<PAGE> 1
VANGUARD
U.S. GROWTH
PORTFOLIO
Semiannual Report
February 28, 1997
[THE VANGUARD GROUP LOGO]
[PHOTO]
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[PHOTO]
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future. The montage includes
a bronze medallion with a likeness of our namesake, HMS Vanguard (Lord Nelson's
flagship at The Battle of the Nile); a clock built circa 1816 in Scotland,
featuring a portrait of Nelson; and several views of our recently completed
campus, which is steeped in nautical imagery--from our buildings named after
Nelson's warships (Victory, Majestic, and Goliath are three shown), to our
artwork and ornamental compass rose.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
3
Report From
The Adviser
5
Performance
Summary
6
Financial
Statements
7
Directors And
Officers
INSIDE BACK COVER
<PAGE> 3
[PHOTO]
FELLOW SHAREHOLDER,
The bull market in stocks continued in truly astonishing fashion during the
six months ended February 28, 1997, the first half of Vanguard U.S. Growth
Portfolio's fiscal year.
The following table presents the six-month returns earned by the U.S.
Growth Portfolio and those achieved by its two primary performance benchmarks:
the average growth mutual fund and the unmanaged Standard & Poor's 500 Composite
Stock Price Index. As you can see, the Portfolio's total return (capital change
plus reinvested dividends) of +20.6% handily outpaced that of the average
competing fund but did not quite match the torrid pace set by the S&P 500 Index.
The Portfolio's return is based on an increase in net asset value from
$22.62 per share on August 31, 1996, to $25.25 per share on February 28, 1997,
with the latter figure adjusted for our annual dividend of $0.26 per share paid
from net investment income and distributions totaling $1.62 paid from net
realized capital gains.
<TABLE>
<CAPTION>
- --------------------------------------------------------
TOTAL RETURN
SIX MONTHS ENDED
FEBRUARY 28, 1997
- --------------------------------------------------------
<S> <C>
Vanguard U.S. Growth Portfolio +20.6%
- --------------------------------------------------------
Average Growth Fund +15.3%
- --------------------------------------------------------
S&P 500 Index +22.5%
- --------------------------------------------------------
</TABLE>
THE PERIOD IN REVIEW
The U.S. stock market provided gains in five of the six months ended February
28. After a setback in December, market averages rapidly regained the lost
ground and were again setting record highs in January and February. Conditions
were tailor-made for stocks, as economic activity and corporate earnings kept
growing while inflation remained in check. Interest rates stayed within
relatively benign ranges and ended the period slightly lower than they started.
In this Panglossian environment, the S&P 500 Index, which is dominated by
large-capitalization stocks, gained +22.5%. The rise was far less pronounced for
small-cap stocks. The Wilshire 4500 Equity Index, a measure of nearly all U.S.
stocks except those in the S&P 500 Index, provided a return of +9.7% during the
six months--a figure that ordinarily would be considered more than respectable.
Your Portfolio benefited from the market's tilt toward large-cap stocks,
since we emphasize such seasoned companies. The typical growth mutual fund has
roughly a third of its assets in smalland mid-cap stocks. Another source of our
5.3-percentage-point edge over the average competitor is that we truly emphasize
growth stocks, while many competing funds hold a blend of growth and value
stocks. During the six months ended February 28, growth stocks held an edge over
value stocks, with the S&P/BARRA Growth Index providing a +24.7% return versus
+20.3% on the S&P/BARRA Value Index.
Our modest shortfall of 1.9 percentage points versus the S&P 500 Index was
partly a matter of stock selection--our biggest holdings as a group didn't keep
pace with the Index, and we did not hold a number of the biggest and
best-performing stocks within it.
As we have noted many times in the past, the Index is a tough standard for
actively managed mutual funds to beat, since it exists only on paper and incurs
none of the
1
<PAGE> 4
operating, administrative, and transaction costs that all funds must
bear. Our expense ratio--0.43% of average net assets in fiscal 1996--puts us at
a disadvantage versus the Index, although it gives us a substantial edge over
the average growth fund, whose expense ratio is 1.50%.
IN SUMMARY
The stock market rise that began in August 1982 is nearing its 15th birthday.
Recent returns have been nothing short of spectacular; in the two years ended
February 28, the S&P 500 Index has produced a cumulative gain just shy of +70%.
While no one knows whether the aging bull market is near exhaustion, such
outsized returns cannot continue indefinitely. This observation is meant not to
alarm, but to remind investors that the stock market is not a one-way street.
The rewards so amply demonstrated in recent years are just the upside of
stock-market volatility. At some point, it is safe to say, the downside will
make its appearance.
However, because the market's swings--both up and down--are so hard to
forecast (who, indeed, could have predicted so strong a start to fiscal 1997?),
we believe that it is futile to try to discern the right moment to get into or
out of the stock market. Rather, we believe the best approach to investing is to
strike a balance of stock funds, bond funds, and money market funds appropriate
to your goals, financial situation, and tolerance for risk. Once you've decided
on such a program, we advise that you do not react to either the siren song of
bull markets or the despair of bear markets. Instead, "stay the course" toward
your long-term investment goals.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
Chairman of the Board President
March 17, 1997
2
<PAGE> 5
[PHOTO]
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED FEBRUARY 28, 1997
U.S. EQUITY MARKETS
The favorable confluence of steady economic growth, low inflation, and rising
corporate earnings made for a very rewarding six months. Stocks, as measured by
the Standard & Poor's 500 Composite Stock Price Index, gained 22.5%.
Much attention has been focused on the market's rise, irrational or
otherwise. In fact, investors' returns have varied widely, depending on their
definition of the "market." Clearly, the best rewards have been in larger
companies, such as those that dominate the S&P 500 Index. In fact, even within
the Index, it was the largest companies that prevailed: The 50 biggest (which
account for roughly half the Index's market value) gained 27.0% over the last
six months, 4.5 percentage points more than the overall Index. Looking at the
S&P 500 Index's performance by sector, financial stocks were strongest, with a
33.5% gain, followed closely by technology issues (up 32.6% as a group). Despite
the economy's good tone, several of the more economically sensitive sectors
failed to keep up with the market. Auto stocks gained 12.5%, while other stocks
closely related to consumer spending, such as retailers and restaurants, were up
10.1%.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED FEBRUARY 28, 1997
-------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- -------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 22.5% 26.2% 16.9%
Russell 2000 Index 8.8 12.6 13.1
MSCI-EAFE Index 2.4 3.5 9.3
- -------------------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 5.4% 5.4% 7.3%
Lehman 10-Year Municipal
Bond Index 5.3 5.3 7.8
Salomon 90-Day U.S. Treasury Bills 2.6 5.2 4.4
- -------------------------------------------------------------------
OTHER
Consumer Price Index 1.5% 3.0% 2.9%
- -------------------------------------------------------------------
</TABLE>
*Average annual.
Those who chose to invest outside the very largest companies earned
decidedly different returns. The 8.8% return of the Russell 2000 Index of small
stocks, for example, lagged the S&P 500 Index by more than half. Here there was
some symmetry with the other index, as small financial issues were the best
performers (up 21.3%), but small technology issues fell far short of their S&P
counterparts, rising a modest 3.9%. This sector includes many companies
competing for share in the crowded networking and Internet markets.
U.S. FIXED-INCOME MARKETS
Bond investors were challenged over the period. The stock market's double-digit
returns cast a long shadow, while bond prices reacted daily--and even hourly in
some cases--to economic reports. Perversely, news of an expanding economy would
push bond yields up (and bond prices down) as the market translated good
economic news into fear of higher inflation. Throughout the period, however,
inflation, as measured by the Consumer Price Index (CPI), remained remarkably
benign. The CPI registered an increase of 3.0% for
3
<PAGE> 6
the 12 months through February. As the month closed, however, a number of strong
economic reports led to an increasing conviction among bond investors that the
Federal Reserve would have to increase rates, albeit modestly.
In general, interest rates fell for the period, spurred by a strong
post-election rally. On February 28, the 30-year U.S. Treasury yield was 6.80%,
noticeably lower than the 7.12% level on August 31. Although the bond market's
primary focus was on inflation, with yields moving up or down accordingly, the
shrinking of the yield difference between Treasury issues and corporate bonds is
another development worth mentioning. The strong corporate earnings of recent
years, with the resulting lower risk of default, have decreased the premium
typically demanded by investors for higher credit risk. Significantly, the yield
difference between the 10-year Treasury note, backed by the full faith and
credit of the U.S. government, and the lowest-credit-quality bonds tracked by
Merrill Lynch has narrowed from 3.5 percentage points one year ago to 2.8
percentage points at the end of February. While not as dramatic for all
relationships, the shrinking yield premiums gave corporate bonds a performance
edge over Treasuries of comparable maturities.
Mortgage-backed issues and municipals were two other relative bright spots
over the past year. The generally stable-to-rising interest-rate environment
benefited mortgages as the threat of refinancings receded. Finally, municipal
bonds outpaced their U.S. Treasury counterparts as demand outstripped supply for
much of the year.
INTERNATIONAL EQUITY MARKETS
In general, foreign markets enjoyed a strong six months. For U.S. investors,
however, some of those returns were trimmed by a very strong dollar. The Morgan
Stanley Capital International-Europe, Australasia, Far East Index showed an
11.2% return. When that number is adjusted for U.S. investors, however, the
return drops to 2.4%.
Regionally, there was a striking disparity between the European and Pacific
markets. In aggregate, Europe's markets provided U.S. investors with a gain of
13.8%, while the Pacific markets declined -10.1%. The poor returns in the
Pacific region reflected ongoing concern about the health of the Japanese
economy. Growth in Japan has remained modest at best for several years despite
government efforts to stimulate the economy through public works programs and
tax incentives. The country is also wrestling with massive changes to its
financial infrastructure. In Europe, the picture was dramatically different,
with the region benefiting from a variety of factors. Among the most important
were (1) ongoing efforts to lower government deficits consistent with the
Maastricht Treaty guidelines; (2) improving economic growth; and (3) a greater
commitment by corporate executives to increasing "shareholder value."
4
<PAGE> 7
REPORT FROM THE ADVISER
After a powerful fiscal 1996, when the Standard & Poor's 500 Composite
Stock Price Index returned 18.7%, the subsequent six months, ending February
28, were even more extraordinary. The S&P 500 Index returned 22.5%. If you are
feeling symptoms of acrophobia, join the crowd!
Meanwhile, the U.S. Growth Portfolio reversed its relative performance in
the two periods. During fiscal 1996, the Portfolio earned 25.3%, which put it
6.6 percentage points ahead of the S&P 500 Index and 5.5 percentage points ahead
of the S&P/ BARRA Growth Index. In the first six months of fiscal 1997, we
earned a total return of 20.6%, roughly 2 percentage points behind the S&P 500
Index and 4 percentage points behind the growth index. In both periods, we were
well ahead of the average growth mutual fund (by about 12 percentage points in
fiscal 1996 and 5 percentage points in the first half of fiscal 1997). We
somewhat lagged the two indexes because of less-productive stock selections. Our
returns remained superior to those of competitors because of such favorable
factors as the tailwind provided by our emphasis on large-capitalization stocks,
a bit lower cash reserves than the typical competing fund holds, and a lower
expense ratio.
<TABLE>
<CAPTION>
- --------------------------------------------
COMPANY NET ASSETS
- --------------------------------------------
<S> <C>
1. Philip Morris* 5.1%
2. Coca-Cola 5.0
3. Intel* 4.5
4. Bristol-Myers Squibb* 4.4
5. Monsanto* 4.1
6. PepsiCo* 3.3
7. American Home Products 3.2
8. Eastman Kodak* 3.2
9. Procter & Gamble 3.2
10. SmithKline Beecham 3.1
--------
39.1%
- --------------------------------------------
</TABLE>
*New to top ten since August 31, 1996.
There were no huge changes in industry diversification within the Portfolio
during the period. We added about 5% of assets to consumer nondurables--Philip
Morris and Sears were the largest purchases. We eliminated the 4% stake in the
communications segment; AT&T is now gone. Otherwise, sector weights were not
materially changed.
We added to our Intel position (very strong earnings) and eliminated AMP
(weak earnings) and McDonald's (slowing growth). Within the health-care sector,
we eliminated Lilly (prematurely) and added materially to our commitment to
Bristol-Myers Squibb (your Portfolio's third-best performer for the six months).
The Portfolio holds 59 issues, one fewer than when the fiscal year began.
The stocks that constitute our top ten holdings sell at price/earnings
ratios that average 5% higher than those of the market. We expect the median
increase in their 1997 earnings to be 17% over 1996 versus a gain in the
upper-single digits for the overall market.
There were many big winners and few big losers in the Portfolio during the
six months, a reflection of the bull market. Winners include Intel, Philip
Morris, Bristol-Myers Squibb, and Coca-Cola. Among those issues that just
sputtered along behind the market were Electronic Data Systems, Informix, and
AT&T.
David Fowler, Portfolio Manager
Parker Hall, Portfolio Manager
Lincoln Capital Management Company
March 12, 1997
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by emphasizing investments in high-quality established growth companies that
sell at reasonable prices in relation to expected earnings and to valuations in
the broad stock market.
5
<PAGE> 8
PERFORMANCE SUMMARY
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolio. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Portfolio could lose money.
U.S. GROWTH PORTFOLIO
TOTAL INVESTMENT RETURNS: AUGUST 31, 1976-FEBRUARY 28, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------
U.S. GROWTH PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------
<S> <C> <C> <C> <C>
1977 -0.7% 1.7% 1.0% -1.8%
1978 19.9 2.5 22.4 12.4
1979 10.5 2.7 13.2 11.6
1980 11.9 3.7 15.6 18.2
1981 8.5 3.2 11.7 5.4
1982 -4.8 3.5 -1.3 3.2
1983 51.3 4.2 55.5 44.0
1984 0.9 1.9 2.8 6.1
1985 16.4 3.7 20.1 18.3
1986 23.6 3.0 26.6 39.1
1987 15.1 2.7 17.8 34.5
1988 -23.5 1.9 -21.6 -17.8
1989 39.6 1.1 40.7 39.2
1990 3.7 1.3 5.0 -5.0
1991 31.9 2.4 34.3 26.9
1992 7.5 1.3 8.8 7.9
1993 0.5 1.2 1.7 15.2
1994 5.5 1.5 7.0 5.5
1995 21.3 1.5 22.8 21.4
1996 23.5 1.8 25.3 18.7
1997* 19.4 1.2 20.6 22.5
- ----------------------------------------------------
</TABLE>
*Six months ended February 28, 1997.
See Financial Highlights table on page 11 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1996*
- -----------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION --------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Growth Portfolio 1/6/59 26.05% 12.92% 13.20% 1.57% 14.77%
- -----------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
6
<PAGE> 9
{PHOTO]
FINANCIAL STATEMENTS
FEBRUARY 28, 1997 (UNAUDITED)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Portfolio's holdings, including
each security's market value on the last day of the reporting period. Securities
are grouped and subtotaled by asset type (common stocks, preferred stocks,
bonds, etc.) and by industry sector. Other assets are added to, and liabilities
are subtracted from, the value of Total Investments to calculate the Portfolio's
Net Assets. Finally, Net Assets are divided by the outstanding shares of the
Portfolio to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the Portfolio's net assets on both a dollar and per-share
basis. Because all income and any realized gains must be distributed to
shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the Portfolio had available to distribute to shareholders as income
dividends or capital gains as of the statement date. Any Accumulated Net
Realized Losses, and any cumulative excess of distributions over net income or
net realized gains, will appear as negative balances. Unrealized Appreciation
(Depreciation) is the difference between the market value of the Portfolio's
investments and their cost, and reflects the gains (losses) that would be
realized if the Portfolio were to sell all of its investments at their
statement-date values.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
U.S. GROWTH PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (95.0%)
- ---------------------------------------------------------------------
BASIC MATERIALS (6.1%)
W.R. Grace & Co. 2,346,000 $ 124,338
Monsanto Co. 7,000,000 254,625
---------
378,963
---------
CAPITAL GOODS & CONSTRUCTION (4.2%)
The Boeing Co. 1,742,000 177,248
Honeywell, Inc. 576,000 40,968
Illinois Tool Works, Inc. 556,000 46,912
---------
265,128
---------
CONSUMER CYCLICAL (9.1%)
Carnival Corp. Class A 1,152,000 40,608
The Walt Disney Co. 1,180,000 87,615
Lowe's Cos., Inc. 2,550,000 93,075
Mattel, Inc. 2,873,000 71,466
May Department Stores Co. 1,490,000 69,471
Mirage Resorts, Inc. 761,000 18,930
- - Payless ShoeSource, Inc. 717,000 30,831
Sears, Roebuck & Co. 2,261,000 122,659
Warnaco Group 1,000,000 31,875
---------
566,530
---------
CONSUMER STAPLES (22.9%)
Campbell Soup Co. 900,000 81,112
The Coca-Cola Co. 5,150,000 314,150
Coca-Cola Enterprises, Inc. 330,000 20,377
Gillette Co. 1,626,000 128,657
PepsiCo, Inc. 6,331,000 208,132
Philip Morris Cos., Inc. 2,350,000 317,544
Procter & Gamble Co. 1,651,000 198,326
Unilever NV NY Registered
Shares 792,000 150,876
Unilever PLC ADR 125,000 12,969
---------
1,432,143
---------
ENERGY (2.2%)
Enron Oil & Gas Co. 600,000 12,150
- - Gulf Canada Resources Ltd. 1,341,000 9,387
- - Renaissance Energy Ltd. 1,950,000 55,280
- - Talisman Energy, Inc. 1,955,000 63,574
---------
140,391
---------
FINANCIAL (8.0%)
American International
Group, Inc. 1,232,000 149,072
Chase Manhattan Corp. 1,851,000 185,331
Household International, Inc. 914,000 88,544
Norwest Corp. 1,480,000 73,630
---------
496,577
---------
HEALTH CARE (19.3%)
American Home Products Corp. 3,152,000 201,728
Bristol-Myers Squibb Co. 2,111,000 275,485
Cardinal Health, Inc. 1,315,000 80,872
Columbia/HCA Healthcare Corp. 763,000 32,046
- - Fresenius Medical Care
AG ADR 1,377,000 43,376
Guidant Corp. 418,000 28,006
- - HealthCare Compare Corp. 781,000 33,193
Johnson & Johnson 2,132,000 122,857
- - Owen Healthcare, Inc. 218,000 5,995
Pfizer, Inc. 1,760,000 161,260
Pharmacia & Upjohn, Inc. 791,400 29,183
SmithKline Beecham PLC ADR 2,584,000 191,862
---------
1,205,863
---------
TECHNOLOGY (22.3%)
- - Altera Corp. 1,424,000 64,614
Automatic Data Processing, Inc. 4,170,000 177,746
- - Cascade Communications Corp. 300,000 9,263
- - Cisco Systems, Inc. 2,592,000 143,532
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
U.S. GROWTH PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
- - DSC Communications Corp. 860,000 $ 18,060
Eastman Kodak Co. 2,213,000 198,340
Electronic Data Systems Corp. 1,153,000 52,029
First Data Corp. 1,580,000 57,868
Hewlett-Packard Co. 2,906,000 162,736
- - Informix Corp. 2,000,000 34,750
Intel Corp. 1,973,000 279,919
Molex, Inc. Class A 630,000 20,948
- - Oracle Corp. 1,950,000 76,538
Reuters Holdings PLC ADR 290,000 18,596
- - Xilinx, Inc. 1,763,000 79,115
----------
1,394,054
----------
MISCELLANEOUS (0.9%)
Service Corp. International 1,900,000 55,100
----------
- ---------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $4,042,753) 5,934,749
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (4.6%)
- ---------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.35%, 3/3/97
(COST $284,884) $284,884 284,884
- ---------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%)
(COST $4,327,637) 6,219,633
- ---------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.4%)
- ---------------------------------------------------------------------
Other Assets--Note C 69,370
Liabilities (41,302)
----------
28,068
- ---------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------
Applicable to 247,476,170 outstanding
$1.00 par value shares
(authorized 500,000,000 shares) $6,247,701
=====================================================================
NET ASSET VALUE PER SHARE $25.25
=====================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------
AT FEBRUARY 28, 1997, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $4,227,662 $17.08
Undistributed Net
Investment Income 8,985 .04
Accumulated Net
Realized Gains 119,058 .48
Unrealized Appreciation--
Note E 1,891,996 7.65
- ---------------------------------------------------------------------
NET ASSETS $6,247,701 $25.25
=====================================================================
</TABLE>
8
<PAGE> 11
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Portfolio during
the reporting period, and details the operating expenses charged to the
Portfolio. These expenses directly reduce the amount of investment income
available to pay to shareholders as dividends. This Statement also shows any Net
Gain (Loss) realized on the sale of investments, and the increase or decrease in
the Unrealized Appreciation (Depreciation) on investments during the period.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
U.S. GROWTH PORTFOLIO
SIX MONTHS ENDED FEBRUARY 28, 1997
(000)
- -----------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 35,953
Interest 7,332
-----------
Total Income 43,285
-----------
EXPENSES
Investment Advisory Fees--Note B 3,868
The Vanguard Group--Note C
Management and Administrative 6,432
Marketing and Distribution 643
Taxes (other than income taxes) 193
Custodian Fees 8
Auditing Fees 5
Shareholders' Reports 109
Annual Meeting and Proxy Costs 29
Directors' Fees and Expenses 7
-----------
Total Expenses 11,294
Expenses Paid Indirectly--Note C (664)
-----------
Net Expenses 10,630
- -----------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 32,655
- -----------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 179,428
- -----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 763,338
- -----------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $975,421
=====================================================================================================
</TABLE>
9
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Portfolio's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
that is detailed in the Statement of Operations. The amounts shown as
Distributions to shareholders from the Portfolio's net income and capital gains
may not match the amounts shown in the Operations section, because distributions
are determined on a tax basis and may be made in a period different from the one
in which the income was earned or the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount shareholders
invested in the Portfolio, either by purchasing shares or by reinvesting
distributions, as well as the amounts redeemed. The corresponding numbers of
Shares Issued and Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
U.S. GROWTH PORTFOLIO
-------------------------------
SIX MONTHS YEAR
ENDED ENDED
FEB. 28, 1997 AUG. 31, 1996
(000) (000)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 32,655 $ 51,249
Realized Net Gain 179,428 307,968
Change in Unrealized Appreciation (Depreciation) 763,338 440,659
------------------------------
Net Increase in Net Assets Resulting from Operations 975,421 799,876
------------------------------
DISTRIBUTIONS
Net Investment Income (55,434) (49,433)
Realized Capital Gain (345,553) (97,161)
------------------------------
Total Distributions (400,987) (146,594)
------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 1,243,083 1,561,164
Issued in Lieu of Cash Distributions 391,846 131,833
Redeemed (505,926) (791,065)
------------------------------
Net Increase from Capital Share Transactions 1,129,003 901,932
- -----------------------------------------------------------------------------------------------------
Total Increase 1,703,437 1,555,214
- -----------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 4,544,264 2,989,050
------------------------------
End of Period $ 6,247,701 $ 4,544,264
=====================================================================================================
(1)Shares Issued (Redeemed)
Issued 50,354 72,254
Issued in Lieu of Cash Distributions 16,774 6,579
Redeemed (20,530) (36,694)
------------------------------
Net Increase in Shares Outstanding 46,598 42,139
=====================================================================================================
</TABLE>
10
<PAGE> 13
FINANCIAL HIGHLIGHTS
This table summarizes the Portfolio's investment results and distributions to
shareholders on a per-share basis. It also presents the Portfolio's Total Return
and shows net investment income and expenses as percentages of average net
assets. These data will help you assess: the variability of the Portfolio's net
income and total returns from year to year; the relative contributions of net
income and capital gains to the Portfolio's total return; how much it costs to
operate the Portfolio; and the extent to which the Portfolio tends to distribute
capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in the
Portfolio for one year. Finally, the table lists the Portfolio's Average
Commission Rate Paid, a disclosure required by the SEC beginning in 1996. This
rate is calculated by dividing total commissions paid on portfolio securities by
the total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. GROWTH PORTFOLIO
YEAR ENDED AUGUST 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -------------------------------------------------------
THROUGHOUT EACH PERIOD FEBRUARY 28, 1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $22.62 $18.83 $15.52 $14.71 $14.71 $13.69
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .14 .26 .25 .20 .21 .19
Net Realized and Unrealized Gain (Loss)
on Investments 4.37 4.39 3.24 .82 .05 1.02
---------------------------------------------------------------------
Total from Investment Operations 4.51 4.65 3.49 1.02 .26 1.21
---------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.26) (.29) (.18) (.21) (.18) (.19)
Distributions from Realized Capital Gains (1.62) (.57) -- -- (.08) --
---------------------------------------------------------------------
Total Distributions (1.88) (.86) (.18) (.21) (.26) (.19)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $25.25 $22.62 $18.83 $15.52 $14.71 $14.71
===================================================================================================================================
TOTAL RETURN 20.61% 25.28% 22.75% 6.98% 1.69% 8.83%
===================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $6,248 $4,544 $2,989 $1,963 $1,954 $1,441
Ratio of Total Expenses to
Average Net Assets 0.42%* 0.43% 0.47% 0.52% 0.49% 0.49%
Ratio of Net Investment Income to
Average Net Assets 1.20%* 1.32% 1.59% 1.30% 1.50% 1.52%
Portfolio Turnover Rate 35%* 44% 32% 47% 37% 24%
Average Commission Rate Paid $.0489 $.0492 N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
11
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
Vanguard U.S. Growth Portfolio is registered under the Investment Company Act of
1940 as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The Portfolio consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities not listed on an exchange are valued at
the latest quoted bid prices. Temporary cash investments are valued at cost,
which approximates market value.
2. FEDERAL INCOME TAXES: The Portfolio intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The Portfolio, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Under a contract that expires March 31, 1998, the Portfolio pays Lincoln
Capital Management Company an investment advisory fee calculated at an annual
percentage rate of average net assets. For the six months ended February 28,
1997, the advisory fee represented an effective annual rate of 0.14% of the
Portfolio's average net assets.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Portfolio under methods approved by the board of directors. At February
28, 1997, the Portfolio had contributed capital of $509,000 to Vanguard
(included in Other Assets), representing 2.5% of Vanguard's capitalization. The
Portfolio's directors and officers are also directors and officers of Vanguard.
Vanguard has asked the Portfolio's investment adviser to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate to the Portfolio part of the commissions generated.
Such rebates are used solely to reduce the Portfolio's administrative expenses.
For the six months ended February 28, 1997, these arrangements reduced the
Portfolio's expenses by $664,000 (an annual rate of 0.02% of average net
assets).
D. During the six months ended February 28, 1997, the Portfolio purchased
$1,659,203,000 of investment securities and sold $905,364,000 of investment
securities, other than U.S. government securities and temporary cash
investments.
E. At February 28, 1997, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $1,891,996,000,
consisting of unrealized gains of $1,924,924,000 on securities that had risen in
value since their purchase and $32,928,000 in unrealized losses on securities
that had fallen in value since their purchase.
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
12
<PAGE> 15
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director
of The Vanguard Group, Inc. and of
each of the investment companies in
The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer,
and Director of The Vanguard Group,
Inc. and of each of the investment
companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and
Director of Rhone-Poulenc Rorer Inc.;
Director of Sun Company, Inc. and
Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great
Atlantic and Pacific Tea Co., Alco
Standard Corp., Raytheon Co.,
Knight-Ridder, Inc., and Massa-
chusetts Mutual Life Insurance Co.;
Trustee Emeritus of Wellesley
College.
BRUCE K. MACLAURY, President Emeritus of The
Brookings Institution; Director of
American Express Bank Ltd., The St.
Paul Companies, Inc., and National
Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's
Professor of Economics, Princeton
University; Director of Prudential
Insurance Co. of America, Amdahl
Corp., Baker Fentress & Co., The
Jeffrey Co., and Southern New
England Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and
Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO
Industries, The BFGoodrich Co., and
The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive
Officer of The Nature Conservancy;
formerly, Director and Senior Partner of
McKinsey & Co.and President of New
York University; Director of Pacific Gas
and Electric Co., Procter & Gamble
Co., and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco
Brands, Inc.; retired Vice Chairman
and Director of RJR Nabisco;
Director of TECO Energy, Inc.
and Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive
Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.;
Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice
President and Secretary of The
Vanguard Group, Inc.; Secretary of
each of the investment companies in
The Vanguard Group.
RICHARD F. HYLAND, Treasurer; Principal of The
Vanguard Group, Inc.; Treasurer of
each of the investment companies in
The Vanguard Group.
KAREN E. WEST, Controller; Principal of The
Vanguard Group, Inc.; Controller of
each of the investment companies in
The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President,
Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President,
Institutional.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGUARD GROUP LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
http://www.vanguard.com [email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses may
be obtained directly from The Vanguard Group.
(C) 1997 Vanguard Marketing Corporation, Distributor
<PAGE> 16
[PHOTO]
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity-International
Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q232-2/97
<PAGE> 17
VANGUARD
INTERNATIONAL GROWTH
PORTFOLIO
Semiannual Report
February 28, 1997
[PHOTO]
[THE VANGUARD GROUP LOGO]
<PAGE> 18
[PHOTO]
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future. The montage includes
a bronze medallion with a likeness of our namesake, HMS Vanguard (Lord Nelson's
flagship at The Battle of the Nile); a clock built circa 1816 in Scotland,
featuring a portrait of Nelson; and several views of our recently completed
campus, which is steeped in nautical imagery--from our buildings named after
Nelson's warships (Victory, Majestic, and Goliath are three shown), to our
artwork and ornamental compass rose.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
3
Report From
The Adviser
5
Performance
Summary
7
Financial
Statements
8
Directors And
Officers
INSIDE BACK COVER
<PAGE> 19
[PHOTO]
FELLOW SHAREHOLDER,
Most of the world's stock markets--with the notable exception of
Japan--were on the rise during the six months ended February 28, 1997, the
first half of the fiscal year for Vanguard International Growth Portfolio.
The following table presents the six-month returns earned by the
Portfolio and by its two primary performance benchmarks: the average
international equity mutual fund and the unmanaged Morgan Stanley Capital
International-Europe, Australasia, Far East (EAFE) Index. As you can see,
the Portfolio's +8.2% total return (capital change plus reinvested
dividends) exceeded those of the average competing fund and, by a larger
margin, the EAFE Index.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
TOTAL RETURN
SIX MONTHS ENDED
FEBRUARY 28, 1997
-----------------------------------------------------------------------------
<S> <C>
Vanguard International
Growth Portfolio +8.2%
-----------------------------------------------------------------------------
Average International Fund +7.2%
-----------------------------------------------------------------------------
MSCI-EAFE Index +2.4%
-----------------------------------------------------------------------------
</TABLE>
The Portfolio's return is based on an increase in net asset value
from $16.13 per share on August 31, 1996, to $16.68 per share on February
28, 1997, with the latter figure adjusted for our annual dividend of $0.19
per share paid from net investment income and distributions totaling $0.55
paid from net realized capital gains.
THE PERIOD IN REVIEW
Stock-market optimism was a global phenomenon during the six months ended
February 28, as every major market in the world--except Japan--posted gains.
Total returns for the period exceeded +20% in local currency terms in a
dozen international markets as well as in the United States. However, in
most cases those gains were diminished by a rise in value of the U.S.
dollar versus other currencies (the British pound excluded). As the dollar
strengthens, securities valued in deutsche marks or francs are worth fewer
dollars. For U.S. investors in international stocks, the risk of currency
fluctuations is added to the normal risks of investing in common stocks.
Still, even in dollar terms, returns from Europe (+13.8%) and
emerging markets (+13.7%) were quite strong during the past six months.
Economic growth, which has been weak in most European nations, showed signs
of picking up during the period. This was true in Japan, too. Nevertheless,
in Japan the combined impact of the equity and currency markets produced a
loss of -16.4% for U.S. investors.
Weighed down by losses in Japan, the EAFE Index--the standard
yardstick for the major developed stock markets outside the United
States--managed a total return of +11.2% in local currencies, reduced by the
dollar's strength to a gain of only +2.4% in U.S. dollar terms. Our
Portfolio and most other international equity funds did considerably better
than the Index because Japan represented much smaller portions of their
holdings than the roughly 35% weighting it had in the Index during the
period.
The +8.2% return earned by the International Growth Portfolio
during the half-year surpassed by a full percentage point the +7.2% return
of the average international fund. This achievement was noteworthy, since
the Portfolio held nearly 25% of its assets in
1
<PAGE> 20
Japanese stocks versus less than 20% for the typical international equity
fund. Deft security selection by our adviser, Schroder Capital Management
International, is one reason we beat our average competitor. Another reason
was our significantly lower costs: The expense ratio of the International
Growth Portfolio was 0.56% of average net assets in fiscal 1996, one-third
of the 1.70% expense ratio of the average international equity fund last
year. This advantage, which we believe is an enduring one, gives the
Portfolio a nice head start against the competition.
A report from Schroder Capital Management begins on page 5.
IN SUMMARY
Despite the downturn in Japanese equities and the strength of the U.S.
dollar, the first half of the fiscal year was a rewarding period for the
International Growth Portfolio, although its returns were overshadowed by
the remarkable results of the U.S. stock market.
On balance, the period demonstrated both the reasons for investing
internationally and the risks of doing so. International stocks can provide
returns that over long periods have been competitive with the U.S. market
and--importantly--that are not in lockstep with returns on U.S. stocks.
Because returns from abroad do not always move in sync with U.S. returns,
they provide added diversification to a portfolio of U.S. securities. On the
other hand, investing abroad exposes the U.S. investor to currency
fluctuations, an added element of risk. During the fiscal half-year, such
fluctuations diminished returns. At other times, the dollar may weaken and
effectively boost returns on international equities.
Diversification remains a good reason for many investors to hold
international stocks in investment programs that also contain a mixture of
U.S. stock funds, bond funds, and money market funds appropriate to their
objectives and tolerance for risk.
Investors who maintain such balanced portfolios are better able to withstand
the notoriously unpredictable movements in securities prices and currency
values, staying on course toward their long-term objectives.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
March 18, 1997
2
<PAGE> 21
[PHOTO]
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED FEBRUARY 28, 1997
U.S. EQUITY MARKETS
The favorable confluence of steady economic growth, low inflation, and
rising corporate earnings made for a very rewarding six months. Stocks, as
measured by the Standard & Poor's 500 Composite Stock Price Index, gained
22.5%.
Much attention has been focused on the market's rise, irrational
or otherwise. In fact, investors' returns have varied widely, depending on
their definition of the "market." Clearly, the best rewards have been in
larger companies, such as those that dominate the S&P 500 Index. In fact,
even within the Index, it was the largest companies that prevailed: The 50
biggest (which account for roughly half the Index's market value) gained
27.0% over the last six months, 4.5 percentage points more than the overall
Index. Looking at the S&P 500 Index's performance by sector, financial
stocks were strongest, with a 33.5% gain, followed closely by technology
issues (up 32.6% as a group). Despite the economy's good tone, several of
the more economically sensitive sectors failed to keep up with the market.
Auto stocks gained 12.5%, while other stocks closely related to consumer
spending, such as retailers and restaurants, were up 10.1%.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED FEBRUARY 28, 1997
-----------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 22.5% 26.2% 16.9%
Russell 2000 Index 8.8 12.6 13.1
MSCI-EAFE Index 2.4 3.5 9.3
---------------------------------------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 5.4% 5.4% 7.3%
Lehman 10-Year Municipal
Bond Index 5.3 5.3 7.8
Salomon 90-Day U.S. Treasury Bills 2.6 5.2 4.4
---------------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.5% 3.0% 2.9%
---------------------------------------------------------------------------------------
</TABLE>
*Average annual.
Those who chose to invest outside the very largest companies earned
decidedly different returns. The 8.8% return of the Russell 2000 Index of
small stocks, for example, lagged the S&P 500 Index by more than half. Here
there was some symmetry with the other index, as small financial issues were
the best performers (up 21.3%), but small technology issues fell far short
of their S&P counterparts, rising a modest 3.9%. This sector includes many
companies competing for share in the crowded networking and Internet
markets.
U.S. FIXED-INCOME MARKETS
Bond investors were challenged over the period. The stock market's
double-digit returns cast a long shadow, while bond prices reacted
daily--and even hourly in some cases--to economic reports. Perversely, news
of an expanding economy would push bond yields up (and bond prices down) as
the market translated good economic news into fear of higher inflation.
Throughout the period, however, inflation, as measured by the Consumer Price
Index (CPI), remained remarkably benign. The CPI registered an increase of
3.0% for
3
<PAGE> 22
the 12 months through February. As the month closed, however, a number of
strong economic reports led to an increasing conviction among bond investors
that the Federal Reserve would have to increase rates, albeit modestly.
In general, interest rates fell for the period, spurred by a
strong post-election rally. On February 28, the 30-year U.S. Treasury yield
was 6.80%, noticeably lower than the 7.12% level on August 31. Although the
bond market's primary focus was on inflation, with yields moving up or down
accordingly, the shrinking of the yield difference between Treasury issues
and corporate bonds is another development worth mentioning. The strong
corporate earnings of recent years, with the resulting lower risk of
default, have decreased the premium typically demanded by investors for
higher credit risk. Significantly, the yield difference between the 10-year
Treasury note, backed by the full faith and credit of the U.S. government,
and the lowest-credit-quality bonds tracked by Merrill Lynch has narrowed
from 3.5 percentage points one year ago to 2.8 percentage points at the end
of February. While not as dramatic for all relationships, the shrinking
yield premiums gave corporate bonds a performance edge over Treasuries of
comparable maturities.
Mortgage-backed issues and municipals were two other relative
bright spots over the past year. The generally stable-to-rising
interest-rate environment benefited mortgages as the threat of refinancings
receded. Finally, municipal bonds outpaced their U.S. Treasury counterparts
as demand outstripped supply for much of the year.
INTERNATIONAL EQUITY MARKETS
In general, foreign markets enjoyed a strong six months. For U.S. investors,
however, some of those returns were trimmed by a very strong dollar. The
Morgan Stanley Capital International-Europe, Australasia, Far East Index
showed an 11.2% return. When that number is adjusted for U.S. investors,
however, the return drops to 2.4%.
Regionally, there was a striking disparity between the European
and Pacific markets. In aggregate, Europe's markets provided U.S. investors
with a gain of 13.8%, while the Pacific markets declined -10.1%. The poor
returns in the Pacific region reflected ongoing concern about the health of
the Japanese economy. Growth in Japan has remained modest at best for
several years despite government efforts to stimulate the economy through
public works programs and tax incentives. The country is also wrestling with
massive changes to its financial infrastructure. In Europe, the picture was
dramatically different, with the region benefiting from a variety of
factors. Among the most important were (1) ongoing efforts to lower
government deficits consistent with the Maastricht Treaty guidelines; (2)
improving economic growth; and (3) a greater commitment by corporate
executives to increasing "shareholder value."
4
<PAGE> 23
[PHOTO]
REPORT FROM THE ADVISER
Vanguard International Growth Portfolio provided a total return of
8.2% during the first half of fiscal 1997, which ended February 28. This
exceeded the performance of both the average international equity mutual
fund, which achieved a 7.2% return, and our principal unmanaged benchmark,
the Morgan Stanley Capital International-Europe, Australasia, Far East
Index, which provided a 2.4% return.
The U.S. dollar was very strong over the entire period, a factor
that, at first glance, had the effect of diminishing our return by 6
percentage points. However, this first glance can be misleading, as I have
written before in my reports to you. A strong dollar boosts the competitive
position of non-U.S. companies in world export markets, and under normal
conditions this helps stock prices, partially offsetting the currency loss
to U.S. investors. This certainly happened in Europe in the last six months:
The 12% fall in the deutsche mark was the single most important reason the
German stock market rose by about 25% in deutsche mark terms, the French
market rose by 33%, and the Dutch market by 35%. I am aware that the 10%
fall in the Japanese yen did not prevent a 7% decline in the local stock
market, but stocks of major exporting companies did perform relatively very
well. However, there was so little confidence in other sectors of Japan's
economy that this relative strength did not spread.
The increases in continental European stock markets were also due
in part to easy monetary conditions locally, along with the existence of
sufficient spare productive capacity to allow for a prolonged period of
expansion without the emergence of inflationary concerns. The coming
European monetary union (EMU) is a much-discussed matter. We have never
positioned the Portfolio expressly to benefit from EMU, and the possible
postponement of its 1999 launch date should not impact your investments. We
continue to invest in companies that are well managed, believing that the
intended single market for goods and services within Europe (i.e., no
discrimination against imports within the region) will primarily benefit
companies that are competitive on costs and quality. About 40% of the
Portfolio is currently invested in continental Europe.
A further 12% of the Portfolio is invested in the United Kingdom,
where many stocks appear to be cheap. However, this reflects the maturity of
the economic cycle and investors' fear that inflationary pressures are
growing. These fears may be overdone, considering the recent strength of the
British pound, which was the only major currency to rise relative to the
U.S. dollar in the past six months. We are becoming more optimistic about
prospects in the United Kingdom.
Japan represents 23% of your Portfolio. I indicated six months ago
that we were waiting to increase the exposure to Japan, but we have kept our
powder dry. If Japan's economic recovery should stall again, the stock
market and the yen will certainly suffer; the consensus is not optimistic.
We believe the crowd is wrong but do not feel in a hurry to buy stocks.
Approximately 18% of the Portfolio is invested in the
faster-growing developed and emerging markets of
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be
achieved by emphasizing investments in high-quality established growth
companies that sell at reasonable prices in relation to expected earnings
and to valuations in the broad stock market.
5
<PAGE> 24
the world. These markets particularly benefit when world trade picks up, and
there are indications that it is doing so. If this transpires, stocks are
good value, and this part of the Portfolio will contribute strongly to
performance.
Richard Foulkes
Schroder Capital Management International
March 12, 1997
6
<PAGE> 25
PERFORMANCE SUMMARY
All of the data on this page represent past performance, which cannot be
used to predict future returns that may be achieved by the Portfolio. Note,
too, that both share price and return can fluctuate widely so that an
investment in the Portfolio could lose money.
INTERNATIONAL GROWTH PORTFOLIO
TOTAL INVESTMENT RETURNS: SEPTEMBER 30, 1981-FEBRUARY 28, 1997
<TABLE>
<CAPTION>
---------------------------------------------------------------
INTERNATIONAL GROWTH PORTFOLIO MSCI-EAFE
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
---------------------------------------------------------------
<S> <C> <C> <C> <C>
1982 -5.7% 0.0% -5.7% -4.7%
1983 57.1 4.3 61.4 31.0
1984 5.7 1.6 7.3 14.7
1985 15.7 2.1 17.8 32.3
1986 96.4 2.5 98.9 103.7
1987 31.2 0.8 32.0 46.0
1988 -10.8 0.9 -9.9 -6.2
1989 22.7 1.8 24.5 22.4
1990 4.0 1.2 5.2 -11.8
1991 -6.8 1.7 -5.1 -0.3
1992 -0.4 1.9 1.5 0.4
1993 18.4 2.7 21.1 27.1
1994 19.5 0.9 20.4 11.1
1995 2.4 1.4 3.8 0.8
1996 11.3 1.4 12.7 8.2
1997* 7.0 1.2 8.2 2.4
---------------------------------------------------------------
</TABLE>
*Six months ended February 28, 1997.
See Financial Highlights table on page 14 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1996*
-----------------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International Growth Portfolio 9/30/81 14.65% 12.60% 8.54% 1.53% 10.07%
-----------------------------------------------------------------------------------------
</TABLE>
* SEC rules require that we provide this average annual total return
information through the latest calendar quarter.
7
<PAGE> 26
[PHOTO]
FINANCIAL STATEMENTS
FEBRUARY 28, 1997 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Portfolio's holdings,
including each security's market value on the last day of the reporting
period. Securities are grouped and subtotaled by asset type (common stocks,
bonds, etc.) and by country. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the Portfolio's
Net Assets. Finally, Net Assets are divided by the outstanding shares of the
Portfolio to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the Portfolio's net assets on both a dollar
and per-share basis. Because all income and any realized gains must be
distributed to shareholders each year, the bulk of net assets consists of
Paid in Capital (money invested by shareholders). The amounts shown for
Undistributed Net Investment Income and Accumulated Net Realized Gains
usually approximate the sums the Portfolio had available to distribute to
shareholders as income dividends or capital gains as of the statement date,
but may differ because certain investments or transactions may be treated
differently for financial statement and tax purposes. Any Accumulated Net
Realized Losses, and any cumulative excess of distributions over net income
or net realized gains, will appear as negative balances. Unrealized
Appreciation (Depreciation) is the difference between the market value of
the Portfolio's investments and their cost, and reflects the gains (losses)
that would be realized if the Portfolio were to sell all of its investments
at their statement-date values.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
MARKET
INTERNATIONAL VALUE*
GROWTH PORTFOLIO SHARES (000)
-----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.7%)
ARGENTINA (0.2%)
-Banco de Galicia y Buenos Aires
SA de CV ADR 250,000 $ 5,906
Perez Companc SA 576,300 4,417
---------
10,323
---------
AUSTRALIA (1.5%)
Amcor Ltd. 807,000 5,311
Australia & New Zealand
Bank Group Ltd. 964,000 6,016
Broken Hill Proprietary Ltd. 700,500 9,270
Comalco Ltd. 1,140,500 6,055
Lend Lease Corp. 321,031 5,870
Lion Nathan Ltd. 2,176,000 5,269
Mayne Nickless Ltd. 975,000 5,759
Mount Isa Mines Holdings Ltd. 4,300,000 5,974
News Corp. Ltd. 1,512,763 8,055
Normandy Mining Ltd. 3,913,212 5,406
- Normandy Mining Ltd. Warrants
Exp. 4/30/01 16,450 5
QNI Ltd. 3,000,000 6,194
Tabcorp Holdings Ltd. 2,355,400 10,804
WMC Ltd. 854,937 5,389
---------
85,377
---------
BRAZIL (2.2%)
Companhia Energetica de
Minas Gerais Pfd. 269,500,000 10,860
Telecomunicacoes
Brasileiras SA 297,460,000 28,161
Telecomunicacoes
Brasileiras SA ADR 439,000 42,583
Telecomunicacoes
Brasileiras SA Pfd. 313,665,755 30,623
Usiminas-Usinas Siderurgicas
de Minas Gerais SA ADR 490,000 5,635
Usiminas-Usinas Siderurgicas
de Minas Gerais SA Pfd. 7,612,149,000 8,765
---------
126,627
---------
CANADA (3.2%)
Canadian Pacific, Ltd. 1,650,000 40,559
Noranda Inc. 2,670,000 64,362
NOVA Corp. 3,450,000 31,676
Royal Bank of Canada 1,200,000 48,416
---------
185,013
---------
CHILE (0.3%)
Chilectra SA ADR 34,000 2,201
Compania de Telecomunicaciones
de Chile SA ADR 229,500 6,713
Sociedad Quimica y Minera
de Chile ADR 120,000 6,990
---------
15,904
---------
DENMARK (0.6%)
Den Danske Bank A/S 376,000 33,628
---------
FINLAND (0.3%)
UPM-Kymmene Oy 832,000 17,516
---------
</TABLE>
8
<PAGE> 27
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
-----------------------------------------------------------------------
<S> <C> <C>
FRANCE (7.4%)
Compagnie de Saint-Gobain SA 400,000 $ 58,976
Compagnie des Gaz de Petrole
Primagaz SA 84,668 8,694
- Compagnie des Gaz de Petrole
Primagaz SA Warrants
EXP. 6/30/98 7,697 152
Compagnie Generale des
Eaux SA 580,500 80,800
Compagnie Generale des
Establissements Michelin
SCA B Shares 1,000,000 62,627
Elf Aquitaine SA 1,320,000 126,271
- SGS-Thomson Microelectronics
NV ADR 900,800 59,453
Valeo SA 447,000 30,128
----------
427,101
----------
GERMANY (6.4%)
Bayer AG 2,391,640 100,942
Friedrich Grohe AG Pfd. 18,747 5,197
Linde AG 60,000 39,096
Mannesmann AG 100,000 39,481
SGL Carbon AG 60,000 8,175
Siemens AG 858,000 43,379
Veba AG 2,295,000 131,325
----------
367,595
----------
HONG KONG (5.5%)
Cheung Kong Holdings Ltd. 5,580,000 53,321
Citic Pacific Ltd. 2,440,000 12,446
HSBC Holdings PLC 2,362,943 57,670
Hong Kong Electric
Holdings Ltd. 4,450,000 15,400
Hutchison Whampoa Ltd. 6,810,000 51,884
Sun Hung Kai Properties Ltd. 5,343,400 61,755
Swire Pacific Ltd. A Shares 4,704,000 40,395
Wharf Holdings Ltd. 5,500,000 24,432
----------
317,303
----------
INDONESIA (0.9%)
PT Indofood Sukses Makmur
(Foreign) 10,450,800 23,321
PT Indosat ADR 95,650 2,750
PT Telekomunikasi Indonesia
ADR 480,000 16,500
PT Telekomunikasi Indonesia
(Foreign) 6,404,000 11,152
----------
53,723
----------
ITALY (0.4%)
Telecom Italia Mobile SPA 8,000,000 20,947
----------
JAPAN (22.8%)
Bridgestone Corp. 4,755,000 85,101
DDI Corp. 8,000 48,190
Dai-Nippon Printing Co., Ltd. 1,500,000 24,981
East Japan Railway Co. 6,245 26,596
Fuji Photo Film Co., Ltd. 3,780,000 126,532
Hirose Electric Co., Ltd. 315,000 17,644
Ito-Yokado Co., Ltd. 1,980,000 89,903
Japan Airport Terminal Co., Ltd. 122,000 1,243
Keyence Corp. 130,000 15,834
Kuraray Co., Ltd. 2,250,000 18,643
Kyocera Corp. 317,000 18,780
Mabuchi Motor Co. 663,300 33,030
Matsushita Electric
Industrial Co., Ltd. 4,810,000 74,129
Mitsui & Co., Ltd. 6,450,000 47,778
Murata Manufacturing Co., Ltd. 2,800,000 98,136
Nippon Steel Corp. 16,600,000 44,151
Nippon Television Network 39,300 11,690
Omron Corp. 2,488,000 39,168
SMC Corp. 986,000 67,073
Seino Transportation Co., Ltd. 296,000 2,943
Shin-Etsu Chemical Co., Ltd. 1,050,000 20,271
Showa Shell Sekiyu 2,760,000 20,605
Sumitomo Electric
Industries Ltd. 3,000,000 41,511
Takeda Chemical Industries Ltd. 7,300,000 146,375
Tokio Marine & Fire
Insurance Co. 7,140,000 68,034
Tokyo Electron Ltd. 545,000 19,056
Toppan Printing Co., Ltd. 1,450,000 16,700
Toyota Motor Corp. 2,350,000 60,167
Yamazaki Baking Co., Ltd. 400,000 5,998
Yasuda Fire & Marine
Insurance Co. 5,190,000 25,888
Yokohama Reito Co., Ltd. 158,000 1,388
----------
1,317,538
----------
KOREA (0.9%)
Hyundai Motor Co., Ltd. GDR 59,000 435
Korea Electric Power Corp. 441,050 12,655
Korea Mobile
Telecommunications Corp. 14,669 14,449
Korean Air Co. 338,302 6,202
Pohang Iron & Steel Co., Ltd. 80,000 5,273
Samsung Electronics Co., Ltd.
GDR 1/2 Non-voting Stock 275,931 5,312
- Samsung Electronics Co., Ltd.
GDR 1/2 Voting Stock 29,140 1,275
Shinhan Bank Co. 465,162 6,894
----------
52,495
----------
MALAYSIA (2.0%)
Genting Bhd. 4,047,000 27,545
Malayan Banking Bhd. 4,333,000 51,479
Renong Bhd. 9,200,000 16,748
Telekom Malaysia Bhd. 2,863,000 23,176
----------
118,948
----------
MEXICO (0.9%)
Apasco SA de CV 1,066,000 7,800
Cemex SA de CV (CPO) 3,114,720 12,435
Cifra SA de CV Series C 8,309,000 12,704
- Grupo Televisa SA GDR 440,000 10,780
Telefonos de Mexico SA
Class L ADR 200,000 7,776
----------
51,495
----------
</TABLE>
9
<PAGE> 28
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
MARKET
INTERNATIONAL VALUE*
GROWTH PORTFOLIO SHARES (000)
-----------------------------------------------------------------------
<S> <C> <C>
NETHERLANDS (13.5%)
ABN AMRO Holding NV 870,000 $ 62,450
Ceteco Holdings NV 123,522 6,427
Delft Instruments NV 454,330 9,332
Elsevier NV 1,545,310 24,741
Getronics NV 2,283,588 74,564
Hagemeyer NV 248,818 21,739
Heineken NV 327,000 57,967
Internationale Nederlanden
Groep NV 6,162,000 238,523
Koninklijke Ahold NV 934,800 60,407
Oce-Van Der Grinten NV 500,382 62,482
Otra NV 789,500 11,517
Philips Electronics NV
(Non-voting) 2,700,000 121,861
Sphinx Kon Gustavsberg NV 401,124 4,204
Verenigde Nederlandse
Uitgeversbedrijven
Verenigd Bezit 1,270,000 26,286
----------
782,500
----------
PHILIPPINES (1.8%)
Ayala Land, Inc. Class B 29,900,155 35,769
Manila Electric Co. Class B 598,000 4,746
Manila Electric Co. GDR 395,605 15,033
Metropolitan Bank & Trust Co. 660,000 18,298
Philippine Long Distance
Telephone Co. 502,000 29,455
----------
103,301
----------
SINGAPORE (2.0%)
DBS Land Ltd. 3,948,000 15,366
Development Bank of
Singapore Ltd. (Foreign) 1,575,000 20,875
Keppel Corp., Ltd. 2,416,000 17,451
Mandarin Oriental
International Ltd. 4,311,369 5,863
Overseas-Chinese Banking
Corp. Ltd. (Foreign) 1,312,850 17,400
Singapore Airlines Ltd. (Foreign) 1,268,000 11,204
Singapore Press Holdings Ltd.
(Foreign) 796,320 15,524
Wing Tai Holdings Ltd. 4,074,000 13,371
----------
117,054
----------
SWEDEN (2.8%)
Astra AB B Shares 1,260,000 58,983
LM Ericsson Telephone
AB B Shares 1,320,000 41,987
Svenska Handelsbanken
AB A Shares 2,200,000 61,616
----------
162,586
----------
SWITZERLAND (8.4%)
ABB AG (Bearer) 97,000 110,218
Adecco SA (Bearer) 148,000 47,962
Ciba Special Rights Exp. 3/12/97 194,000 12,278
Novartis AG (Registered) 194,000 222,027
Roche Holding AG (Dividend-
Right Certificates) 11,090 93,344
----------
485,829
----------
THAILAND (0.7%)
Bangkok Bank PLC (Foreign) 1,215,000 10,698
Land & House PLC (Foreign) 1,966,700 11,164
Thai Farmers Bank PLC
(Foreign) 2,374,900 14,032
- Thai Farmers Bank PLC
Warrants Exp. 9/15/02 190,375 103
United Communication Industry
PLC (Foreign) 930,000 5,747
----------
41,744
----------
UNITED KINGDOM (12.0%)
Asda Group PLC 26,750,000 48,744
Barclays PLC 1,891,000 34,184
British Aerospace PLC 2,700,000 56,385
- British Aerospace PLC
Warrants Exp. 11/15/00 120,000 1,429
British Airways PLC 2,050,000 21,087
British Land Co., PLC 5,880,000 51,324
British Petroleum Co., PLC 9,516,058 105,574
British Steel PLC 7,000,000 17,131
Burton Group PLC 6,000,000 15,320
Cable and Wireless PLC 4,000,000 32,761
David S. Smith Holdings PLC 3,500,000 14,047
De La Rue PLC 972,200 9,905
EMI Group PLC 1,300,000 24,412
Enterprise Oil PLC 3,300,000 33,327
RTZ Corp. PLC 3,060,000 46,879
Rank Group PLC 7,980,000 54,291
Tesco PLC 10,000,000 55,145
Thorn PLC 1,300,000 4,030
United News & Media PLC 2,500,000 28,674
Vodafone Group PLC 4,400,000 20,926
Zeneca Group PLC 600,000 17,650
----------
693,225
----------
----------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $4,456,070) 5,587,772
----------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
----------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.8%)
----------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.35%, 3/3/97
(COST $160,571) $160,571 160,571
----------------------------------------------------------------------
TOTAL INVESTMENTS (99.5%)
(COST $4,616,641) 5,748,343
----------------------------------------------------------------------
</TABLE>
10
<PAGE> 29
<TABLE>
<CAPTION>
----------------------------------------------------------------------
MARKET
VALUE*
(000)
----------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (0.5%)
Other Assets--Notes C and F $ 751,101
Liabilities--Note F (723,173)
---------
27,928
----------------------------------------------------------------------
NET ASSETS (100%)
----------------------------------------------------------------------
Applicable to 346,278,005 outstanding
$1.00 par value shares
(authorized 550,000,000 shares) $5,776,271
======================================================================
NET ASSET VALUE PER SHARE $16.68
======================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
-Non-Income Producing Security.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
AMOUNT PER
(000) SHARE
----------------------------------------------------------------------
AT FEBRUARY 28, 1997, NET ASSETS CONSISTED OF:
----------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $4,563,026 $13.18
Overdistributed Net
Investment Income--Note D (2,506) (.01)
Accumulated Net
Realized Gains--Note D 55,272 .16
Unrealized Appreciation--Note E
Investment Securities 1,131,702 3.27
Foreign Currencies and
Forward Currency Contracts 28,777 .08
----------------------------------------------------------------------
NET ASSETS $5,776,271 $16.68
======================================================================
</TABLE>
11
<PAGE> 30
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Portfolio
during the reporting period, and details the operating expenses charged to
the Portfolio. These expenses directly reduce the amount of investment
income available to pay to shareholders as dividends. This Statement also
shows any Net Gain (Loss) realized on the sale of investments, and the
increase or decrease in the Unrealized Appreciation (Depreciation) on
investments during the period--these amounts include the effect of foreign
currency movements on the value of the Portfolio's securities. Currency
gains (losses) on the translation of other assets and liabilities, combined
with the results of any investments in forward currency contracts during the
period, are shown separately.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
INTERNATIONAL GROWTH PORTFOLIO
SIX MONTHS ENDED FEBRUARY 28, 1997
(000)
-----------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends(1) $ 23,523
Interest 3,842
---------
Total Income 27,365
---------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 3,703
Performance Adjustment 786
The Vanguard Group--Note C
Management and Administrative 6,291
Marketing and Distribution 695
Taxes (other than income taxes) 168
Custodian Fees 1,623
Auditing Fees 5
Shareholders' Reports 171
Annual Meeting and Proxy Costs 41
Directors' Fees and Expenses 8
---------
Total Expenses 13,491
-----------------------------------------------------------------------------
NET INVESTMENT INCOME 13,874
-----------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 23,300
Foreign Currencies and Forward Currency Contracts 41,730
-----------------------------------------------------------------------------
REALIZED NET GAIN 65,030
-----------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 309,137
Foreign Currencies and Forward Currency Contracts 36,693
-----------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 345,830
-----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $424,734
=============================================================================
</TABLE>
(1) Dividends are net of foreign withholding taxes of $3,315,000.
12
<PAGE> 31
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes
information that is detailed in the Statement of Operations. The amounts
shown as Distributions to shareholders from the Portfolio's net income and
capital gains may not match the amounts shown in the Operations section,
because distributions are determined on a tax basis and may be made in a
period different from the one in which the income was earned or the gains
were realized. The Capital Share Transactions section shows the amount
shareholders invested in the Portfolio, either by purchasing shares or by
reinvesting distributions, as well as the amounts redeemed. The
corresponding numbers of Shares Issued and Redeemed are shown at the end of
the Statement.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
INTERNATIONAL GROWTH PORTFOLIO
------------------------------
SIX MONTHS YEAR
ENDED ENDED
FEB. 28, 1997 AUG. 31, 1996
(000) (000)
----------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 13,874 $ 56,078
Realized Net Gain 65,030 245,794
Change in Unrealized Appreciation
(Depreciation) 345,830 161,918
-------------------------
Net Increase in Net Assets
Resulting from Operations 424,734 463,790
-------------------------
DISTRIBUTIONS
Net Investment Income (61,181) (47,382)
Realized Capital Gain (177,103) (49,751)
-------------------------
Total Distributions (238,284) (97,133)
-------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 1,019,885 1,967,623
Issued in Lieu of Cash Distributions 218,875 90,182
Redeemed (646,164) (780,882)
-------------------------
Net Increase from Capital
Share Transactions 592,596 1,276,923
----------------------------------------------------------------------------
Total Increase 779,046 1,643,580
----------------------------------------------------------------------------
NET ASSETS
Beginning of Period 4,997,225 3,353,645
-------------------------
End of Period $5,776,271 $4,997,225
============================================================================
(1)Shares Issued (Redeemed)
Issued 61,836 125,890
Issued in Lieu of Cash Distributions 13,654 6,000
Redeemed (39,107) (50,140)
-------------------------
Net Increase in Shares Outstanding 36,383 81,750
============================================================================
</TABLE>
13
<PAGE> 32
FINANCIAL HIGHLIGHTS
This table summarizes the Portfolio's investment results and distributions
to shareholders on a per-share basis. It also presents the Portfolio's Total
Return and shows net investment income and expenses as percentages of
average net assets. These data will help you assess: the variability of the
Portfolio's net income and total returns from year to year; the relative
contributions of net income and capital gains to the Portfolio's total
return; how much it costs to operate the Portfolio; and the extent to which
the Portfolio tends to distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Portfolio for one year. Finally, the table lists the Portfolio's Average
Commission Rate Paid, a disclosure required by the SEC beginning in 1996.
This rate is calculated by dividing total commissions paid on portfolio
securities by the total number of shares purchased and sold on which
commissions were charged.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
INTERNATIONAL GROWTH PORTFOLIO
YEAR ENDED AUGUST 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ---------------------------------------------
THROUGHOUT EACH PERIOD FEBRUARY 28, 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 .03 .19 .20 .14 .12 .20
Net Realized and Unrealized Gain (Loss)
on Investments 1.26 1.65 .32 2.31 1.96 (.05)
-----------------------------------------------------------
Total from Investment Operations 1.29 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 $16.68 $16.13 $14.70 $14.36 $12.02 $10.15
=================================================================================================================
TOTAL RETURN 8.18% 12.72% 3.76% 20.44% 21.06% 1.49%
=================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $5,776 $4,997 $3,354 $2,989 $1,477 $919
Ratio of Total Expenses to
Average Net Assets 0.50%* 0.56% 0.59% 0.46% 0.59% 0.58%
Ratio of Net Investment Income to
Average Net Assets 0.51%* 1.35% 1.53% 1.37% 1.27% 2.04%
Portfolio Turnover Rate 21%* 22% 31% 28% 51% 58%
Average Commission Rate Paid $.0009 $.0223 N/A N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
14
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
Vanguard International Growth Portfolio is registered under the Investment
Company Act of 1940 as a diversified open-end investment company, or mutual
fund. The Portfolio invests in securities of foreign issuers which may
subject it to investment risks not normally associated with investing in
securities of United States corporations.
A. The following significant accounting policies conform to generally
accepted accounting principles for mutual funds. The Portfolio consistently
follows such policies in preparing its financial statements.
1. SECURITY VALUATION: Foreign securities listed on an exchange are
valued at the latest quoted sales prices on the appropriate exchange as of
the close of trading on the New York Stock Exchange (generally 4:00 p.m.
Eastern time) on the valuation date. Securities not listed on an exchange
are valued at the latest quoted bid prices. Temporary cash investments are
valued at cost, which approximates market value.
2. FOREIGN CURRENCY: Securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the
bid prices of those currencies against U.S. dollars last quoted by major
banks as of 5:00 p.m. Geneva time on the valuation date.
Realized gains (losses) and unrealized appreciation (depreciation) on
investment securities include the effects of changes in exchange rates since
the securities were purchased, combined with the effects of changes in
security prices. Fluctuations in the value of other assets and liabilities
resulting from changes in exchange rates are recorded as unrealized foreign
currency gains (losses) until the asset or liability is settled in cash,
when they are recorded as realized foreign currency gains (losses).
3. FORWARD CURRENCY CONTRACTS: The Portfolio enters into forward currency
contracts to protect the value of securities and related receivables and
payables against changes in future foreign exchange rates. The Portfolio's
risks in using these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the ability of the counterparties
to fulfill their obligations under the contracts.
Forward currency contracts are valued at their quoted daily settlement
prices. The aggregate principal amounts of the contracts are not recorded in
the financial statements. Fluctuations in the value of the contracts are
recorded in the Statement of Net Assets as an asset (liability) and in the
Statement of Operations as unrealized appreciation (depreciation) until the
contracts are closed, when they are recorded as realized forward currency
contract gains (losses).
4. FEDERAL INCOME TAXES: The Portfolio intends to continue to qualify as
a regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the
financial statements.
5. REPURCHASE AGREEMENTS: The Portfolio, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are
held by a custodian bank until the agreements mature. Each agreement
requires that the market value of the collateral be sufficient to cover
payments of interest and principal; however, in the event of default or
bankruptcy by the other party to the agreement, retention of the collateral
may be subject to legal proceedings.
6. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial
reporting purposes.
7. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold.
Costs used to determine realized gains (losses) on the sale of investment
securities are those of the specific securities sold.
15
<PAGE> 34
B. Under a contract that expires March 31, 1998, the Portfolio pays Schroder
Capital Management International an investment advisory fee calculated at an
annual percentage rate of average net assets. The basic fee is subject to
quarterly adjustments based on performance relative to the Morgan Stanley
Capital International-Europe, Australasia, Far East Index. For the six
months ended February 28, 1997, the advisory fee represented an effective
annual basic rate of 0.14% of the Portfolio's average net assets before an
increase of $786,000 (an annual rate of 0.03%) based on performance.
C. The Vanguard Group furnishes at cost corporate management,
administrative, marketing, and distribution services. The costs of such
services are allocated to the Portfolio under methods approved by the board
of directors. At February 28, 1997, the Portfolio had contributed capital of
$471,000 to Vanguard (included in Other Assets), representing 2.4% of
Vanguard's capitalization. The Portfolio's directors and officers are also
directors and officers of Vanguard.
D. During the six months ended February 28, 1997, the Portfolio purchased
$913,946,000 of investment securities and sold $559,365,000 of investment
securities other than temporary cash investments.
During the six months ended February 28, 1997, the Portfolio realized net
foreign currency losses of $159,000, which decreased distributable net
income for tax purposes; accordingly, such losses have been reclassified
from accumulated net realized gains to overdistributed net investment
income.
E. At February 28, 1997, net unrealized appreciation of investment
securities for financial reporting and federal income tax purposes was
$1,131,702,000, consisting of unrealized gains of $1,303,420,000 on
securities that had risen in value since their purchase and $171,718,000 in
unrealized losses on securities that had fallen in value since their
purchase.
At February 28, 1997, the Portfolio had open forward currency contracts
to deliver foreign currency in exchange for U.S. dollars as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
(000)
----------------------------------------------------
CONTRACT AMOUNT
--------------------
CONTRACT FOREIGN U.S. MARKET VALUE IN UNREALIZED
SETTLEMENT DATE CURRENCY DOLLARS U.S. DOLLARS APPRECIATION
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deliver:
3/17/97 CHF 323,000 $248,605 $219,666 $29,339
-------------------------------------------------------------------------
</TABLE>
CHF--Swiss francs.
The Portfolio had net unrealized foreign currency losses of $562,000
resulting from the translation of other assets and liabilities at February
28, 1997.
F. The market value of securities on loan to broker/dealers at February 28,
1997, was $635,631,000, for which the Portfolio held cash collateral of
$671,541,000.
All comparative mutual fund data are from Lipper Analytical Services, Inc.
or Morningstar unless otherwise noted.
16
<PAGE> 35
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer Inc.;
Director of Sun Company, Inc. and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.; Trustee Emeritus of Wellesley
College.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corp., Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich
Co., and The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co.
and President of New York University; Director of Pacific Gas and
Electric Co., Procter & Gamble Co., and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
and Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in
The Vanguard Group.
RICHARD F. HYLAND, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President, Information Technology.
JAMES H. GATELY, Senior Vice President, Individual Investor Group.
IAN A. MACKINNON, Senior Vice President, Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President, Institutional.
RALPH K. PACKARD, Senior Vice President and Chief Financial Officer.
[THE VANGUARD GROUP LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
http://www.vanguard.com [email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C) 1997 Vanguard Marketing Corporation, Distributor
<PAGE> 36
[PHOTO]
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity-International
Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q812-2/97
