Services 1-800-662-2739 --
Tele-Account 1-800-662-6273
19
<PAGE> 68
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
REDEEMING SHARES (continued)
SELLING OR EXCHANGING SHARES
BY TELEPHONE
[TELEPHONE GRAPHIC]
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 sell or exchange 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.
SELLING OR EXCHANGING SHARES
BY MAIL
[ENVELOPE GRAPHIC]
FIRST-CLASS mail to:
The Vanguard Group
Vanguard International Growth Portfolio
P.O. Box 1120
Valley Forge, PA 19482
EXPRESS or REGISTERED mail to:
The Vanguard Group
Vanguard International 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. To exchange into an
account with a different registration (including a different name, address, or
taxpayer identification number), you must provide the guaranteed signatures of
all current account owners on your written instructions.
RETIREMENT:
For information on how to request distributions from:
- - IRAs -- call Client Services.
- - SEP-IRAs, SIMPLE-IRAs, 403(b)(7) custodial accounts, and Profit
Sharing and Money Purchase Pension (Keogh) Plans -- call
Individual Retirement Services at 1-800-662-2003.
Depending on your account registration type, additional documentation
may be required.
EXCHANGING SHARES ONLINE
[COMPUTER GRAPHIC]
ACCOUNT TYPE
You may use your personal computer to exchange shares of most Vanguard funds by
accessing Vanguard's website (http://www.vanguard.com). To establish this
service for your account, you must first register through our website. We will
then send to you, by mail, an account access password that will enable you to
make online exchanges.
The Vanguard funds that you cannot purchase or sell through online exchange are
VANGUARD INDEX TRUST, VANGUARD BALANCED INDEX FUND, VANGUARD INTERNATIONAL
EQUITY INDEX FUND, VANGUARD REIT INDEX PORTFOLIO, VANGUARD TOTAL INTERNATIONAL
PORTFOLIO, AND VANGUARD GROWTH AND INCOME PORTFOLIO (formerly known as Vanguard
Quantitative Portfolios). These funds do permit online exchanges within IRAs and
other retirement accounts.
20
<PAGE> 69
REDEEMING SHARES (continued)
SELLING OR EXCHANGING SHARES
AUTOMATICALLY
[GRAPHIC]
ACCOUNT TYPE
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. We must consider the interests of all Portfolio shareholders and so
reserve the right to delay your redemption proceeds -- up to seven days -- if
the amount will disrupt the Portfolio's operation or performance.
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.
PORTFOLIO AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you clear, concise account and tax statements to help you keep
track of your Vanguard International Growth Portfolio account throughout the
year as well as when you are preparing your income tax returns.
In addition, you will receive financial reports about the Portfolio twice
a year. These comprehensive reports include an assessment of the Portfolio's
performance (and a comparison to its industry benchmark), an overview of the
markets, a report from the adviser, as well as a listing of its holdings and
other financial statements.
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
PORTFOLIO SUMMARY
[GRAPHIC]
Mailed quarterly; shows the market value of your account at the close of the
statement period, as well as distributions, purchases, sales, and exchanges 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 distributions,
proceeds from the sale of shares, and distributions from IRAs or other
retirement accounts.
AVERAGE COST STATEMENT
[GRAPHIC]
Issued quarterly for taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using the average cost single category method.
Investor Information 1-800-662-7447 -- Client Services 1-800-662-2739 --
Tele-Account 1-800-662-6273
21
<PAGE> 70
PORTFOLIO AND ACCOUNT UPDATES (continued)
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.
[GRAPHIC]
Toll-free access to Vanguard fund and account information -- as well as some
transactions -- through any Touch-Tone(TM) telephone. Tele-Account provides
total return, share price, price change, and yield quotations for all Vanguard
funds; gives your account balances and history (e.g., last transaction, latest
dividend distribution); and allows you to sell or exchange fund shares.
COMPUTER ACCESS
VANGUARD ON THE
WORLD WIDE WEB
http://www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
Investor Information 1-800-662-7447 Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
22
<PAGE> 71
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about
Vanguard International Growth Portfolio, including its investment objective,
risks, strategy, 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 strategy? (page 5)
/ / Who should invest in the Portfolio? (page 4)
/ / The risks associated with the Portfolio? (pages 4 - 8)
/ / Whether the Portfolio is federally insured?
(inside front cover)
/ / The Portfolio's expenses? (page 2)
/ / The background of the Portfolio's investment manager?
(page 12)
/ / How to open an account? (page 17)
/ / How to sell or exchange shares? (page 19)
/ / How often you'll receive statements and financial reports?
(page 21)
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
Reading this prospectus will help you to decide whether Vanguard International
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.
23
<PAGE> 72
ABOUT THE QUIZ
Knowing your risk tolerance is important when you are making an investment
decision. To give you a general idea of your comfort level with investing,
circle the response that most closely matches your personal situation. Keep in
mind, though, that there is no "foolproof" way to accurately gauge your risk
tolerance. Scoring for the quiz is below.
HOW TO SCORE THE QUIZ
Use the number of your answer as the number of points scored. For instance, if
you chose answer #3 to a question, that's worth three points. Add up your points
and check below for the type of investor you are. (Note: If you chose answer #1
or #2 to Question C, subtract five points from your total score.)
- - If you scored between 0 and 25 points, you are considered a
conservative investor.
- - If you scored between 26 and 32 points, you are considered a moderate
investor.
- - If you scored between 33 and 35 points, you are considered an
aggressive investor.
A SIMPLE RISK QUIZ
A. I HAVE BEEN INVESTING IN STOCK AND BOND MUTUAL FUNDS (OR IN INDIVIDUAL STOCKS
OR BONDS) FOR . . .
1. Less than a year
2. 1 - 2 years
3. 3 - 4 years
4. 5 - 9 years
5. 10 years or more
B. WHEN IT COMES TO INVESTING IN STOCK OR BOND MUTUAL FUNDS (OR INDIVIDUAL
STOCKS OR BONDS), I WOULD SAY I'M . . .
1. A very inexperienced investor
2. A somewhat inexperienced investor
3. A somewhat experienced investor
4. An experienced investor
5. A very experienced investor
C. I AM COMFORTABLE WITH INVESTMENTS THAT MAY LOSE MONEY FROM TIME TO TIME IF
THEY OFFER THE POTENTIAL FOR HIGHER RETURNS.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
D. I WILL KEEP AN INVESTMENT EVEN IF IT LOSES 10% OF ITS VALUE OVER THE COURSE
OF A YEAR.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
E. IN ADDITION TO MY LONG-TERM INVESTMENTS, I HAVE EMERGENCY SAVINGS EQUAL TO
____ MONTHS OF MY TAKE-HOME PAY.
1. Zero
2. One
3. Two
4. Three
5. Four or more
F. I FIND IT EASY TO PAY MY MONTHLY BILLS FROM MY CURRENT PAY.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
G. OVERALL, MY PERSONAL FINANCIAL SITUATION IS SECURE.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
24
<PAGE> 73
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,
U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements,
commercial paper, and banker's acceptances.
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 the
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.
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.
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, 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> 74
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, PA 19482
<TABLE>
<S> <C> <C>
INVESTOR INFORMATION VANGUARD BROKERAGE ELECTRONIC ACCESS TO THE
DEPARTMENT SERVICES VANGUARD MUTUAL FUND
1-800-662-7447 (SHIP) 1-800-992-8327 EDUCATION AND INFORMATION
TEXT TELEPHONE: For information on trading CENTER
1-800-952-3335 stocks, bonds, and options World Wide Web
For information on our funds, at reduced commissions http://www.vanguard.com
fund services, and retirement
accounts; requests for VANGUARD TELE-ACCOUNT(R) E-mail
literature 1-800-662-6273 (ON-BOARD) [email protected]
For 24-hour automated access
CLIENT SERVICES DEPARTMENT to price and yield, information
1-800-662-2739 (CREW) on your account, certain
TEXT TELEPHONE: transactions
1-800-662-2738
For information on your
account, account transactions,
account statements
</TABLE>
(c) 1997 Vanguard Marketing
Corporation, Distributor
P081N
<PAGE> 75
VANGUARD
INTERNATIONAL GROWTH
PORTFOLIO
Institutional Prospectus
December 12, 1997
This prospectus contains financial data for the Portfolio through the fiscal
year ended August 31, 1997.
[GRAPHIC OF SHIP]
(A MEMBER OF THE VANGUARD GROUP(R) LOGO)
<PAGE> 76
VANGUARD INTERNATIONAL GROWTH PORTFOLIO An International Stock Mutual Fund
<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 Strategy 5
Investment Policies 7
Investment Limitations 8
Investment
Performance 9
Share Price 9
Dividends, Capital
Gains, and Taxes 10
The Portfolio and
Vanguard 10
Investment Adviser 11
General Information 12
Investing
with Vanguard
- - For Plan Participants 13
- - For Other
Institutional Investors 13
Accessing Fund Information by
Computer 14
Prospectus Postscript 15
Risk Quiz 16
Glossary Inside Back Cover
</TABLE>
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 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.
IMPORTANT NOTE
This prospectus is intended for institutional clients and for participants in
employer-sponsored retirement or savings plans. Another version -- for investors
who would like to open a personal account -- can be obtained by calling Vanguard
at 1-800-662-7447.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
A Statement of Additional Information (dated December 12, 1997) containing more
information about the Portfolio is, by reference, part of this prospectus and
may be obtained without charge by contacting Vanguard (see back cover), or
visiting the Securities and Exchange Commission's website (http://www.sec.gov).
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategy 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 your needs. 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> 77
PORTFOLIO PROFILE VANGUARD INTERNATIONAL GROWTH PORTFOLIO
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 dividend income.
- - Investors unwilling to accept significant fluctuations in share price.
RISKS OF THE PORTFOLIO (Pages 4-8)
The 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. In participant accounts, all distributions are
automatically reinvested.
INVESTMENT ADVISER (Page 11)
Schroder Capital Management International, London, England.
INCEPTION DATE: September 30, 1981
NET ASSETS AS OF 8/31/97: $7.1 billion
PORTFOLIO'S EXPENSE RATIO FOR THE
YEAR ENDED 8/31/97: 0.57%
NEWSPAPER ABBREVIATION: IntlGr
VANGUARD FUND NUMBER: 081
CUSIP NUMBER: 921910204
QUOTRON SYMBOL: VWIGX.Q
AVERAGE ANNUAL TOTAL RETURNS--
PERIODS ENDED AUGUST 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
--------------------------
<S> <C> <C> <C>
International Growth
Portfolio 15.8% 14.6% 8.4%
MSCI EAFE Index 9.4 11.0 5.5
</TABLE>
QUARTERLY RETURNS (%) 1988-1997 (intended to show volatility of returns)
[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> 78
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
1997 was 0.57%, or $5.70 per $1,000 of average net assets. The average actively
managed international equity mutual fund had expenses in 1996 of 1.70%, or
$17.00 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:
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<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 based upon those incurred in the fiscal year ended August 31, 1997.
ANNUAL PORTFOLIO OPERATING EXPENSES
<TABLE>
<S> <C> <C>
Management and Administrative Expenses: 0.30%
Investment Advisory Expenses: 0.17%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.03%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.07%
----
Total Other Expenses: 0.10%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.57%
====
</TABLE>
The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes that (1)
the Portfolio provides a return of 5% a year and (2) you redeem your investment
at the end of each period.
<TABLE>
<CAPTION>
------------------------------------------
1 Year 3 Years 5 Years 10 Years
------------------------------------------
<S> <C> <C> <C>
$6 $18 $32 $71
------------------------------------------
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 79
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended August 31, 1997. 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 calling Vanguard (see back cover).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Year Ended August 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.13 $ 14.70 $ 14.36 $ 12.02 $ 10.15 $ 10.31
-----------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .19 .19 .20 .14 .12 .20
Net Realized and
Unrealized Gain (Loss)
on Investments 2.28 1.65 .32 2.31 1.96 (.05)
-----------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 2.47 1.84 .52 2.45 2.08 .15
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.19) (.20) (.18) (.11) (.21) (.19)
Distributions from
Realized Capital Gains (.55) (.21) -- -- -- (.12)
-----------------------------------------------------------------
TOTAL DISTRIBUTIONS (.74) (.41) (.18) (.11) (.21) (.31)
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $ 17.86 $ 16.13 $ 14.70 $ 14.36 $ 12.02 $ 10.15
==================================================================================================
TOTAL RETURN 15.84% 12.72% 3.76% 20.44% 21.06% 1.49%
==================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $ 7,089 $ 4,997 $ 3,354 $ 2,989 $ 1,477 $ 919
Ratio of Total Expenses to
Average Net Assets 0.57% 0.56% 0.59% 0.46% 0.59% 0.58%
Ratio of Net Investment
Income to Average
Net Assets 1.26% 1.35% 1.53% 1.37% 1.27% 2.04%
Portfolio Turnover Rate 22% 22% 31% 28% 51% 58%
Average Commission
Rate Paid $ .0015 $ .0223 N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Year Ended August 31,
------------------------------------------------
1991 1990 1989 1988
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 11.81 $ 11.61 $ 10.45 $ 14.21
------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .18 .32 .13 .16
Net Realized and
Unrealized Gain (Loss)
on Investments (.80) .31 2.26 (1.36)
------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS (.62) .63 2.39 (1.26)
- ---------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.20) (.15) (.16) (.13)
Distributions from
Realized Capital Gains (.68) (.28) (1.07) (2.43)
------------------------------------------------
TOTAL DISTRIBUTIONS (.88) (.43) (1.23) (2.56)
- ---------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $ 10.31 $ 11.81 $ 11.61 $ 10.45
=================================================================================
TOTAL RETURN -5.11% 5.25% 24.49% -9.92%
=================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $ 846 $ 796 $ 550 $ 454
Ratio of Total Expenses to
Average Net Assets 0.67% 0.68% 0.64% 0.67%
Ratio of Net Investment
Income to Average
Net Assets 1.80% 3.01% 1.27% 1.39%
Portfolio Turnover Rate 49% 45% 50% 71%
Average Commission
Rate Paid N/A N/A N/A N/A
- ---------------------------------------------------------------------------------
</TABLE>
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a historical measure of dividend income, and total return is a
measure of past dividend income (assuming that it has been reinvested) plus
realized and unrealized 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 1997 with a net asset value (price) of $16.13 per
share. During the year, the Portfolio earned $.19 per share from investment
income (interest and dividends) and $2.28 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 $2.47 per share, $.74 per share was
returned to shareholders in the form of dividend and capital gains
distributions. The earnings ($2.47 per share) less distributions ($.74 per
share) resulted in a share price of $17.86 at the end of the year, an increase
of $1.73 per share (from $16.13 at the beginning of the period to $17.86 at the
end of the period). Assuming the shareholder had reinvested the distributions in
the purchase of more shares, the total return from the Portfolio was 15.84% for
the year.
As of August 31, 1997, the Portfolio had $7.09 billion in net assets; an
expense ratio of 0.57% ($5.70 per $1,000 of net assets); and net investment
income amounting to 1.26% of its average net assets. It sold and replaced
securities valued at 22% of its total net assets.
3
<PAGE> 80
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 hopes of a greater
increase in share price, or who prefer a higher portion of the fund's returns to
come as capital gains (which may be taxed at lower rates than dividend income).
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.
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 [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.
[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, and money market 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 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
4
<PAGE> 81
as disruptive to the efficient management of the Portfolio. 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. If you own shares of the Portfolio as an investment option in an
employer-sponsored retirement or savings plan, your plan dictates the rules
governing exchanges. Contact your plan administrator for details.
- - The Portfolio reserves the right to stop offering shares at any time.
INVESTMENT STRATEGY
This section explains how the investment adviser pursues the Portfolio's
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
strategy is not fundamental and can be changed by the Portfolio's Board of
Directors without shareholder approval. However, before making any important
change in its strategy, 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 long-term growth stocks; the remaining third
may be invested in stocks that pursue shorter-term opportunities.
[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, Australasia, Far
East (MSCI EAFE) Index, a widely used barometer of international 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, that the gap between best and worst tends to narrow over the
long term.
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,
closely monitoring daily transactions.
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 companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stocks may not be as liquid as the stocks of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than in the United
States. These factors, among others, could negatively impact the returns that
Americans receive from a foreign investment. For more information, see the
Portfolio's Statement of Additional Information.
5
<PAGE> 82
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1996)
- -----------------------------------------------------------------
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 13.9 15.8 14.9
- -----------------------------------------------------------------
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1996. 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 15.8%, compared to 13.2% 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 because the International Growth Portfolio does not
hold the same securities held in the MSCI EAFE Index or any other market index,
the performance of the Portfolio will not mirror the returns of any particular
index.
[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 (SCMI), 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. SCMI
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.
[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, SCMI analyzes and ranks the
companies in that country that, SCMI believes, offer the potential for
above-average earnings growth. SCMI considers on-site evaluations a vital part
of the security selection process, visiting more than 6,000 companies in more
than 20 countries each year. The
6
<PAGE> 83
companies chosen by SCMI reflect a wide variety of countries and industries.
The top ten holdings (which amounted to 28% of the Portfolio's total net
assets) as of August 31, 1997, follow.
<TABLE>
<CAPTION>
COMPANY COUNTRY
<S> <C>
1. Novartis AG (Reg) Switzerland
2. ING Groep NV Netherlands
3. ABB AG (BER) Switzerland
4. Takeda Chemical Industries Ltd. Japan
5. Fuji Photo Film Co., Ltd. Japan
6. Elf Aquitaine SA France
7. Philips Electronics NV Netherlands
8. Veba AG Germany
9. British Petroleum Co., PLC United Kingdom
10. Murata Manufacturing Co., Ltd. Japan
</TABLE>
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 SCMI according to traditional methods of active
investment management, which means securities are bought and sold according to
SCMI's judgments about companies and their financial prospects, and about
foreign stock markets and economies in general.
[FLAG] THE PORTFOLIO IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT
SCMI 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 43%. (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. SCMI will use these
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. The average turnover rate for all international
stock funds is 56%.
7
<PAGE> 84
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.
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.
contracts to eliminate some of the uncertainty of foreign exchange rates--but
will not speculate on changes in the market.
[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.
[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 other liquid portfolio securities in the
amount of the obligation underlying the futures or options contract. Only a
limited percentage of the Portfolio's assets--5%--may be applied towards the
deposits required on futures contracts, and the value of all futures contracts
in which the Portfolio acquires an interest cannot exceed 20% of the
Portfolio's total assets.
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 reduce the Portfolio's transaction costs by buying futures instead of
actual stocks.
- - To add value to the Portfolio 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, the Portfolio has adopted fundamental limitations on some of its
investment policies. Some of these limitations are that the Portfolio may not:
- - Invest more than 5% of its assets in the securities of companies that have
been in business for less than three years.
8
<PAGE> 85
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for temporary or emergency purposes to meet 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.
A complete list of applicable investment limitations can be found in the
Statement of Additional Information; these 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.
[BAR GRAPH]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 8/31/97
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
International Growth 15.8% 10.6% 14.6% 8.4%
MSCI EAFE Index 9.4% 6.0% 11.0% 5.5%
- --------------------------------------------------------------------------------
</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, Australasia, Far East (MSCI 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 p.m. Eastern time)
on the New York Stock Exchange. Net asset value per share is computed by adding
up the total value of the Portfolio's
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> 86
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.
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 Funds. 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. In addition, the Portfolio may occasionally be required
to make supplemental dividend or capital gains distributions at some other time
during the year.
If you own shares of the Portfolio as an investment option in an
employer-sponsored retirement or savings plan, these dividend and capital gains
distributions will be reinvested in additional Portfolio shares and accumulate
on a tax-deferred basis. You will not owe taxes on these distributions until you
begin withdrawals. You should consult your plan administrator, your plan's
Summary Plan Document, or your own tax adviser about the tax consequences of an
investment in the Portfolio and of any plan withdrawals.
If your Vanguard International Growth Portfolio investment is not part of an
employer-sponsored plan, you can receive distributions of income or capital
gains in cash, or you may have them automatically reinvested in more shares of
the Portfolio. Both dividend and capital gains distributions--whether received
in cash or reinvested in additional shares--are subject to federal (and possibly
state and local) income taxes, no matter how long you have held the shares in
the Portfolio. You should consult your own tax adviser about other tax
consequences of an investment in the Portfolio.
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.
THE PORTFOLIO AND VANGUARD
The Portfolio is part of Vanguard World Fund, which in turn is a member of The
Vanguard Group, a family of more than 30 investment
10
<PAGE> 87
companies with more than 95 distinct investment portfolios and total net assets
of more than $310 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, 33 Gutter Lane,
London, England EC2V 8AS, as its investment adviser. SCMI manages the Portfolio
subject to the control of the officers and Directors of the Fund.
SCMI is paid an advisory fee calculated by applying a quarterly rate, based
on the following annual percentage rates, to the Portfolio's average month-end
assets for the 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, SCMI'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.
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>
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.
11
<PAGE> 88
PLAIN TALK ABOUT
THE PORTFOLIO'S ADVISER
Schroder Capital Management International (SCMI) is part of a worldwide group of
banks and financial services companies known as The Schroder Group. The Group
manages more than $150 billion in assets. The manager responsible for overseeing
SCMI's strategy for Vanguard International Growth Portfolio is:
RICHARD FOULKES, Executive Vice President and Deputy Chairman of SCMI; with
SCMI since 1968; educated at the Sorbonne, France; M.A. from Cambridge
University, England.
He has served in this capacity since the Portfolio's inception in 1981.
For the year ended August 31, 1997, the investment advisory fee paid to SCMI
was $10.22 million, which included a base fee of $8.24 million and, because the
Portfolio's cumulative total return performance bettered that of the MSCI EAFE
Index over the past 36 months, an additional $1.98 million.
The advisory agreement authorizes SCMI to choose brokers or dealers to handle
the purchases and sales of the Portfolio's securities, and directs SCMI to use
every effort to get the best available price and most favorable execution from
these brokers with respect to all transactions.
At times, SCMI may choose brokers who charge higher commissions in the
interest of obtaining better execution of a transaction. If more than one broker
can obtain the best available price and favorable execution of a transaction,
then SCMI is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to SCMI or the Portfolio. However,
SCMI will not pay higher commissions specifically for the purpose of obtaining
research services. The Portfolio may direct SCMI to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Portfolio.
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 SCMI 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 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 for investment management purposes operate like
separate companies.
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. Annual meetings will
not be held by the Portfolio except as required by the Investment Company Act of
1940. A meeting will be scheduled to vote on the removal of a Director if the
holders of at least 10% of the Portfolio's shares request a meeting in writing.
12
<PAGE> 89
INVESTING WITH VANGUARD
FOR PLAN PARTICIPANTS
Vanguard International Growth Portfolio is an investment option in your
retirement or savings plan. Your plan administrator 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 a Portfolio or about Vanguard,
including the Portfolio's investment objective, strategy, or risks,
contact Vanguard's Participant Services Center, toll-free, at
1-800-523-1188.
- - If you have questions about your account, contact your plan
administrator or the organization that provides recordkeeping services
for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Portfolio's shares are processed
as soon as they have been received by Vanguard in good order. Good order means
that your request includes complete information on your contribution, exchange,
or redemption, and that Vanguard has received the appropriate assets.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. However,
because excessive exchanges can potentially disrupt the management of the
Portfolio and increase its transaction costs, Vanguard reserves the right to
refuse any exchange request. In addition, certain investment options,
particularly funds made up of company stock or investment contracts, may be
subject to unique restrictions. Contact your plan administrator for details on
the exchange policies that apply to your plan.
Before making an exchange, you should consider the following:
- - Before you exchange to another Vanguard fund available in your plan,
you should read that fund's prospectus. Contact Participant Services,
toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Your plan
administrator can explain how frequently exchanges are allowed.
FOR OTHER INSTITUTIONAL INVESTORS
If you have questions about Vanguard International Growth Portfolio, including
how to establish an account, call Vanguard, toll-free, at 1-800-523-1036.
If you have questions about an existing account, contact your Vanguard
account administrator.
TRANSACTIONS
Purchases, exchanges, or redemptions of the Portfolio's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request
13
<PAGE> 90
INVESTING WITH VANGUARD (continued)
includes complete information on your purchase, exchange, or redemption, and
that Vanguard has received the appropriate assets. The price of shares bought,
exchanged, or sold will be the Portfolio's next-determined net asset value after
Vanguard has processed your request, provided your request has been received
before the close of trading on the New York Stock Exchange (generally 4 p.m.
Eastern time).
Vanguard must consider the interests of all Portfolio shareholders and
so reserves the right to:
- - Delay or reject any purchase or exchange request that may disrupt the
Portfolio's operation or performance.
- - Revise or terminate the exchange privilege or limit the amount of an
exchange, at any time, without notice.
- - Take up to seven days to deliver your redemption proceeds.
- - Pay redemption proceeds -- in whole or in part -- through a
distribution in kind of readily marketable securities.
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ON THE
WORLD WIDE WEB
http://www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website,
which provides timely news and information about Vanguard funds and services;
an online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
14
<PAGE> 91
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about
Vanguard International Growth Portfolio, including its investment objective,
risks, strategy, 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 strategy? (page 5)
/ / Who should invest in the Portfolio? (page 4)
/ / The risks associated with the Portfolio? (pages 4 - 8)
/ / Whether the Portfolio is federally insured?
(inside front cover)
/ / The Portfolio's expenses? (page 2)
/ / The background of the Portfolio's investment manager?
(page 12)
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
Reading this prospectus will help you to decide whether Vanguard International
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.
15
<PAGE> 92
ABOUT THE QUIZ
Knowing your risk tolerance is important when you are making an investment
decision. To give you a general idea of your comfort level with investing,
circle the response that most closely matches your personal situation. Keep in
mind, though, that there is no "foolproof" way to accurately gauge your risk
tolerance. Scoring for the quiz is below.
HOW TO SCORE THE QUIZ
Use the number of your answer as the number of points scored. For instance, if
you chose answer #3 to a question, that's worth three points. Add up your points
and check below for the type of investor you are. (Note: If you chose answer #1
or #2 to Question C, subtract five points from your total score.)
- - If you scored between 0 and 25 points, you are considered a
conservative investor.
- - If you scored between 26 and 32 points, you are considered a moderate
investor.
- - If you scored between 33 and 35 points, you are considered an
aggressive investor.
A SIMPLE RISK QUIZ
A. I HAVE BEEN INVESTING IN STOCK AND BOND MUTUAL FUNDS (OR IN INDIVIDUAL STOCKS
OR BONDS) FOR . . .
1. Less than a year
2. 1 - 2 years
3. 3 - 4 years
4. 5 - 9 years
5. 10 years or more
B. WHEN IT COMES TO INVESTING IN STOCK OR BOND MUTUAL FUNDS (OR INDIVIDUAL
STOCKS OR BONDS), I WOULD SAY I'M . . .
1. A very inexperienced investor
2. A somewhat inexperienced investor
3. A somewhat experienced investor
4. An experienced investor
5. A very experienced investor
C. I AM COMFORTABLE WITH INVESTMENTS THAT MAY LOSE MONEY FROM TIME TO TIME IF
THEY OFFER THE POTENTIAL FOR HIGHER RETURNS.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
D. I WILL KEEP AN INVESTMENT EVEN IF IT LOSES 10% OF ITS VALUE OVER THE COURSE
OF A YEAR.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
E. IN ADDITION TO MY LONG-TERM INVESTMENTS, I HAVE EMERGENCY SAVINGS EQUAL TO
____ MONTHS OF MY TAKE-HOME PAY.
1. Zero
2. One
3. Two
4. Three
5. Four or more
F. I FIND IT EASY TO PAY MY MONTHLY BILLS FROM MY CURRENT PAY.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
G. OVERALL, MY PERSONAL FINANCIAL SITUATION IS SECURE.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
16
<PAGE> 93
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,
U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements,
commercial paper, and banker's acceptances.
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 the
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.
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.
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, 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> 94
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482
FOR PARTICIPANTS IN
EMPLOYER-SPONSORED PLANS
PARTICIPANT SERVICES DEPARTMENT
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
For information on the
Vanguard funds in your plan,
Monday through Friday
8:30 a.m. to 9 p.m.,
Eastern time
FOR OTHER INSTITUTIONAL INVESTORS
1-800-523-1036
For information on Vanguard funds and services
ELECTRONIC ACCESS TO THE
VANGUARD MUTUAL FUND
EDUCATION AND INFORMATION
CENTER
World Wide Web
http://www.vanguard.com
E-mail
[email protected]
(C) 1997 Vanguard Marketing
Corporation, Distributor
I081N
<PAGE> 95
PART B
VANGUARD WORLD FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 12, 1997
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectuses (dated December 12, 1997). 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
The Share Price of Each Portfolio..................................................... 6
Purchase of Shares.................................................................... 7
Redemption of Shares.................................................................. 7
Dividends, Capital Gains and Taxes.................................................... 8
Investment Limitations................................................................ 8
Management of the Fund................................................................ 10
Investment Advisory Services.......................................................... 13
Portfolio Transactions................................................................ 15
General Information................................................................... 17
Financial Statements.................................................................. 18
Performance Measures.................................................................. 18
</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 CONTRACTS 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 transaction 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. Assets committed to futures contracts will be
segregated at the Fund's custodian bank to the extent required by law.
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
1
<PAGE> 96
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.
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 the Fund require that all of its
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish any
non-hedging positions do not exceed five percent of the value of the Fund's
portfolio. 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
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. 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
2
<PAGE> 97
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 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.
Utilization of futures transactions by a Portfolio does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a Portfolio could both lose money on futures contracts and
experience a decline in the value of its portfolio securities. There is also the
risk of loss by a Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Portfolio has an open position in a futures contract or
related option.
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. The Portfolios may be required to defer the recognition of
losses on futures contracts to the extent of any unrecognized gains on related
positions held by the Portfolios.
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. 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.
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 and, with respect to 65% of its
gross assets, will invest in the securities of at least three different
countries. The U.S. Growth Portfolio may invest up to 20% of its assets in
3
<PAGE> 98
securities of foreign companies. Investors should recognize that investing in
foreign companies involves certain special considerations which are not
typically associated with investing in U.S. companies.
CURRENCY RISK Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Portfolios may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Portfolios will
be affected favorably or unfavorably by changes in currency rates and in
exchange control regulations, and may incur costs in connection with conversions
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.
FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS 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.
COUNTRY RISK 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 Portfolios will endeavor to achieve most favorable execution
costs in their 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
Portfolios' foreign securities will be somewhat greater than the expenses for
the custodian arrangements for handling U.S. securities of equal value.
4
<PAGE> 99
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 foreign companies held by the Portfolios. However,
these foreign withholding taxes are not expected to have a significant impact on
the Portfolios, since each Portfolio seeks long-term capital appreciation and
any income should be considered incidental.
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 a 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 net assets, at the time of investment, will be invested in
repurchase agreements having maturities longer than seven days and in securities
subject to legal or contractual restrictions on resale or for which there are no
readily available market quotations. From time to time, the Fund's Board of
Directors may determine that certain restricted securities known as Rule 144A
securities are liquid and not subject to the 15% limitation described above.
LENDING OF SECURITIES Each Portfolio may lend its investment securities 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 net 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
5
<PAGE> 100
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 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.
YIELD AND TOTAL RETURN
The yield of the U.S. Growth Portfolio of the Fund for the 30-day period
ended August 31, 1997, was 1.01%.
The average annual total return of each Portfolio of the Fund for certain
periods ended August 31, 1997, is set forth below:
<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
8/31/97 8/31/97 8/31/97
------------ ------------- --------------
<S> <C> <C> <C>
U.S. Growth Portfolio............... +32.50% + 17.26% +14.14%
International Growth Portfolio...... +15.84% + 14.58% + 8.42%
</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.
THE SHARE PRICE OF EACH PORTFOLIO
Each Portfolio's share price, or "net asset value" per share, is calculated
by dividing the total assets of the Portfolio, less all liabilities, by the
total number of shares outstanding. The net asset value is determined as of the
close of the New York Stock Exchange (generally 4:00 p.m. Eastern time) on each
day the aforementioned exchange is open for trading.
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
Board of Directors deems in good faith to reflect fair value.
Bonds and other fixed income 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. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any material developments related to specific
securities.
Foreign securities are valued at the last quoted sales price, according to
the broadest and most representative market, available at the time the Portfolio
is valued. If events which 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 valued by such
methods as the Board of Directors deems in good faith to reflect fair value.
In 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 officially quoted daily exchange rates utilized by Morgan
Stanley Capital International in the calculation of their various benchmarking
indices. This officially quoted exchange rate may be determined prior to or
after the close of a particular 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.
6
<PAGE> 101
The share price for each Portfolio can be found daily in the mutual fund
listings of most major newspapers under the heading of Vanguard Funds.
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.
TRADING SHARES THROUGH CHARLES SCHWAB
You may purchase or redeem shares of Vanguard funds through Charles Schwab
& Co., Inc. ("Schwab"). The Vanguard funds have authorized Schwab to accept
purchase and redemption orders on the funds' behalf. An order placed through
Schwab is deemed to have been received by the funds at the time an authorized
Schwab broker, or an authorized designee of a Schwab broker, accepts the order.
When you place an order through Schwab, your order will be priced at the fund's
price when next computed after the order has been accepted by an authorized
Schwab broker or a broker's designee.
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.
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) all redemptions, regardless of the amount involved, when the proceeds
7
<PAGE> 102
are to be paid to someone other than the registered owner(s); and (2) 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
The following restrictions supplement the Fund's investment limitations as
set forth in the Prospectus. Except as otherwise indicated, these restrictions
are fundamental policies of each Portfolio which cannot be changed without the
approval of a majority (as defined in the Investment Company Act of 1940 (the
"1940 Act")) of the Portfolio's outstanding voting shares. Each Portfolio may
not under any circumstances:
(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 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
8
<PAGE> 103
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 three 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 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;
(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.).
The investment limitations set forth above are considered at the time that
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction. 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 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."
9
<PAGE> 104
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 August 31,
1997, 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 and Director * ALFRED M. RANKIN, JR., Director
Chairman and Director of The Vanguard Chairman, President, Chief Executive Officer,
Group, Inc., and of each of the investment and Director of NACCO Industries, Inc.;
companies in The Vanguard Group; Director Director of The BFGoodrich Company, and The
of The Mead Corporation, General Accident Standard Products Company.
Insurance, and Chris-Craft Industries, Inc. JOHN C. SAWHILL, Director
JOHN J. BRENNAN, President, Chief Executive President and Chief Executive Officer of The
Officer & Director * Nature Conservancy; formerly, Director and
President, Chief Executive Officer and Senior Partner of McKinsey & Co., and
Director of The Vanguard Group, Inc., and President of New York University; Director
of each of the other investment companies of Pacific Gas and Electric Company,
in The Vanguard Group. Procter & Gamble Company, and NACCO
ROBERT E. CAWTHORN, Director Industries.
Chairman Emeritus and Director of Rhone- JAMES O. WELCH, JR., Director
Poulenc Rorer, Inc.; Managing Director of Retired Chairman of Nabisco Brands, Inc.;
Global Health Care Partners/DLJ Merchant retired Vice Chairman and Director of RJR
Banking Partners; Director of Sun Company, Nabisco; Director of TECO Energy, Inc., and
Inc., and Westinghouse Electric Kmart Corporation.
Corporation. J. LAWRENCE WILSON, Director
BARBARA BARNES HAUPTFUHRER, Director Chairman and Chief Executive Officer of Rohm
Director of The Great Atlantic and Pacific & Haas Company; Director of Cummins Engine
Tea Company, IKON Office Solutions, Inc., Company, and The Mead Corporation; and
Raytheon Company, Knight-Ridder, Inc., Trustee of Vanderbilt University.
Massachusetts Mutual Life Insurance Co.,
and Ladies Professional Golf Association; RAYMOND J. KLAPINSKY, Secretary *
and Trustee Emerita of Wellesley College. Managing Director and Secretary of The
Vanguard Group, Inc.; Secretary of each of
BRUCE K. MACLAURY, Director the investment companies in The Vanguard
President Emeritus of The Brookings Group.
Institution; Director of the American
Express Bank, Ltd., the St. Paul Companies, RICHARD F. HYLAND, Treasurer *
Inc., and National Steel Corporation. Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The
BURTON G. MALKIEL, Director Vanguard Group.
Chemical Bank Chairman's Professor of
Economics, Princeton University; Director KAREN E. WEST, Controller *
of Prudential Insurance Co. of America, Principal of The Vanguard Group, Inc.;
Amdahl Corporation, Baker Fentress & Co., Controller of each of the investment
The Jeffrey Co., and Southern New England companies in The Vanguard Group.
Telecommunications Company. ---------------------------------------------
*Officers of the Fund are "interested
persons" as defined in the Investment Company
Act of 1940.
</TABLE>
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
10
<PAGE> 105
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, 1997, the Fund had
contributed capital of $1,090,000 to Vanguard, representing 5.5% 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, 1997, the Fund's allocated share of Vanguard's
actual net costs of operation relating to management and administrative services
(including transfer agency) totaled approximately $33,329,000.
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 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, 1997, the Fund
paid approximately $2,865,000 of the Group's distribution and marketing
expenses, which represented an effective annual rate of .03% 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 Tax-Free Fund, Vanguard
Pennsylvania Tax-Free Fund, Vanguard Ohio Tax-Free
11
<PAGE> 106
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 Index Fund, several portfolios of Vanguard
Fixed Income Securities Fund, Vanguard Tax-Managed Fund, the Aggressive Growth
Portfolio of Vanguard Horizon Fund, the Total International Portfolio of
Vanguard STAR Fund,a portion of Vanguard/ Windsor Fund, a portion of Vanguard
Explorer Fund, 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 1997 fiscal year to John C. Bogle, Chairman
was approximately $154,721 and to all Officers of the Fund, as a group, was
approximately $244,977.
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 1997 fiscal year
was approximately $8,250.
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, 1997.
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............... $3,670 $ 530 $15,000 $70,000
Robert E. Cawthorn.......... $3,670 $ 441 $13,000 $70,000
Bruce K. MacLaury........... $3,909 $ 506 $12,000 $65,000
Burton G. Malkiel........... $3,696 $ 356 $15,000 $70,000
Alfred M. Rankin, Jr. ...... $3,670 $ 279 $15,000 $70,000
John C. Sawhill............. $3,670 $ 331 $15,000 $70,000
James O. Welch, Jr. ........ $3,670 $ 407 $15,000 $70,000
J. Lawrence Wilson.......... $3,670 $ 294 $15,000 $70,000
</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 his or her service as Director or Trustee of 35 Vanguard
Funds (34 in the case of Mr. Malkiel; 28 in the case of Mr. MacLaury).
12
<PAGE> 107
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, 1995, 1996, and 1997, the Fund paid
advisory fees of $4,523,000, $6,139,000, and $8,475,000, respectively, to
Lincoln.
DESCRIPTION OF LINCOLN
Lincoln is an Illinois corporation in which a controlling interest is held
by the following persons: Timothy H. Ubben, Chairman; J. Parker Hall III, Chief
Executive Officer; Kenneth R. Meyer, President; Ray B. Zemon, Executive Vice
President; David M. Fowler, Executive Vice President; and Richard W. Knee,
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, 1998. 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
13
<PAGE> 108
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 at the end of each fiscal
quarter calculated by applying a quarterly rate, based on the following annual
percentage rates, to the average 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>
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
International Europe, Australasia, Far East ("MSCI EAFE") Index as follows:
(a) On assets of the Portfolio of $1 billion or less:
<TABLE>
<CAPTION>
THREE-YEAR PERFORMANCE ANNUAL INCENTIVE (+)/
DIFFERENTIAL VS. MSCI EAFE INDEX 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. MSCI EAFE INDEX 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 was
not fully operable until the quarter ended February 29, 1996, and, until that
date, was 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 MSCI 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 MSCI 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
14
<PAGE> 109
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 MSCI EAFE
Index for any period, expressed as a percentage of the MSCI EAFE Index level at
the beginning of such period, shall be the sum of (i) the change in the level of
the MSCI EAFE Index during such period and (ii) the value, computed consistently
with the MSCI EAFE Index, of cash distributions made by companies whose
securities comprise the MSCI EAFE Index accumulated to the end of such period.
For this purpose cash distributions on the securities which comprise the MSCI
EAFE Index shall be treated as reinvested in the MSCI EAFE Index at least as
frequently as the end of each calendar quarter following the payment of the
dividend. The foregoing notwithstanding, any computation of the investment
performance of the International Growth Portfolio and the investment record of
the MSCI EAFE Index shall be in accordance with any then applicable rules of the
Securities and Exchange Commission.
The Directors believe that the MSCI EAFE Index is an appropriate standard
against which the investment performance of the Fund's International Growth
Portfolio can be measured. The MSCI EAFE Index is the only index available which
covers the major international markets outside North America. The weighting of
securities in the MSCI 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, 1998. The
agreement may be terminated prior to that date, or continued after March 31,
1998, in accordance with the same provisions applicable to the Fund's agreement
with Lincoln.
During the three fiscal years ending August 31, 1995, 1996 and 1997,
respectively, the Fund paid Schroder Capital the following advisory fees:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Basic Fee.............................................. $4,369,000 $5,892,000 $ 8,245,000
Increase/(Decrease) for Performance Adjustment......... 518,000 1,545,000 1,980,000
---------- ---------- -----------
Total............................................. $4,887,000 $7,437,000 $10,225,000
========== ========== ===========
</TABLE>
DESCRIPTION OF SCHRODER CAPITAL
The fund is managed by the London branch office of Schroder Capital
Management International ("SCMI"). SCMI 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 $150 billion. Schroder
Capital Management International was established in London in 1979 to manage
international portfolios for U.S. institutions.
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
15
<PAGE> 110
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, each 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 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, 1995, 1996 and 1997, the Fund
paid $6,681,209, $10,614,940, and $11,987,643 in brokerage commissions,
respectively.
16
<PAGE> 111
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.
GENERAL INFORMATION
The Fund was organized as Ivest Fund, a Massachusetts Corporation, in 1959.
The Fund is now a Maryland Corporation and is authorized to issue 1,550,000,000
shares with a par value of $1.00 per share. Currently the Fund is offering
shares of two Portfolios with 500,000,000 shares allocated to the U.S. Growth
Portfolio and 550,000,000 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 U.S. Growth Portfolio are held by State
Street Bank and Trust Company, Boston, MA, and by Morgan Guaranty Trust Company,
New York, NY for the International Growth Portfolio. The Vanguard Group, Inc.,
Valley Forge, PA, serves as the Fund's Transfer and Dividend Disbursing Agent.
Price Waterhouse LLP, serves as independent accountants for the Fund and will
audit its financial statements annually. The Fund is not involved in any
litigation.
17
<PAGE> 112
FINANCIAL STATEMENTS
The Financial Statements of U.S. Growth and International Growth Portfolios
for the year ended August 31, 1997, including the financial highlights for each
of the five years in the period ended August 31, 1997, appearing in the
Portfolios' respective 1997 Annual Reports to Shareholders, and the reports
thereon of Price Waterhouse LLP, independent accountants, also appearing
therein, are incorporated by reference in this Statement of Additional
Information. The Portfolios' 1997 Annual Reports to Shareholders are 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 & POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
STANDARD & POOR'S MIDCAP 400 INDEX -- is composed of 400 medium sized
domestic stocks.
STANDARD & POOR'S/BARRA 600 VALUE INDEX -- contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S/BARRA 600 GROWTH INDEX -- contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX -- consists of the stocks in the Russell 1000
Index (comprising the 1,000 largest U.S.-based companies measured by total
market capitalization) with the lowest price-to-book ratios, comprising 50% of
the market capitalization of the Russell 1000.
WILSHIRE 5000 EQUITY INDEX -- consists of more than 7,000 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 -- composed of the 2,000 smallest stocks contained
in the Russell 3000, representing approximately 7% of the Russell 3000 total
market capitalization.
RUSSELL 2000(R) VALUE INDEX -- contains stocks from the Russell 2000 Index
with a less-than-average growth orientation.
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, Australasia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and
29 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.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
18
<PAGE> 113
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 BOND INDEX -- 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 -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index
and a 35% weighting in a blended equity composite (75% Standard & Poor's/BARRA
Value Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all
publicly issued, fixed rate, nonconvertible investment grade,
dollar-denominated, SEC-registered corporate debt rated AA or AAA.
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 $1.6 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 $700 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
19
<PAGE> 114
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.
20
