<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-17620) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 71 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 71 [X]
VANGUARD WORLD FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ARTICLES OF INCORPORATION)
P.O. BOX 2600
VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, SECRETARY
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE
on December 27, 1996 pursuant to paragraph (b) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SECURITIES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 OF THE INVESTMENT COMPANY ACT OF
1940. REGISTRANT FILED ITS RULE 24F-2 NOTICE FOR ITS FISCAL YEAR ENDED AUGUST
31, 1996, WITH THE COMMISSION ON OCTOBER 30, 1996.
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<PAGE> 2
VANGUARD WORLD FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
- ----------------------------------------------------- ----------------------------------------
<S> <C> <C>
Item 1. Cover Page.............................. Cover Page
Item 2. Synopsis................................ Not Applicable
Item 3. Condensed Financial Information......... Financial Highlights
Item 4. General Description of Registrant....... Investment Objective; Investment
Policies; General Information
Item 5. Management of the Fund.................. Management of the Portfolio
Item 6. Capital Stock and Other Securities...... Opening an Account and Purchasing
Shares; Selling Your Shares; The Share
Price of the Portfolio; Dividends,
Capital Gains and Taxes; General
Information Cover Page; Other Vanguard
Services
Item 7. Purchase of Securities Being Offered.... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase................ Selling Your Shares
Item 9. Pending Legal Proceedings............... Not Applicable
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
- ----------------------------------------------------- ----------------------------------------
Item 10. Cover Page.............................. Cover Page
Item 11. Table of Contents....................... Cover Page
Item 12. General Information and History......... Investment Objective and Policies;
Management of the Fund
Item 13. Investment Objective and Policies....... Investment Objective and Policies;
Investment Limitations
Item 14. Management of the Fund.................. Management of the Fund; Investment
Advisory Services
Item 15. Control Persons and Principal Holders of
Securities.............................. Management of the Fund
Item 16. Investment Advisory and Other
Services................................ Management of the Fund; Investment
Advisory Services
Item 17. Brokerage Allocation.................... Portfolio Transactions
Item 18. Capital Stock and Other Securities...... Financial Statements
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered................ Purchase of Shares; Redemption of
Shares; Financial Statements
Item 20. Tax Status.............................. Not Applicable
Item 21. Underwriters............................ Not Applicable
Item 22. Calculations of Yield Quotations of
Money Market Fund....................... Not Applicable
Item 23. Financial Statements.................... Financial Statements
</TABLE>
<PAGE> 3
VANGUARD
U.S. GROWTH
PORTFOLIO
Prospectus
December 27, 1996
-----------------
This prospectus contains [ picture of a sailing vessel in background ]
financial data for the
Portfolio through the
fiscal year ended
August 31, 1996.
A member of The Vanguard Group(R)
<PAGE> 4
VANGUARD U.S. GROWTH PORTFOLIO A Growth Stock Mutual Fund
INVESTMENT OBJECTIVE AND POLICIES
CONTENTS Vanguard U.S. Growth Portfolio (the
"Portfolio") is a diversified mutual fund, a
Portfolio Expenses 2 part of Vanguard World Fund, Inc. (the
"Fund"), an open-end investment management
Financial Highlights 3 company.
The Portfolio seeks to provide long-term
A Word About Risk 4 capital growth by investing in equity
securities of high-quality, seasoned U.S.
The Portfolio's companies with records of exceptional
Objective 4 growth. The Portfolio emphasizes companies
with strong positions in their markets,
Who Should Invest 4 reasonable financial strength, and low
sensitivity to changing economic conditions.
Investment Strategies 5 IT IS IMPORTANT TO NOTE THAT THE
PORTFOLIO'S SHARES ARE NOT GUARANTEED OR
Investment Policies 7 INSURED BY THE FDIC OR ANY OTHER AGENCY OF
THE U.S. GOVERNMENT. AS WITH ANY INVESTMENT
Investment Limitations 8 IN COMMON STOCKS, WHICH ARE SUBJECT TO WIDE
FLUCTUATIONS IN MARKET VALUE, YOU COULD LOSE
Investment MONEY BY INVESTING IN THE PORTFOLIO.
Performance 8
FEES AND EXPENSES
Share Price 9 The Portfolio is offered on a no-load basis,
which means that you pay no sales
Dividends, Capital commissions or 12b-1 marketing fees. You
Gains, and Taxes 9 will, however, incur expenses for investment
advisory, management, administrative, and
The Portfolio and distribution services, which are included in
Vanguard 10 the expense ratio.
Investment Adviser 10 ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
A Statement of Additional Information (dated
General Information 11 December 27, 1996) containing more
information about the Portfolio is, by
Investing reference, part of this prospectus and may
with Vanguard 12 be obtained without charge by writing to
Vanguard or by calling our Investor
Services and Information Department at 1-800-662-7447.
Account Features 12
WHY READING THIS PROSPECTUS IS IMPORTANT
Types of Accounts 13 This prospectus explains the objective,
risks, and strategies of the U.S. Growth
Distribution Options 14 Portfolio. To highlight terms and concepts
important to mutual fund investors, we have
Buying Shares 14 provided "Plain Talk" explanations along the
way. Reading the prospectus will help you to
Redeeming Shares 16 decide whether the Portfolio is the right
investment for you. We suggest that you keep
Fund and Account Updates 18 it for future reference.
Prospectus Postscript 20
Glossary Inside Back Cover
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE> 5
PORTFOLIO PROFILE VANGUARD U.S. GROWTH PORTFOLIO
WHO SHOULD INVEST (page 4)
- - Investors seeking a growth stock mutual fund as part of a balanced and
diversified investment program.
- - In Investors seeking growth of their capital over the long term -- at least
five years.
WHO SHOULD NOT INVEST
- - Investors seeking current dividend income.
- - Investors unwilling to accept significant fluctuations in share price.
RISKS OF THE PORTFOLIO (pages 4 - 7)
This Portfolio's total return will fluctuate within a wide range, so an investor
could lose money over short or even extended periods. The Portfolio is subject
to manager risk (the chance that poor security selection will cause it to lag
the stock market as a whole) and, as a growth stock fund, to objective risk (the
chance that returns from growth stocks will trail returns from the overall stock
market).
DIVIDENDS AND CAPITAL GAINS (page 9)
Paid annually in December.
INVESTMENT ADVISER (page 10)
Lincoln Capital Management Company, Chicago, IL.
INCEPTION DATE: January 6, 1959
NET ASSETS AS OF 8/31/96: $4.54 billion
PORTFOLIO'S EXPENSE RATIO FOR THE YEAR ENDED 8/31/96: 0.43%
LOADS, 12b-1 MARKETING FEES: None
SUITABLE FOR IRAs: Yes
MINIMUM INITIAL INVESTMENT: $3,000; $1,000
for IRAs and custodial accounts for minors
NEWSPAPER ABBREVIATION: USGro
VANGUARD FUND NUMBER: 023
ACCOUNT FEATURES (page 12)
- - Telephone Redemption
- - Vanguard Direct Deposit Service(sm)
- - Vanguard Automatic Exchange Service(sm)
- - Vanguard Fund Express(R)
- - Vanguard Dividend Express(sm)
AVERAGE ANNUAL TOTAL RETURN --
PERIODS ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
---------------------------
<S> <C> <C> <C>
U.S. Growth Portfolio 25.3% 12.7% 14.3%
S&P 500 Index 18.7 13.6 15.0
</TABLE>
QUARTERLY RETURNS (%) 1987 - 1996 (intended to show volatility of returns)
[ GRAPH ]
In evaluating past performance, remember that it is not indicative of future
performance and that returns from stocks before adjusting for inflation were
relatively high during the periods shown. Performance figures include the
reinvestment of any dividends and capital gains distributions. The returns shown
are net of expenses, but they do not reflect income taxes an investor would have
incurred. Note, too, that both the return and principal value of an investment
will fluctuate so that investors' shares, when redeemed, may be worth more or
less than their original cost.
1
<PAGE> 6
PLAIN TALK ABOUT
The Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time, have
a dramatic impact on a fund's performance.
PORTFOLIO EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Portfolio.
As noted in this table, you do not pay fees of any kind when you buy, sell,
or exchange shares of the Portfolio:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
</TABLE>
The next table illustrates the operating expenses that you would incur as a
shareholder of the Portfolio. These expenses are deducted from the Portfolio's
income before it is paid to you. Expenses include investment advisory fees as
well as the costs of maintaining accounts, administering the Portfolio,
providing shareholder services, and other activities. The expenses shown in the
table are for the fiscal year ended August 31, 1996.
ANNUAL PORTFOLIO OPERATING EXPENSES
<TABLE>
<S> <C> <C>
Management and Administrative Expenses: 0.24%
Investment Advisory Expenses: 0.16%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.01%
----
Total Other Expenses: 0.03%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.43%
====
</TABLE>
The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes (1) that
the Portfolio provides a return of 5% a year and (2) that you redeem your
investment at the end of each period.
<TABLE>
<CAPTION>
--------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------
<S> <C> <C> <C> <C>
$4 $14 $24 $54
--------------------------------------------
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
PLAIN TALK ABOUT
Fund Expenses
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard U.S. Growth Portfolio's expense ratio in fiscal year 1996 was
0.43%, or $4.30 per $1,000 of average net assets. The average growth equity
mutual fund in 1995 was 1.36%, or $13.60 per $1,000 of average net
assets, according to Lipper Analytical Services, Inc., which reports on the
mutual fund industry.
2
<PAGE> 7
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended August 31, 1996. The financial
highlights were audited by Price Waterhouse LLP, independent accountants. You
should read this information in conjunction with the Portfolio's financial
statements and accompanying notes, which appear, along with the audit report
from Price Waterhouse, in the Portfolio's most recent Annual Report to
shareholders. The Annual Report is incorporated by reference in the Statement of
Additional Information and in this prospectus, and contains a more complete
discussion of the Portfolio's performance. You may have the Report sent to you
without charge by writing to Vanguard or by calling our Investor Information
Department.
PLAIN TALK ABOUT
How to Read the Financial Highlights Table
The Portfolio began fiscal 1996 with a net asset value (price) of $18.83 per
share. During the year, the Portfolio earned $.26 per share from investment
income (interest and dividends) and $4.39 per share from investments that had
appreciated in value or that were sold for higher prices than the Portfolio paid
for them. Of those total earnings of $4.65 per share, $.86 per share was
returned to shareholders in the form of dividend and capital gains
distributions.
The earnings ($4.65 per share) less distributions ($.86 per share) resulted
in a share price of $22.62 at the end of the year, an increase of $3.79 per
share (from $18.83 at the beginning of the period to $22.62 at the end of the
period). Assuming that the shareholder had reinvested the distributions in the
purchase of more shares, total return from the Portfolio was 25.28% for the
year.
As of August 31, 1996, the Portfolio had $4.54 billion in net assets; an
expense ratio of .43% ($4.30 per $1,000 of net assets); and net investment
income amounting to 1.32% of its average net assets. It sold and replaced
securities valued at 44% of its total net assets.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Year Ended August 31,
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $18.83 $15.52 $14.71 $14.71 $13.69 $10.38 $10.01 $ 7.17 $12.74 $13.21
---------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .26 .25 .20 .21 .19 .20 .14 .11 .10 .30
Net Realized and
Unrealized Gain (Loss)
on Investments 4.39 3.24 .82 .05 1.02 3.30 .36 2.79 (2.10) 1.45
---------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 4.65 3.49 1.02 .26 1.21 3.50 .50 2.90 (2.00) 1.75
- -----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.29) (.18) (.21) (.18) (.19) (.19) (.13) (.06) (.31) (.28)
Distributions from
Realized Capital Gains (.57) -- -- (.08) -- -- -- -- (3.26) (1.94)
----------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.86) (.18) (.21) (.26) (.19) (.19) (.13) (.06) (3.57) (2.22)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $22.62 $18.83 $15.52 $14.71 $14.71 $13.69 $10.38 $10.01 $7.17 $12.74
- ------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 25.28% 22.75% 6.98% 1.69% 8.83% 34.28% 5.03% 40.72% (21.62)% 17.81%
==================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $4,544 $2,989 $1,963 $1,954 $1,441 $747 $339 $184 $130 $184
Ratio of Expenses to
Average Net Assets .43% .47% .52% .49% .49% .56% .74% .95% .88% .65%
Ratio of Net Investment
Income to Average
Net Assets 1.32% 1.59% 1.30% 1.50% 1.52% 1.82% 1.77% 1.44% 1.23% 2.41%
Portfolio Turnover Rat 44% 32% 47% 37% 24% 30% 49% 48% 38% 142%
Average Commission
Rate Paid $.0492 N/A N/A N/A N/A N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
From time to time, the Vanguard Funds advertise yield and total return
figures. Yield is an historical measure of dividend income, and total return is
a measure of past dividend income (assuming that it has been reinvested) plus
capital appreciation. Neither yield nor total return should be used to predict
the future performance of a fund.
3
<PAGE> 8
PLAIN TALK ABOUT
Growth Funds and
Value Funds
Growth Investing and Value Investing are two styles employed by stock fund
managers. Growth Funds generally focus on companies that, due to their strong
earnings and revenue potential, offer above-average prospects for capital
growth, with less emphasis on dividend income. Value Funds generally emphasize
companies that, considering their assets and earnings history, are attractively
priced; these companies often pay regular dividend income to shareholders.
Growth and Value Stocks have, in the past, produced similar long-term returns,
though each has periods when it outperforms the other. In general, growth funds
appeal to investors who will accept more volatility in hope of a greater
increase in share price, while Value Funds are appropriate for investors who
want some dividend income and the potential for capital gains but are less
tolerant of share-price fluctuations.
PLAIN TALK ABOUT
Investing for the Long Term
Vanguard U.S. Growth Portfolio is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of speculating on
short-term fluctuations in the stock market.
A WORD ABOUT RISK
This prospectus describes the risks you will face as an investor in Vanguard
U.S. Growth Portfolio. It is important to keep in mind one of the main axioms of
investing: the higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: the lower the risk, the lower the
potential reward. However, as you consider an investment in the U.S. Growth
Portfolio, you should also take into account your personal tolerance for the
daily fluctuations of the stock market.
Look for this "warning flag" symbol [GRAPHIC IMAGE OF FLAG] throughout the
prospectus. It is used to mark detailed information about each type of risk that
you, as a shareholder of the Portfolio, will confront.
THE PORTFOLIO'S OBJECTIVE
The Portfolio seeks to provide long-term growth in capital. This objective is
fundamental, which means that it cannot be changed unless a majority of
shareholders vote to do so.
[GRAPHIC IMAGE OF FLAG]
BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING PAGES,
YOUR INVESTMENT IN THE PORTFOLIO, AS WITH ANY INVESTMENT IN COMMON STOCKS,
COULD LOSE MONEY.
WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:
- - You wish to add a growth stock fund to your existing holdings, which could
include other stock -- as well as bond, money market, and tax-exempt --
investments.
- - You are seeking growth of capital over the long term -- at least five years.
- - You are not looking for current income.
- - You characterize your investment temperament as "relatively aggressive."
- - You are seeking a fund that emphasizes good-quality companies with
established records of growth.
This Portfolio is not an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of the Portfolio's shareholders. To
minimize such costs, which reduce the ultimate returns achieved by you and other
shareholders, the Portfolio has adopted the following policies:
- - The Portfolio reserves the right to reject any purchase request -- including
exchanges from other Vanguard Funds -- that it regards as disruptive to the
efficient management of the Portfolio. This
4
<PAGE> 9
could be because of the timing of the investment or because of a history of
excessive trading by the investor.
- - There is a limit on the number of times you can exchange into or out of the
Portfolio (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Portfolio reserves the right to stop offering shares at any time.
INVESTMENT STRATEGIES
This section explains how the Portfolio's investment adviser pursues the
objective of long-term growth in capital. It also explains three important risks
- -- market risk, objective risk, and manager risk -- faced by investors in the
Portfolio. Unlike the Portfolio's investment objective, the adviser's investment
strategies are not fundamental and can be changed by the Portfolio's Board of
Directors without shareholder approval. However, before making any important
change in its strategies, the Portfolio will give shareholders 30-days notice,
in writing.
MARKET EXPOSURE
The Portfolio invests chiefly in large-capitalization common stocks that offer
favorable prospects for capital growth but that produce little current income.
At times, the Portfolio may also invest in securities that are convertible into
common stocks.
[GRAPHIC IMAGE OF FLAG]
THE PORTFOLIO IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT
STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN EXTENDED PERIODS.
STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING STOCK PRICES
AND PERIODS OF FALLING STOCK PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns (dividend income plus change in market
value) for the U.S. stock market over various periods as measured by the
Standard & Poor's 500 Composite Stock Price Index, a widely used barometer of
stock market activity. Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, how the gap between best and worst tends to
narrow over the long term.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
U.S. STOCK MARKET RETURNS 1926 - 1995
- ------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Best 53.9% 23.9% 20.1% 16.9%
Worst - 43.3 - 12.5 - 0.9 3.1
Average 12.5 10.3 10.7 10.7
- ------------------------------------------------------------------------------
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1995. For example, while the average return on stocks
PLAIN TALK ABOUT
Costs and Market Timing
Some Investors Try to Profit From "Market Timing" -- Switching Money Into
Investments When They Expect Prices to Rise, and Taking Money Out When They
Expect the Market to Fall. As Money is Shifted In and Out, A Fund Incurs
Expenses for Buying and Selling Securities. These Costs are Borne by All Fund
Shareholders, Including the Long-Term Investors Who Do Not Generate the Costs.
Therefore, the Portfolio Discourages Short-Term Trading By, Among Other Things,
Limiting the Number of Exchanges it Permits.
PLAIN TALK ABOUT
Large-Cap, Mid-Cap, and
Small-Cap Stocks
Stocks of publicly traded companies -- and mutual funds that hold these stocks
- -- can be classified by the companies' market value, or capitalization. Vanguard
defines large-capitalization, or large-cap, funds as those holding stocks of
companies with an average total market value exceeding $5 billion. Mid-cap funds
hold stocks of companies with an average market value between $750 million and
$5 billion. Small-cap funds hold stocks of companies with an average market
value of less than $750 million.
5
<PAGE> 10
for all of the 5-year periods was +10.3%, returns for these five-year periods
ranged from a -12.5% average (from 1928 through 1932), to +23.9% (from 1951
through 1955). These average returns reflect past performance on common stocks
and should not be regarded as an indication of future returns from either the
stock market as a whole or this Portfolio in particular.
Finally, because the U.S. Growth Portfolio does not hold the same securities
held in the Standard & Poor's 500 Index or any other market index, the
performance of the Portfolio will not mirror the returns of any particular
index.
[GRAPHIC IMAGE OF FLAG]
THE PORTFOLIO IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE POSSIBILITY THAT
RETURNS FROM GROWTH STOCKS WILL TRAIL RETURNS FROM THE OVERALL STOCK
MARKET. AS A GROUP, GROWTH STOCKS TEND TO GO THROUGH CYCLES OF RELATIVE
UNDERPERFORMANCE AND OUTPERFORMANCE IN COMPARISON TO COMMON STOCKS IN
GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL
YEARS.
SECURITY SELECTION
Lincoln Capital Management Company (Lincoln), adviser to the Portfolio, selects
common stocks of seasoned U.S. companies that have past records of growth and,
in Lincoln's opinion, above-average prospects for continued growth. Such
companies tend to have strong positions in their markets, reasonable financial
strength, and relatively low sensitivity to changing economic conditions.
Lincoln seeks to identify stocks that sell at attractive prices in relation to
their growth potential. The top ten holdings (which amounted to 33% of the
Portfolio's total net assets) as of August 31, 1996, follow.
1. The Coca-Cola Co.
2. AT&T Corp.
3. Cisco Systems, Inc.
4. Automatic Data Processing Inc.
5. American Home Products Co.
6. Johnson & Johnson
7. Hewlett-Packard Co.
8. Procter & Gamble Co.
9. Pfizer, Inc.
10. SmithKline Beecham PLC
Keep in mind that, because the makeup of the Portfolio changes daily, this
listing is only a "snapshot" at one point in time. Note, too, that the
Portfolio's relatively low level of diversification means that there is a
greater chance that the poor performance of a single stock held could hurt the
Portfolio.
The Portfolio is run by Lincoln according to traditional methods of active
investment management, which means securities are bought and sold according to
Lincoln's judgments about companies and their financial prospects, and about the
stock market and the economy in general.
PLAIN TALK ABOUT
Portfolio Diversification
In general, the more diversified a Fund's Portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the Fund. One measure of a
Fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average U.S. Equity Mutual Fund has
about 25% of its assets invested in its ten largest holdings, while some
less-diversified Mutual Funds have more than 50% of their assets invested in the
stocks of just ten companies.
6
<PAGE> 11
PLAIN TALK ABOUT
Portfolio Turnover
Before investing in a Mutual Fund, you should review its Portfolio turnover rate
for an indication of the potential effect of transaction costs on the Fund's
future returns. In general, the greater the volume of buying and selling by the
Fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. Also, Funds with high Portfolio turnover rates
may be more likely than low-turnover Funds to generate capital gains that must
be distributed to shareholders as taxable income. The average turnover rate for
actively managed funds investing in common stocks is 75%.
PLAIN TALK ABOUT
Derivatives
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new, exotic types of derivatives -- some of which
can carry considerable risks.
[GRAPHIC IMAGE OF FLAG]
THE PORTFOLIO IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT
LINCOLN MAY DO A POOR JOB OF SELECTING STOCKS.
PORTFOLIO TURNOVER
Although the Portfolio generally seeks to invest for the long term, it retains
the right to sell securities regardless of how long they have been held. The
Portfolio's average turnover rate for the past five years has been about 37%. (A
turnover rate of 100% would occur, for example, if the Portfolio sold and
replaced securities valued at 100% of its total net assets within a one-year
period.)
INVESTMENT POLICIES
Besides investing in common stocks of growth companies, the Portfolio may follow
a number of investment policies to achieve its objective.
[GRAPHIC IMAGE OF FLAG]
ALTHOUGH IT HAS NOT DONE SO IN THE PAST, THE PORTFOLIO RESERVES THE RIGHT
TO INVEST, TO A LIMITED EXTENT, IN STOCK FUTURES AND OPTIONS CONTRACTS,
WHICH ARE TRADITIONAL TYPES OF DERIVATIVES.
Losses (or gains) involving futures can sometimes be substantial -- in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a Portfolio. This Portfolio will
not use futures and options for speculative purposes or as leveraged investments
that magnify the gains or losses of an investment. Rather, the Portfolio will
keep separate cash reserves or other liquid portfolio securities in the amount
of the obligation underlying the futures contract. Only a limited percentage of
the Portfolio's assets -- up to 5% if required for deposit and no more than 20%
of total assets -- may be committed to such contracts.
The reasons for which the Portfolio may use futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To make it easier to trade.
- - To reduce costs by buying futures instead of actual stocks when futures are
cheaper.
The Portfolio will usually hold only a small percentage of its assets in cash
reserves, although if the investment adviser believes that market conditions
warrant a temporary defensive measure, the Portfolio may hold cash reserves
without limit.
7
<PAGE> 12
PLAIN TALK ABOUT
Past Performance
Whenever you see information on a Fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the Fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
INVESTMENT LIMITATIONS
To reduce risk and maintain diversification, the Portfolio has adopted limits on
some of its investment policies. Specifically, the Portfolio will not:
- - Invest more than 5% of its assets in the securities of companies that have
been in business for less than three years.
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for the purpose of meeting shareholder requests to
redeem shares. With respect to 75% of its assets, this Portfolio will not:
- - Invest more than 5% in the securities of any one company.
- - Buy more than 10% of the outstanding voting securities of any company.
The limitations listed in this prospectus and in the Statement of Additional
Information are fundamental and may be changed only by approval of a majority of
the Portfolio's shareholders.
INVESTMENT PERFORMANCE
Vanguard U.S. Growth Portfolio invests primarily in common stocks, so its
performance is closely correlated to the performance of the overall stock
market. Historically, stock market performance has been characterized by sharp
up-and-down swings in the short term and by more stable growth over the long
term.
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 8/31/96
[GRAPH]
The results shown above represent the Portfolio's "average annual total
return" performance, which assumes that any distributions of capital gains and
dividends were reinvested for the indicated periods. Also included is
comparative information on the unmanaged Standard & Poor's 500 Index. The chart
does not make any allowance for Federal, state, or local income taxes that
shareholders must pay on a current basis.
In weighing these performance figures, note that the Portfolio has been in
operation since January 6, 1959, and managed by Lincoln Capital Management since
August 31, 1987.
8
<PAGE> 13
PLAIN TALK ABOUT
Distributions
As a Shareholder, you are entitled to your share of the Fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an Income Dividend or Capital Gains Distribution. Income
Dividends come from the dividends that the Fund earns from its holdings as well
as interest it receives from its money market and bond investments. Capital
Gains are realized whenever the Fund sells securities for higher prices than it
paid for them. These Capital Gains are either short-term or long-term depending
on whether the Fund held the securities for less than or more than one year.
SHARE PRICE
The Portfolio's share price, called its net asset value, is calculated each
business day after the close of regular trading (generally 4:00 p.m. Eastern
time) of the New York Stock Exchange. Net asset value per share is computed by
adding up the total value of the Portfolio's investments and other assets,
subtracting any of its liabilities, or debts, and then dividing by the number of
Portfolio shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = ------------------------------------
NUMBER OF SHARES OUTSTANDING
Daily net asset value, or NAV, is useful to you as a shareholder because the
NAV, multiplied by the number of Portfolio shares you own, gives you the dollar
amount you would have received had you sold all of your shares back to the
Portfolio that day.
The Portfolio's share price can be found daily in the mutual fund listings of
most major newspapers under the heading Vanguard Group. Different newspapers use
different abbreviations of the Portfolio's name, but the most common is USGRO.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each December, the Portfolio distributes to shareholders virtually all of its
income from interest and dividends, as well as any capital gains realized from
the sale of securities. You can receive distributions of income or capital gains
in cash, or you may have them automatically reinvested in more shares of the
Portfolio. In either case, distributions of dividends and capital gains that are
declared in December -- even if paid to you in January -- are taxed as if they
had been paid to you in December. Vanguard will process your dividend
distribution and send you a statement each year showing the tax status of all
your distributions.
- - The dividends and short-term capital gains that you receive are taxable to you
as ordinary dividend income. Any distributions of net long-term capital gains
by the Portfolio are taxable to you as long-term capital gains, no matter how
long you've owned shares in the Portfolio. Both dividends and capital gains
distributions are taxable to you whether received in cash or reinvested in
additional shares. Although the Portfolio does not seek to realize any
particular amount of capital gains during a year, such gains are realized from
time to time as byproducts of the ordinary investment activities of the
Portfolio. Consequently, distributions may vary considerably from year to
year.
- - If you sell or exchange shares, any gain or loss you have is a taxable event,
which means that you may have a capital gain to report as income, or a capital
loss to report as a deduction, when you complete your Federal income tax
return.
9
<PAGE> 14
- - Distributions of dividends or capital gains, and capital gains or losses from
your sale or exchange of Portfolio shares, may be subject to state and local
income taxes as well.
The tax information in this prospectus is provided as general information and
will not apply to you if you are investing in a tax-deferred account such as an
IRA. You should consult your own tax adviser about the tax consequences of an
investment in the Portfolio.
THE PORTFOLIO AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 30 investment
companies with more than 90 distinct investment portfolios and total net assets
of more than $230 billion. All of the Vanguard Funds share in the expenses
associated with business operations, such as personnel, office space, equipment,
and advertising.
Vanguard also provides marketing services to the Funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each Fund pays its
allocated share of The Vanguard Group's costs.
A list of the Fund's Directors and Officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.
INVESTMENT ADVISER
The Portfolio employs Lincoln Capital Management Company, 200 South Wacker
Drive, Chicago, IL 60606, as its investment adviser. Lincoln manages the
Portfolio subject to the control of the Officers and Directors of the Fund.
Lincoln is paid an advisory fee based on average month-end net assets of the
Portfolio and a sliding percentage scale:
<TABLE>
<CAPTION>
--------------------------------
ASSETS MANAGED FEE
--------------------------------
<S> <C>
First $25 million 0.40%
Next $125 million 0.35
Next $350 million 0.25
Next $500 million 0.20
Next $1.5 billion 0.15
Assets over $2.5 billion 0.10
-------------------------------
</TABLE>
For the year ended August 31, 1996, the investment advisory fee paid to
Lincoln was $6.13 million.
The fee agreement with Lincoln does not provide for either an incentive bonus
or penalty based on performance. The agreement authorizes Lincoln to choose
brokers or dealers to handle the purchase and sale of the Portfolio's
securities, and directs Lincoln to get the best available price and most
favorable execution from these brokers with respect to all transactions.
PLAIN TALK ABOUT
"Buying a Dividend"
Unless you are investing in a Tax-Deferred Retirement Account (such as an IRA),
it is not to your advantage to buy shares of a Fund shortly before it makes a
distribution, because part of your investment will come back to you as a Taxable
Distribution. This is known as "Buying a Dividend." For example: on December 15,
you invest $5,000, buying 250 shares for $20 each. If the Fund pays a
distribution of $1 per share on December 16, its share price would drop to $19
(not counting market change). You would still have only $5,000 (250 shares x $19
= $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you
would owe tax on the $250 distribution you received, even if you had reinvested
the dividends in more shares. To avoid "Buying a Dividend," check a Fund's
distribution schedule before you invest.
PLAIN TALK ABOUT
Vanguard'S Unique Corporate Structure
The Vanguard Group, Inc. is the only Mutual Mutual Fund Company. It is owned
jointly by the Funds it oversees and by the Shareholders in those Funds. Other
Mutual Funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its Funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to Fund Shareholders in
the form of lower operating expenses.
10
<PAGE> 15
The Board of Directors may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser, either as
a replacement for Lincoln or as an additional adviser. However, no such change
would be made before giving shareholders 30-days notice, in writing.
GENERAL INFORMATION
The U.S. Growth Portfolio is one of two Portfolios of Vanguard World Fund, Inc.
The other Portfolio is the International Growth Portfolio. Vanguard World Fund
was originally formed as a corporation in 1959 and is now organized under the
laws of the State of Maryland. The Portfolios are combined under one corporation
for administrative purposes, but in virtually all respects operate like separate
corporations.
Shareholders of the U.S. Growth Portfolio have rights and privileges similar
to those enjoyed by other corporate shareholders. For example, shareholders will
not be responsible for any liabilities of the corporation. If any matters are to
be voted on by shareholders (such as a change in a fundamental investment
objective or the election of directors), each share outstanding at that point
would be entitled to one vote. Annual meetings will not be held by the Portfolio
except as required by the Investment Company Act of 1940. A meeting will be
scheduled (for example, to vote on the removal of a director) if the holders of
at least 10% of the Portfolio's shares request a meeting in writing.
PLAIN TALK ABOUT
The Portfolio's Adviser
Lincoln Capital Management Company, an investment advisory firm founded in 1967,
currently manages about $41 billion in assets. It provides investment counseling
services to a limited number of clients, most of which are institutional clients
such as pension funds. The managers responsible for overseeing the
implementation of Lincoln's strategy for Vanguard U.S. Growth Portfolio are:
J. PARKER HALL III, President of Lincoln; 40 years investment experience, 26
years with Lincoln; B.A. from Swarthmore College, M.B.A. from Harvard Business
School.
DAVID M. FOWLER, Vice President of Lincoln; 25 years investment experience,
13 years with Lincoln; B.S. from Loyola University, M.B.A. from Northwestern
University.
Both have served in this capacity since Lincoln became the portfolio's
adviser in August 1987.
11
<PAGE> 16
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to Fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer you as a Vanguard U.S. Growth Portfolio shareholder. Booklets providing
detailed information are available on the services marked with a [Booklet].
Please call us to request copies.
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares.
TELEPHONE REDEMPTIONS Automatically set up for this Portfolio unless you
(SALES AND EXCHANGES) notify us otherwise.
VANGUARD DIRECT DEPOSIT Automatic method for depositing your paycheck or
SERVICE U.S. Government payment (including Social Security
[BOOKLET] and Government pension checks) into your account.
VANGUARD AUTOMATIC EXCHANGE Automatic method for moving a fixed amount of
SERVICE money from one Vanguard Fund account to another.*
[BOOKLET]
VANGUARD FUND EXPRESS Electronic method for buying or selling shares. You
[BOOKLET] can transfer money between your Vanguard Fund
account and an account at your bank, savings and
loan, or credit union on a systematic schedule or
whenever you wish.*
VANGUARD DIVIDEND EXPRESS Electronic method for transferring dividends and/or
[BOOKLET] capital gains distributions directly from your
Vanguard Fund account to your bank, savings and
loan, or credit union account or to another
Vanguard Fund account.
VANGUARD BROKERAGE SERVICES A cost-effective way to trade stocks, bonds, and
(VBS) options on major exchanges, Nasdaq, and other
[BOOKLET] domestic over-the-counter markets at reduced rates,
and to buy and sell shares of non-Vanguard mutual
funds. Call VBS (1-800-992-8327) for additional
information and the appropriate forms.
*Can be used to "dollar-cost average" [BOOKLET] or to contribute to an
IRA or other retirement plan.
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
12
<PAGE> 17
TYPES OF ACCOUNTS
INDIVIDUAL OR OTHER ENTITY
Vanguard's account registration form can be used to establish a variety of
non-retirement accounts.
FOR ONE OR MORE PEOPLE To open an account in the name of one (individual) or
more (joint tenants) people. $3,000 minimum initial
investment.
FOR A MINOR CHILD To open an account as an UGMA/UTMA (Uniform
[BOOKLET] Gifts/Transfers to Minors Act). Age of majority and
other transfer requirements are set by state law.
$1,000 minimum initial investment.
FOR HOLDING TRUST ASSETS To invest assets held in an existing trust. $3,000
[BOOKLET] minimum initial investment.
FOR THIRD-PARTY TRUSTEE To open an account as a retirement trust or plan
RETIREMENT INVESTMENTS based on an existing corporate or institutional plan.
(Vanguard is not the These accounts are established by the custodian or
custodian or trustee.) trustee of the existing plan.
FOR AN ORGANIZATION To open an account as a corporation, partnership, or
other entity. These accounts may require a corporate
resolution or other documents to name the individuals
authorized to act. $3,000 minimum initial investment.
RETIREMENT
You establish these accounts with a Vanguard adoption agreement -- not a
Vanguard account registration form. To request the appropriate adoption
agreement and forms, or to ask questions about investing for retirement, call
Investor Information.
FOR AN INDIVIDUAL To open a retirement account in the name of an
RETIREMENT ACCOUNT (IRA) individual. IRAs can be established with a
(Vanguard Fiduciary Trust contribution, a direct roll-over from an employer's
Company is the plan such as a 401(k), or an asset transfer or
custodian.) rollover from another financial institution such as a
bank or mutual fund company. $1,000 minimum initial
investment.
FOR A SIMPLIFIED EMPLOYEE To open a retirement account in the name of an
PENSION PLAN ACCOUNT employee. SEPs allow employers to make deductible
(SEP-IRA) contributions directly to IRAs established by their
(Vanguard Fiduciary Trust employees. A SEP can be established by people who are
Company is the self-employed, small-business owners, partnerships,
custodian.) or corporations.
FOR A QUALIFIED To open a retirement account that allows
RETIREMENT PROGRAM small-business owners or people who are self-employed
ACCOUNT to make tax-deductible retirement contributions for
(Vanguard Fiduciary Trust themselves and their employees into Profit-Sharing
Company can be the and Money Purchase Pension (Keogh) plans.
custodian.)
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
13
<PAGE> 18
TYPES OF ACCOUNTS (continued)
FOR A 403(B)(7) CUSTODIAL ACCOUNT To open a retirement account that allows
(Vanguard Fiduciary Trust employees of tax- exempt institutions (for
Company is the custodian.) example, schools or hospitals) to make
pre-tax retirement contributions.
DISTRIBUTION OPTIONS
You can receive distributions of dividends and/or capital gains in a number of
ways:
REINVESTMENT Dividends and capital gains are
automatically reinvested in additional
shares of the Portfolio.
DIVIDENDS IN CASH Dividends are paid by check and mailed to
your account's address of record, and
capital gains are reinvested in additional
shares of the Portfolio.
DIVIDENDS AND CAPITAL GAINS Both dividends and capital gains are paid by
IN CASH check and mailed to your account's address
of record.
To electronically transfer cash dividends and/or capital gains to your bank,
savings and loan, or credit union account, or to another Vanguard Fund
account, see Vanguard Dividend Express under "Services and Account Features."
BUYING SHARES
You buy your shares at the Portfolio's next-determined net asset value after
Vanguard receives your request, provided we receive your request before 4:00
p.m. Eastern time (the close of trading on the New York Stock Exchange). The
Portfolio is offered on a no-load basis, meaning that you do not pay sales
commissions or 12b-1 marketing fees.
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
MINIMUM INVESTMENT $3,000 (regular account); $1,000 $100 by mail or exchange;
(IRAs and custodial accounts for minors). $1,000 by wire.
<S> <C> <C>
BY MAIL Complete and sign the Mail your check with an Invest-By-Mail form
[LETTER] application form. detached from your confirmation statement to
First-class mail to: the address listed on the form.
The Vanguard Group
P.O. Box 2600 Make your check payable to: Make your check payable to:
Valley Forge, PA 19482 The Vanguard Group - 23 The Vanguard Group - 23
Express or Registered mail to: All purchases must be made in U.S. All purchases must be made in
The Vanguard Group dollars, and checks must be drawn U.S. dollars, and checks must be
455 Devon Park Drive on U.S. banks. drawn on U.S. banks.
Wayne, PA 19087
</TABLE>
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
14
<PAGE> 19
BUYING SHARES (continued)
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNt
<S> <C> <C>
BY TELEPHONE Call Vanguard Tele-Account* 24 Call Vanguard Tele-Account* 24
[TELEPHONE] hours a day -- or Client Services hours a day -- or Client Services
1-800-662-6273 during business hours -- to during business hours -- to
Vanguard Tele-Account(R) exchange from another Vanguard Fund exchange from another Vanguard Fund
1-800-662-2739 account with the same registration account with the same registration
Client Services (name, address, taxpayer I.D., and (name, address, taxpayer I.D., and
account type). account type).
Use Vanguard Fund Express (see
"Services and Account Features") to
transfer assets from your bank
account. Call Client Services
before your first use to verify
that this option is in place.
</TABLE>
*You must obtain a Personal Identification Number through
Tele-Account at least seven days before you request your first
exchange.
IMPORTANT NOTE: Once a telephone transaction has been approved by you and a
confirmation number assigned, it cannot be revoked. We reserve the right to
refuse any purchase.
<TABLE>
<S> <C> <C>
BY WIRE Call Client Services to arrange Call Client Services to arrange
[WIRE] your wire transaction. your wire transaction.
Wire to:
CoreStates Bank, N.A. Wire transactions are not available Wire transactions are not available
ABA 031000011 for retirement accounts. for retirement accounts.
CoreStates No 01019897
[Temporary Account Number]
Vanguard U.S. Growth
Portfolio
[Account Registration]
Attn Vanguard
</TABLE>
<TABLE>
<S> <C>
AUTOMATICALLY Vanguard offers a variety of ways
[SYMBOL] that you can add to your account
automatically. See "Services and
Account Features."
</TABLE>
You can redeem (that is, sell or exchange) shares purchased by check or
Vanguard Fund Express at any time. However, while your redemption request will
be processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten days.
It is important that you call Vanguard before you invest a large dollar
amount by wire or check. We must consider the interests of all Portfolio
shareholders and so reserve the right to delay or refuse any purchase that will
disrupt the Portfolio's operation or performance.
INVESTOR INFORMATION 1-800-662-7447 CLIENT SERVICES 1-800-602-2739
TELE-ACCOUNT 1-800-662-6273
15
<PAGE> 20
REDEEMING SHARES
IMPORTANT TAX NOTE: Any sale or exchange of shares in a non-retirement account
could result in a taxable gain or a loss.
The ability to redeem (that is, sell or exchange) Portfolio shares by telephone
is automatically established for your account unless you tell us in writing that
you do not want this option.
To protect your account from unauthorized or fraudulent telephone
instructions, Vanguard follows specific security procedures. When we receive a
call requesting an account transaction, we require the caller to provide:
- Portfolio name.
- 10-digit account number.
- Name and address exactly as registered on that account.
- Social Security or Employer Identification number as registered on that
account.
If you call to sell shares, the sale proceeds will be made payable to you, as
the registered shareholder, and mailed to your account's address of record.
If we follow reasonable security procedures, neither the Portfolio nor
Vanguard will be responsible for the authenticity of transaction instructions
received by telephone. We believe that these procedures are reasonable and that,
if we follow them, you bear the risk of any losses resulting from unauthorized
or fraudulent telephone transactions on your account. However, if we do not
follow these or other reasonable procedures, Vanguard may be liable for any
losses resulting from unauthorized or fraudulent transactions.
HOW TO SELL SHARES
You may withdraw any part of your account, at any time, by selling shares. Sale
proceeds are normally mailed within two business days after Vanguard receives
your request. The sale price of your shares will be the Portfolio's
next-determined net asset value after Vanguard receives all required documents
in good order.
Good order means that the request includes:
- Portfolio name and account number.
- Amount of the transaction (in dollars or shares).
- Signatures of all owners exactly as registered on the account.
- Signature guarantees (if required).
- Any supporting legal documentation that may be required.
- Any certificates you are holding for the account.
Sales or exchange requests received after the close of trading on the New
York Stock Exchange (generally 4:00 p.m. Eastern time) are processed at the next
business day's net asset value.
The Portfolio reserves the right to close any non-retirement or UGMA/UTMA
account whose balance falls below the minimum initial investment. The Portfolio
will deduct a $10 annual fee if your non-retirement account balance falls below
$2,500 or if your UGMA/UTMA account balance falls below $500. The fee is waived
if your total Vanguard account assets are $50,000 or more.
Some written requests require a signature guarantee from a bank, broker, or
other acceptable institution. A notary public cannot provide a signature
guarantee.
INVESTOR INFORMATION 1-800-662-7447 CLIENT SERVICES 1-800-602-2738
TELE-ACCOUNT 1-800-662-6273
16
<PAGE> 21
REDEEMING SHARES (continued)
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one Vanguard Fund to purchase shares of
another.
Although we make every effort to maintain the exchange privilege, Vanguard
reserves the right to revise or terminate the exchange privilege, limit the
amount of an exchange, or reject any exchange, at any time, without notice.
Because excessive exchanges can potentially disrupt the management of the
Portfolio and increase transaction costs, Vanguard limits exchange activity to
two substantive exchange redemptions (at least 30 days apart) from the Portfolio
during any 12-month period. "Substantive" means either a dollar amount large
enough to have a negative impact on the Portfolio or a series of movements
between Vanguard Funds.
Before you exchange into a new Vanguard Fund, be sure to read its prospectus.
For a copy and for answers to questions you might have, call Investor
Information.
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
BY TELEPHONE ALL TYPES EXCEPT RETIREMENT:
[TELEPHONE]
1-800-662-6273 Call Vanguard Tele-Account* 24 hours a day --
Vanguard Tele-Account or Client Services during business hours -- to
sell or exchange shares. You can exchange
1-800-662-2739 shares from this Portfolio to open an account
Client Services in another Vanguard Fund or to add to an
existing Vanguard Fund account with an
identical registration.
RETIREMENT:
You can exchange -- but not sell -- shares by
calling Tele- Account or Client Services.
*You must obtain a Personal Identification
Number through Tele-Account at least seven days
before you request your first redemption.
BY MAIL ALL TYPES EXCEPT RETIREMENT:
[LETTER]
First-class mail to: Send a letter of instruction signed by all
The Vanguard Group registered account holders. Include the
Vanguard U.S. Growth Portfolio Portfolio name and account number and (if you
P.O. Box 1120 are selling) a dollar amount or number of
Valley Forge, PA 19482 shares OR (if you are exchanging) the name of
the Fund you want to exchange into and a dollar
EXPRESS OR REGISTERED mail to: amount or number of shares.
The Vanguard Group
Vanguard U.S. Growth Portfolio RETIREMENT:
455 Devon Park Drive
Wayne, PA 19087 For information on how to request
distributions from . . .
- IRAs, call Client Services.
- SEP-IRAs, 403(b)(7) custodial accounts, and
Profit-Sharing and Money Purchase Pension
(Keogh) Plans, call Individual Retirement
Services at 1-800-662-2003.
Depending on your account registration type,
additional documentation may be required.
ALL TYPES EXCEPT RETIREMENT:
AUTOMATICALLY Vanguard offers several ways to sell or
[SYMBOL] exchange shares automatically (see "Services
and Account Features"). Call Investor
Information for the appropriate booklet and
application if you did not elect a feature when
you opened your account.
INVESTOR INFORMATION 1-800-662-7447 CLIENT SERVICES 1-800-602-2738
TELE-ACCOUNT 1-800-662-6273
17
<PAGE> 22
REDEEMING SHARES (continued)
It is important that you call Vanguard before you redeem a large dollar
amount. We must consider the interests of all Portfolio shareholders and so
reserve the right to delay your redemption proceeds -- up to seven days -- if
the amount will disrupt the Portfolio's operation or performance.
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the United States
Securities and Exchange Commission. If you experience difficulty making a
telephone redemption during periods of drastic economic or market change, you
can send us your request by regular or express mail. Follow the instructions
on selling or exchanging shares by mail in the "Redeeming Shares" section.
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you clear, concise account and tax statements to help you keep
track of your Vanguard U.S. Growth Portfolio account throughout the year as well
as when you are preparing your income tax returns.
In addition, you will receive financial reports about the Portfolio twice a
year. These comprehensive reports include an assessment of the Portfolio's
performance (and a comparison to its industry benchmark), an overview of the
markets, a report from the adviser, as well as a listing of its holdings and
other financial statements.
CONFIRMATION STATEMENT Sent each time you buy, sell, or
exchange shares; confirms the date and the
amount of your transaction.
PORTFOLIO SUMMARY Mailed quarterly; shows the market
value of your account at the close of the
statement period, as well as distributions,
purchases, sales, and exchanges for the current
calendar year.
FUND FINANCIAL REPORTS Mailed in April and October for this Portfolio.
TAX STATEMENTS Generally mailed in January; report
previous year's dividend distributions,
proceeds from the sale of shares, and
distributions from IRAs or other retirement
accounts.
AVERAGE COST STATEMENT Issued quarterly for taxable
[BOOKLET] accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you
redeemed during the previous quarter, using the
average cost single category method.
INVESTOR INFORMATION 1-800-662-7447 CLIENT SERVICES 1-800-602-2738
TELE-ACCOUNT 1-800-662-6273
18
<PAGE> 23
FUND AND ACCOUNT UPDATES (continued)
AUTOMATED TELEPHONE ACCESS
VANGUARD TELE-ACCOUNT Toll-free access to Vanguard Fund
1-800-662-6273 and account information -- as well as some
Any time, seven days a week, transactions -- through any TouchTone(TM)
from anywhere in the telephone. Tele-Account provides total return,
continental share price, price change, and yield quotations
United States for all Vanguard Funds; gives your account
and Canada. balances and history (e.g., last transaction,
latest dividend distribution); and allows you
to sell or exchange Fund shares.
COMPUTER ACCESS Use your personal computer to learn more about
Vanguard Funds and services; keep in touch with
VANGUARD ONLINE(sm) your Vanguard accounts; map out a long-term
Keyword: Vanguard investment strategy; and ask questions, make
suggestions, and send messages to Vanguard.
Vanguard Online is offered through America
Online(R) (AOL). To establish an AOL account,
call 1-800-238-6336.
VANGUARD ON THE Use your personal computer to visit Vanguard's
WORLD WIDE WEB education- oriented website, which provides
http://www.vanguard.com timely news and infor- mation about Vanguard
Funds and services; an online "university" that
offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you
create your own investment and retirement
strategies.
SHARES OF THE PORTFOLIO MAY ONLY BE SOLD IN THOSE STATES IN WHICH THEY ARE
REGISTERED. THE PORTFOLIO'S SHARES ARE CURRENTLY REGISTERED FOR SALE IN ALL 50
STATES, AND THE PORTFOLIO INTENDS TO MAINTAIN SUCH REGISTRATION.
INVESTOR INFORMATION 1-800-662-7447 CLIENT SERVICES 1-800-602-2738
TELE-ACCOUNT 1-800-662-6273
19
<PAGE> 24
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about
Vanguard U.S. Growth Portfolio, including its investment objective, risks,
strategies, and expenses, as well as services available to you as a shareholder.
It is important that you understand these facts so that you can decide
whether an investment in this Portfolio is right for you. The following
questions offer a quick review of some of the subjects covered by this
prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN . . .
- The Portfolio's objective? (page 4)
- The Portfolio's investment strategies? (page 5)
- Who should invest in the Portfolio? (page 4)
- The risks associated with the Portfolio? (pages 4 - 7)
- Whether the Portfolio is Federally insured?
(inside front cover)
- The Portfolio's expenses? (page 2)
- The background of the Portfolio's investment managers?
(page 11)
- How to open an account? (page 14)
- How to sell or exchange shares? (page 16)
- How often you'll receive statements and financial reports?
(page 18)
PLAIN TALK ABOUT
Keeping Your Prospectus
Reading this prospectus will help you to decide whether Vanguard U.S. Growth
Portfolio is suitable for your investment goals. If you decide to invest, don't
throw the prospectus out; you will no doubt need it for future reference.
20
<PAGE> 25
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION MUTUAL FUND
Payment to mutual fund shareholders An investment company that pools the
of gains realized during the year on money of many people and invests it
securities that the fund has sold at in a variety of securities in an
a profit, minus any realized losses. effort to achieve a specific
objective over time.
CASH RESERVES
Cash deposits as well as short-term NET ASSET VALUE (NAV)
bank deposits, money market The market value of a mutual fund's
instruments, and U.S. Treasury bills. total assets, minus liabilities,
divided by the number of shares
COMMON STOCK outstanding. The value of a single
A security representing ownership share is called its share value or
rights in a corporation. A share price.
stockholder is entitled to share in
the company's profits, some of which PORTFOLIO DIVERSIFICATION
may be paid out as dividends. Holding a variety of securities so
that a portfolio's return is not hurt
DIVIDEND INCOME by the poor performance of a single
Payment to shareholders of income security or industry.
from interest or dividends generated
by a fund's investments. PRICE/EARNINGS (P/E) RATIO
The current share price of a stock,
DOLLAR-COST AVERAGING divided by its per-share earnings
Investing equal amounts of money at (profits) from the past year. A stock
regular intervals on an ongoing selling for $20, with earnings of $2
basis. This technique ensures that an per share, has a price/earnings ratio
investor buys fewer shares when of 10.
prices are high and more shares when
prices are low. PRINCIPAL
The amount of your own money you put
EXPENSE RATIO into an investment.
The percentage of a fund's average
net assets used to pay its expenses. SECURITIES
The expense ratio includes management Stocks, bonds, and other investment
fees, administrative fees, and any vehicles.
12b-1 marketing fees.
TOTAL RETURN
FIXED-INCOME SECURITIES A percentage change, over a specified
Investments, such as bonds, that have time period, in a mutual fund's net
a fixed payment schedule. While the asset value, with the ending net
level of income offered by these asset value adjusted to account for
securities is predetermined, their the reinvestment of all distributions
prices may fluctuate. of dividends and capital gains.
GROWTH STOCK FUND VALUE STOCK FUND
A mutual fund that emphasizes stocks A mutual fund that focuses on the
of companies whose strong earnings stocks of companies that, considering
and revenue potential indicate their earnings and dividends, are
above-average prospects for capital attractively priced; these companies
growth, with less emphasis on often pay regular dividend income to
dividend income. shareholders.
INVESTMENT ADVISER VOLATILITY
An organization that makes the The fluctuations in value of a mutual
day-to-day decisions regarding a fund or other security. The greater a
portfolio's investments. fund's volatility, the wider the
fluctuations between its high and low
prices.
YIELD
Current income (interest or
dividends) earned by an investment,
expressed as a percentage of the
investment's price.
<PAGE> 26
[ THE VANGUARD GROUP LOGO ]
THE VANGUARD GROUP (R)
Post Office Box 2600
Valley Forge, PA 19482
<TABLE>
<S> <C> <C>
INVESTOR INFORMATION VANGUARD BROKERAGE ELECTRONIC ACCESS TO THE
DEPARTMENT SERVICES VANGUARD MUTUAL FUND
1-800-662-7447 (SHIP) 1-800-992-8327 EDUCATION AND INFORMATION
TEXT TELEPHONE: For information on trading CENTER
1-800-952-3335 stocks, bonds, and options On America Online(R)
For information on our Funds, at reduced commissions Keyword: Vanguard
Fund services, and retirement
accounts; requests for On the World Wide Web
literature VANGUARD TELE-ACCOUNT(R) http://www.vanguard.com
1-800-662-6273 (ON-BOARD)
CLIENT SERVICES DEPARTMENT For 24-hour automated access To send e-mail to Vanguard
1-800-662-2739 (CREW) to price and yield, information [email protected]
TEXT TELEPHONE: on your account, certain
1-800-662-2738 transactions
For information on your
account, account transactions,
account statements
(C) 1996 Vanguard Marketing
Corporation, Distributor
P023N
</TABLE>
<PAGE> 27
VANGUARD
U.S. GROWTH
PORTFOLIO
Institutional Prospectus
December 27, 1996
------------------------
This prospectus contains [ picture of a sailing vessel in background ]
financial data for the
Portfolio through the
fiscal year ended
August 31, 1996.
[VANGUARD GROUP LOGO]
<PAGE> 28
VANGUARD U.S. GROWTH PORTFOLIO A Growth Stock Mutual Fund
INVESTMENT OBJECTIVE AND POLICIES
CONTENTS Vanguard U.S. Growth Portfolio (the
"Portfolio") is a diversified mutual fund, a
Portfolio Expenses 2 part of Vanguard World Fund, Inc. (the
"Fund"), an open-end investment management
Financial Highlights 3 company.
The Portfolio seeks to provide
A Word About Risk 4 long-term capital growth by investing in
equity securities of high-quality, seasoned
The Portfolio's U.S. companies with records of exceptional
Objective 4 growth. The Portfolio emphasizes companies
with strong positions in their markets,
Who Should Invest 4 reasonable financial strength, and low
sensitivity to changing economic conditions.
Investment Strategies 5 IT IS IMPORTANT TO NOTE THAT THE
PORTFOLIO'S SHARES ARE NOT GUARANTEED OR
Investment Policies 7 INSURED BY THE FDIC OR ANY OTHER AGENCY OF
THE U.S. GOVERNMENT. AS WITH ANY INVESTMENT
Investment Limitations 8 IN COMMON STOCKS, WHICH ARE SUBJECT TO WIDE
FLUCTUATIONS IN MARKET VALUE, YOU COULD LOSE
Investment MONEY BY INVESTING IN THE PORTFOLIO.
Performance 8
FEES AND EXPENSES
Share Price 9 The Portfolio is offered on a no-load basis,
which means that you pay no sales
Dividends, Capital commissions or 12b-1 marketing fees. You
Gains, and Taxes 9 will, however, incur expenses for investment
advisory, management, administrative, and
The Portfolio and distribution services, which are included in
Vanguard 10 the expense ratio.
Investment Adviser 10 IMPORTANT NOTE
This prospectus is intended for
General Information 11 institutional clients and for participants
in employer-sponsored retirement or savings
Investing plans. Another version--for investors who
with Vanguard would like to open a personal investment
account--can be obtained by calling Vanguard
- - For Plan Participants 12 at 1-800-662-7447.
- - For Other ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
Institutional Investors 12 A Statement of Additional Information (dated
December 27, 1996) containing more
Accessing Fund information about the Portfolio is, by
Information reference, part of this prospectus and may
by Computer 13 be obtained without charge by contacting
Vanguard (see back cover).
Prospectus Postscript 14
Risk Quiz 15
Investment Primer 16
WHY READING THIS PROSPECTUS IS IMPORTANT
Glossary Inside Back Cover This prospectus explains the objective,
risks, and strategies of the U.S. Growth
Portfolio. To highlight terms and concepts
important to mutual fund investors, we have
provided "Plain Talk" explanations along the
way. Reading the prospectus will help you to
decide whether the Portfolio is the right
investment for your needs. We suggest that
you keep it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE> 29
Vanguard U.S. Growth Portfolio
PORTFOLIO PROFILE
WHO SHOULD INVEST (page 4)
- - Investors seeking a growth stock mutual fund as part of a balanced and
diversified investment program.
- - Investors seeking growth of their capital over the long term -- at least five
years.
WHO SHOULD NOT INVEST
- - Investors unwilling to accept significant fluctuations in share price.
- - Investors seeking current dividend income.
RISKS OF THE PORTFOLIO (pages 4 - 7)
This Portfolio's total return will fluctuate within a wide range, so an investor
could lose money over short or even extended periods. The Portfolio is subject
to manager risk (the chance that poor security selection will cause it to lag
the stock market as a whole) and, as a growth stock fund, to objective risk (the
chance that returns from growth stocks will trail returns from the overall stock
market).
DIVIDENDS AND CAPITAL GAINS (page 9)
Paid annually in December. In participant accounts, all distributions are
automatically reinvested.
INVESTMENT ADVISER (page 10)
Lincoln Capital Management Company,
Chicago, IL.
INCEPTION DATE: January 6, 1959
NET ASSETS AS OF 8/31/96: $4.54 billion
PORTFOLIO'S EXPENSE RATIO FOR THE YEAR
ENDED 8/31/96: 0.43%
NEWSPAPER ABBREVIATION: USGro
VANGUARD FUND NUMBER: 023
AVERAGE ANNUAL TOTAL RETURN --
PERIODS ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
------ ------- ---------
<S> <C> <C> <C>
U.S. Growth Portfolio 25.3% 12.7% 14.3%
S&P 500 Index 18.7% 13.6% 15.0%
</TABLE>
QUARTERLY RETURNS (%) 1987 - 1996 (intended to show volatility of returns)
[ GRAPH ]
In evaluating past performance, remember that it is not indicative of future
performance and that returns from stocks before adjusting for inflation were
relatively high during the periods shown. Performance figures include the
reinvestment of any dividends and capital gains distributions. The returns shown
are net of expenses, but they do not reflect income taxes an investor would have
incurred. Note, too, that both the return and principal value of an investment
will fluctuate so that investors' shares, when redeemed, may be worth more or
less than their original cost.
1
<PAGE> 30
PLAIN TALK ABOUT
The Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time, have
a dramatic impact on a fund's performance.
PLAIN TALK ABOUT
Fund Expenses
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard U.S. Growth Portfolio's expense ratio in fiscal year 1996 was
0.43%, or $4.30 per $1,000 of average net assets. The average growth equity
mutual fund had expenses in 1995 of 1.36%, or $13.60 per $1,000 of average net
assets, according to Lipper Analytical Services, Inc., which reports on the
mutual fund industry.
PORTFOLIO EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Portfolio.
As noted in this table, you do not pay fees of any kind when you buy, sell,
or exchange shares of the Portfolio:
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
The next table illustrates the operating expenses that you would incur as a
shareholder of the Portfolio. These expenses are deducted from the Portfolio's
income before it is paid to you. Expenses include investment advisory fees as
well as the costs of maintaining accounts, administering the Portfolio,
providing shareholder services, and other activities. The expenses shown in the
table are for the fiscal year ended August 31, 1996.
ANNUAL PORTFOLIO OPERATING EXPENSES
Management and Administrative Expenses: 0.24%
Investment Advisory Expenses: 0.16%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.01%
----
Total Other Expenses: 0.03%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.43%
====
The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes (1) that
the Portfolio provides a return of 5% a year and (2) that you redeem your
investment at the end of each period.
<TABLE>
<CAPTION>
--------------------------------------------
1 Year 3 Years 5 Years 10 Years
--------------------------------------------
<S> <C> <C> <C> <C>
$4 $14 $24 $54
--------------------------------------------
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 31
PLAIN TALK ABOUT
How to Read the Financial Highlights Table
The Portfolio began fiscal 1996 with a net asset value (price) of $18.83 per
share. During the year, the Portfolio earned $.26 per share from investment
income (interest and dividends) and $4.39 per share from investments that had
appreciated in value or that were sold for higher prices than the Portfolio paid
for them. Of those total earnings of $4.65 per share, $.86 per share was
returned to shareholders in the form of dividend and capital gains
distributions.
The earnings ($4.65 per share) less distributions ($.86 per share) resulted
in a share price of $22.62 at the end of the year, an increase of $3.79 per
share (from $18.83 at the beginning of the period to $22.62 at the end of the
period). Assuming that the shareholder had reinvested the distributions in the
purchase of more shares, total return from the Portfolio was 25.28% for the
year.
As of August 31, 1996, the Portfolio had $4.54 billion in net assets; an
expense ratio of .43% ($4.30 per $1,000 of net assets); and net investment
income amounting to 1.32% of its average net assets. It sold and replaced
securities valued at 44% of its total net assets.
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended August 31, 1996. The financial
highlights were audited by Price Waterhouse LLP, independent accountants. You
should read this information in conjunction with the Portfolio's financial
statements and accompanying notes, which appear, along with the audit report
from Price Waterhouse, in the Portfolio's most recent Annual Report to
shareholders. The Annual Report is incorporated by reference in the Statement of
Additional Information and in this prospectus, and contains a more complete
discussion of the Portfolio's performance. You may have the Report sent to you
without charge by calling Vanguard (see back cover).
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended August 31,
---------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $18.83 $15.52 $ 14.7 $14.71 $13.69 $10.38 $10.01 $ 7.17 $12.74 $13.21
INVESTMENT OPERATIONS
Net Investment Income .26 .25 .20 .21 .19 .20 .14 .11 .10 .30
Net Realized and
Unrealized Gain (Loss)
on Investments 4.39 3.24 .82 .05 1.02 3.30 .36 2.79 (2.10) 1.45
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 4.65 3.49 1.02 .26 1.21 3.50 .50 2.90 (2.00) 1.75
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net
Investment Income (.29) (.18) (.21) (.18) (.19) (.19) (.13) (.06) (.31) (.28)
Distributions from
Realized Capital Gains (.57) -- -- (.08) -- -- -- -- (3.26) (1.94)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.86) (.18) (.21) (.26) (.19) (.19) (.13) (.06) (3.57) (2.22)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $22.62 $18.83 $15.52 $14.71 $14.71 $13.69 $10.38 $10.01 $ 7.17 $12.74
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 25.28% 22.75% 6.98% 1.69% 8.83% 34.28% 5.03% 40.72% (21.62)% 17.81%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $4,544 $2,989 $1,963 $1,954 $1,441 $ 747 $ 339 $ 184 $ 130 $ 184
Ratio of Expenses to
Average Net Assets .43% .47% .52% .49% .49% .56% .74% .95% .88% .65%
Ratio of Net Investment
Income to Average
Net Assets 1.32% 1.59% 1.30% 1.50% 1.52% 1.82% 1.77% 1.44% 1.23% 2.41%
Portfolio Turnover Rate 44% 32% 47% 37% 24% 30% 49% 48% 38% 142%
Average Commission
Rate Paid $.0492 NA NA NA NA NA NA NA NA NA
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
From time to time, the Vanguard Funds advertise yield and total return
figures. Yield is an historical measure of dividend income, and total return is
a measure of past dividend income (assuming that it has been reinvested) plus
capital appreciation. Neither yield nor total return should be used to predict
the future performance of a fund.
3
<PAGE> 32
PLAIN TALK ABOUT
Growth Funds and Value Funds
Growth investing and value investing are two styles employed by stock fund
managers. Growth funds generally focus on companies that, due to their strong
earnings and revenue potential, offer above-average prospects for capital
growth, with less emphasis on dividend income. Value funds generally emphasize
companies that, considering their assets and earnings history, are attractively
priced; these companies often pay regular dividend income to shareholders.
Growth and value stocks have, in the past, produced similar long-term returns,
though each has periods when it outperforms the other. In general, growth funds
appeal to investors who will accept more volatility in hope of a greater
increase in share price, while value funds are appropriate for investors who
want some dividend income and the potential for capital gains but are less
tolerant of share-price fluctuations.
PLAIN TALK ABOUT
Investing for the Long Term
Vanguard U.S. Growth Portfolio is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of speculating on
short-term fluctuations in the stock market.
================================================================================
A WORD ABOUT RISK
This prospectus describes the risks you will face as an investor in Vanguard
U.S. Growth Portfolio. It is important to keep in mind one of the main axioms of
investing: the higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: the lower the risk, the lower the
potential reward. However, as you consider an investment in the U.S. Growth
Portfolio, you should also take into account your personal tolerance for the
daily fluctuations of the stock market.
Look for this "warning flag" symbol [WARNING FLAG] throughout the prospectus.
It is used to mark detailed information about each type of risk that you, as a
shareholder of the Portfolio, will confront.
================================================================================
THE PORTFOLIO'S OBJECTIVE
The Portfolio seeks to provide long-term growth in capital. This objective is
fundamental, which means that it cannot be changed unless a majority of
shareholders vote to do so.
[WARNING FLAG] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE
FOLLOWING PAGES, YOUR INVESTMENT IN THE PORTFOLIO, AS WITH ANY
INVESTMENT IN COMMON STOCKS, COULD LOSE MONEY.
WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:
- - You wish to add a growth stock fund to your existing holdings, which
could include other stock -- as well as bond and money market --
investments.
- - You are seeking growth of capital over the long term -- at least five
years.
- - You are not looking for income.
- - You characterize your investment temperament as "relatively
aggressive."
- - You are seeking a fund that emphasizes good-quality companies with
established records of growth.
This Portfolio is not an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of the Portfolio's shareholders. To
minimize such costs, which reduce the ultimate returns achieved by you and other
shareholders, the Portfolio has adopted the following policies:
- - The Portfolio reserves the right to reject any purchase request --
including exchanges from other Vanguard Funds -- that it regards as
disruptive to the efficient management of the Portfolio. This
4
<PAGE> 33
could be because of the timing of the investment or because of a
history of excessive trading by the investor.
- - There is a limit on the number of times you can exchange into or out of
the Portfolio. If you own shares of the Portfolio as an investment
option in an employer-sponsored retirement or savings plan, your plan
dictates the rules governing exchanges. Contact your plan administrator
for details.
- - The Portfolio reserves the right to stop offering shares at any time.
PLAIN TALK ABOUT
Costs and Market Timing
Some investors try to profit from "market timing" -- switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Portfolio discourages short-term trading by, among other things,
closely monitoring daily transactions.
INVESTMENT STRATEGIES
This section explains how the Portfolio's investment adviser pursues the
objective of long-term growth in capital. It also explains three important risks
- -- market risk, objective risk, and manager risk -- faced by investors in the
Portfolio. Unlike the Portfolio's investment objective, the adviser's investment
strategies are not fundamental and can be changed by the Portfolio's Board of
Directors without shareholder approval. However, before making any important
change in its strategies, the Portfolio will give shareholders 30-days notice,
in writing.
PLAIN TALK ABOUT
Large-Cap, Mid-Cap, and Small-Cap Stocks
Stocks of publicly traded companies -- and mutual funds that hold these stocks
- -- can be classified by the companies' market value, or capitalization. Vanguard
defines large-capitalization, or large-cap, funds as those holding stocks of
companies with an average total market value exceeding $5 billion. Mid-cap funds
hold stocks of companies with an average market value between $750 million and
$5 billion. Small-cap funds hold stocks of companies with an average market
value of less than $750 million.
MARKET EXPOSURE
The Portfolio invests chiefly in large-capitalization common stocks that offer
favorable prospects for capital growth but that produce little current income.
At times, the Portfolio may also invest in securities that are convertible into
common stocks.
[WARNING FLAG] THE PORTFOLIO IS SUBJECT TO MARKET RISK, WHICH IS THE
POSSIBILITY THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT
OR EVEN EXTENDED PERIODS. STOCK MARKETS TEND TO MOVE IN
CYCLES, WITH PERIODS OF RISING STOCK PRICES AND PERIODS OF
FALLING STOCK PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns (dividend income plus change in market
value) for the U.S. stock market over various periods as measured by the
Standard & Poor's 500 Composite Stock Price Index, a widely used barometer of
stock market activity. Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, how the gap between best and worst tends to
narrow over the long term.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
U.S. STOCK MARKET RETURNS 1926 - 1995
- ------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Best 53.9% 23.9% 20.1% 16.9%
Worst - 43.3 - 12.5 - 0.9 3.1
Average 12.5 10.3 10.7 10.7
- ------------------------------------------------------------------
</TABLE>
5
<PAGE> 34
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1995. For example, while the average return on stocks for all of the
5-year periods was +10.3%, returns for these five-year periods ranged from a
- -12.5% average (from 1928 through 1932), to +23.9% (from 1951 through 1955).
These average returns reflect past performance on common stocks and should not
be regarded as an indication of future returns from either the stock market as a
whole or this Portfolio in particular.
Finally, because the U.S. Growth Portfolio does not hold the same securities
held in the Standard & Poor's 500 Index or any other market index, the
performance of the Portfolio will not mirror the returns of any particular
index.
[WARNING FLAG] THE PORTFOLIO IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE
POSSIBILITY THAT RETURNS FROM GROWTH STOCKS WILL TRAIL RETURNS
FROM THE OVERALL STOCK MARKET. AS A GROUP, GROWTH STOCKS TEND
TO GO THROUGH CYCLES OF RELATIVE UNDERPERFORMANCE AND
OUTPERFORMANCE IN COMPARISON TO COMMON STOCKS IN GENERAL.
THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL
YEARS.
PLAIN TALK ABOUT
Portfolio Diversification
In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average U.S. equity mutual fund has
about 25% of its assets invested in its ten largest holdings, while some
less-diversified mutual funds have more than 50% of their assets invested in the
stocks of just ten companies.
SECURITY SELECTION
Lincoln Capital Management Company (Lincoln), adviser to the Portfolio, selects
common stocks of seasoned U.S. companies that have past records of growth and,
in Lincoln's opinion, above-average prospects for continued growth. Such
companies tend to have strong positions in their markets, reasonable financial
strength, and relatively low sensitivity to changing economic conditions.
Lincoln seeks to identify stocks that sell at attractive prices in relation to
their growth potential. The top ten holdings (which amounted to 33% of the
Portfolio's total net assets) as of August 31, 1996, follow.
1. The Coca-Cola Co.
2. AT&T Corp.
3. Cisco Systems, Inc.
4. Automatic Data Processing Inc.
5. American Home Products Co.
6. Johnson & Johnson
7. Hewlett-Packard Co.
8. Procter & Gamble Co.
9. Pfizer, Inc.
10. SmithKline Beecham PLC
Keep in mind that, because the makeup of the Portfolio changes daily, this
listing is only a "snapshot" at one point in time. Note, too, that the
Portfolio's relatively low level of diversification means that there is a
greater chance that the poor performance of a single stock held could hurt the
Portfolio.
The Portfolio is run by Lincoln according to traditional methods of active
investment management, which means securities are bought and
6
<PAGE> 35
sold according to Lincoln's judgments about companies and their financial
prospects, and about the stock market and the economy in general.
[WARNING FLAG] The Portfolio is subject to manager risk, which is the
possibility that Lincoln may do a poor job of selecting
stocks.
PLAIN TALK ABOUT
Portfolio Turnover
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. The average turnover rate for actively managed
funds investing in common stocks is 75%.
PORTFOLIO TURNOVER
Although the Portfolio generally seeks to invest for the long term, it retains
the right to sell securities regardless of how long they have been held. The
Portfolio's average turnover rate for the past five years has been about 37%. (A
turnover rate of 100% would occur, for example, if the Portfolio sold and
replaced securities valued at 100% of its total net assets within a one-year
period.)
PLAIN TALK ABOUT
Derivatives
A Derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "Traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new, exotic types of derivatives -- some of which
can carry considerable risks.
INVESTMENT POLICIES
Besides investing in common stocks of growth companies, the Portfolio may follow
a number of investment policies to achieve its objective.
[WARNING FLAG] ALTHOUGH IT HAS NOT DONE SO IN THE PAST, THE PORTFOLIO
RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN STOCK
FUTURES AND OPTIONS CONTRACTS, WHICH ARE TRADITIONAL TYPES OF
DERIVATIVES.
Losses (or gains) involving futures can sometimes be substantial -- in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a Portfolio. This Portfolio will
not use futures and options for speculative purposes or as leveraged investments
that magnify the gains or losses of an investment. Rather, the Portfolio will
keep separate cash reserves or other liquid portfolio securities in the amount
of the obligation underlying the futures contract. Only a limited percentage of
the Portfolio's assets -- up to 5% if required for deposit and no more than 20%
of total assets -- may be committed to such contracts.
The reasons for which the Portfolio may use futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs
while simulating full investment in stocks.
- - To make it easier to trade.
- - To reduce costs by buying futures instead of actual stocks when futures
are cheaper.
The Portfolio will usually hold only a small percentage of its assets in cash
reserves, although if the investment adviser believes that market conditions
warrant a temporary defensive measure, the Portfolio may hold cash reserves
without limit.
7
<PAGE> 36
INVESTMENT LIMITATIONS
To reduce risk and maintain diversification, the Portfolio has adopted limits on
some of its investment policies. Specifically, the Portfolio will not:
- - Invest more than 5% of its assets in the securities of companies that
have been in business for less than three years.
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for the purpose of meeting shareholder requests to
redeem shares. With respect to 75% of its assets, this Portfolio will
not:
- - Invest more than 5% in the securities of any one company.
- - Buy more than 10% of the outstanding voting securities of any company.
The limitations listed in this prospectus and in the Statement of Additional
Information are fundamental and may be changed only by approval of a majority of
the Portfolio's shareholders.
PLAIN TALK ABOUT
Past Performance
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
INVESTMENT PERFORMANCE
Vanguard U.S. Growth Portfolio invests primarily in common stocks, so its
performance is closely correlated to the performance of the overall stock
market. Historically, stock market performance has been characterized by sharp
up-and-down swings in the short term and by more stable growth over the long
term.
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 8/31/96
[BAR GRAPH]
The results shown above represent the Portfolio's "average annual total
return" performance, which assumes that any distributions of capital gains and
dividends were reinvested for the indicated periods. Also included is
comparative information on the unmanaged Standard & Poor's 500 Index. The chart
does not make any allowance for Federal, state, or local income taxes that
shareholders must pay on a current basis.
In weighing these performance figures, note that the Portfolio has been in
operation since January 6, 1959, and managed by Lincoln Capital Management since
August 31, 1987.
8
<PAGE> 37
PLAIN TALK ABOUT
Distributions
As a Shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from the dividends that the fund earns from its holdings as well
as interest it receives from its Money Market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term depending
on whether the fund held the securities for less than or more than one year.
SHARE PRICE
The Portfolio's share price, called its net asset value, is calculated each
business day after the close of regular trading (generally 4:00 p.m. Eastern
time) of the New York Stock Exchange. Net asset value per share is computed by
adding up the total value of the Portfolio's investments and other assets,
subtracting any of its liabilities, or debts, and then dividing by the number of
Portfolio shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -------------------------------------------
NUMBER OF SHARES OUTSTANDING
Daily net asset value, or NAV, is useful to you as a shareholder because the
NAV, multiplied by the number of Portfolio shares you own, gives you the dollar
amount you would have received had you sold all of your shares back to the
Portfolio that day.
The Portfolio's share price can be found daily in the mutual fund listings of
most major newspapers under the heading Vanguard Group. Different newspapers use
different abbreviations of the Portfolio's name, but the most common is USGro.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each December, the Portfolio distributes to shareholders virtually all of its
income from interest and dividends, as well as any capital gains realized from
the sale of securities.
If you own shares of the Portfolio as an investment option in an
employer-sponsored retirement or savings plan, these dividend and capital gains
distributions will be reinvested in additional Portfolio shares and accumulate
on a tax-deferred basis. You will not owe taxes on these distributions until you
begin withdrawals. You should consult your plan administrator, your plan's
Summary Plan Document, or your own tax adviser about the tax consequences of an
investment in the Portfolio and of any plan withdrawals.
If your Vanguard U.S. Growth Portfolio investment is not part of an
employer-sponsored plan, you can receive distributions of income or capital
gains in cash, or you may have them automatically reinvested in more shares of
the Portfolio. Both dividend and capital gains distributions -- whether received
in cash or reinvested in additional shares -- are subject to Federal (and
possibly state and local) income taxes, no matter how long you have held the
shares in the Portfolio. You should consult your own tax adviser about other tax
consequences of an investment in the Portfolio.
9
<PAGE> 38
PLAIN TALK ABOUT
Vanguard's Unique Corporate Structure
The VANGUARD Group, Inc. is the only Mutual Mutual Fund company. It is owned
jointly by the funds it oversees and by the Shareholders in those funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to fund shareholders in
the form of lower operating expenses.
THE PORTFOLIO AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 30 investment
companies with more than 90 distinct investment portfolios and total net assets
of more than $230 billion. All of the Vanguard Funds share in the expenses
associated with business operations, such as personnel, office space, equipment,
and advertising.
Vanguard also provides marketing services to the Funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each Fund pays its
allocated share of The Vanguard Group's costs.
A list of the Fund's Directors and Officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.
INVESTMENT ADVISER
The Portfolio employs Lincoln Capital Management Company, 200 South Wacker
Drive, Chicago, IL 60606, as its investment adviser. Lincoln manages the
Portfolio subject to the control of the Officers and Directors of the Fund.
Lincoln is paid an advisory fee based on average month-end net assets of the
Portfolio and a sliding percentage scale:
<TABLE>
<CAPTION>
---------------------------------
ASSETS MANAGED FEE
---------------------------------
<S> <C>
First $25 million 0.40%
Next $125 million 0.35
Next $350 million 0.25
Next $500 million 0.20
Next $1.5 billion 0.15
Assets over $2.5 billion 0.10
---------------------------------
</TABLE>
For the year ended August 31, 1996, the investment advisory fee paid to
Lincoln was $6.13 million.
The fee agreement with Lincoln does not provide for either an incentive bonus
or penalty based on performance. The agreement authorizes Lincoln to choose
brokers or dealers to handle the purchase and sale of the Portfolio's
securities, and directs Lincoln to get the best available price and most
favorable execution from these brokers with respect to all transactions.
The Board of Directors may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser, either as
a replacement for Lincoln or as an additional adviser. However, no such change
would be made before giving shareholders 30-days notice, in writing.
10
<PAGE> 39
GENERAL INFORMATION
The U.S. Growth Portfolio is one of two Portfolios of Vanguard World Fund, Inc.
The other Portfolio is the International Growth Portfolio. Vanguard World Fund
was originally formed as a corporation in 1959 and is now organized under the
laws of the State of Maryland. The Portfolios are combined under one corporation
for administrative purposes, but in virtually all respects operate like separate
corporations.
Shareholders of the U.S. Growth Portfolio have rights and privileges similar
to those enjoyed by other corporate shareholders. For example, shareholders will
not be responsible for any liabilities of the corporation. If any matters are to
be voted on by shareholders (such as a change in a fundamental investment
objective or the election of directors), each share outstanding at that point
would be entitled to one vote. Annual meetings will not be held by the Portfolio
except as required by the Investment Company Act of 1940. A meeting will be
scheduled (for example, to vote on the removal of a director) if the holders of
at least 10% of the Portfolio's shares request a meeting in writing.
PLAIN TALK ABOUT
The Portfolio's Adviser
Lincoln Capital Management Company, an investment advisory firm founded in 1967,
currently manages about $41 billion in assets. It provides investment counseling
services to a limited number of clients, most of which are institutional clients
such as pension funds. The managers responsible for overseeing the
implementation of Lincoln's strategy for Vanguard U.S. Growth Portfolio are:
J. PARKER HALL III, President of Lincoln; 40 years investment experience, 26
years with Lincoln; B.A. from Swarthmore College, M.B.A. from Harvard Business
School.
DAVID M. FOWLER, Vice President of Lincoln; 25 years investment experience,
13 years with Lincoln; B.S. from Loyola University, M.B.A. from Northwestern
University.
Both have served in this capacity since Lincoln became the Portfolio's
adviser in August 1987.
11
<PAGE> 40
INVESTING WITH VANGUARD
FOR PLAN PARTICIPANTS
Vanguard U.S. Growth Portfolio is an investment option in your retirement or
savings plan. Your plan administrator or your employee benefits office can
provide you with detailed information on how to participate in your plan and how
to elect the Portfolio as an investment option.
- - If you have any questions about the Portfolio or Vanguard, including the
Portfolio's investment objective, strategies, or risks, contact Vanguard's
Participant Services Department, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator or
the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Portfolio's shares are processed
as soon as they have been received by Vanguard in good order. Good order means
that your request includes complete information on your contribution, exchange,
or redemption, and that Vanguard has received the appropriate assets.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. However,
because excessive exchanges can potentially disrupt the management of the
Portfolio and increase its transaction costs, Vanguard reserves the right to
refuse any exchange request. In addition, certain investment options,
particularly funds made up of company stock or investment contracts, may be
subject to unique restrictions. Contact your plan administrator for details on
the exchange policies that apply to your plan.
Before making an exchange, you should consider the following:
- - Before you exchange to another Vanguard Fund available in your plan, you
should read that Fund's prospectus. Contact Participant Services, toll-free,
at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Your plan
administrator can explain how frequently exchanges are allowed.
FOR OTHER INSTITUTIONAL INVESTORS
If you have questions about Vanguard U.S. Growth Portfolio, including how to
establish an account, call Vanguard, toll-free, at 1-800-523-1036.
If you have questions about an existing account, contact your Vanguard
account administrator.
12
<PAGE> 41
Investing with Vanguard (continued)
TRANSACTIONS
Purchases, exchanges, or redemptions of the Portfolio's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your purchase, exchange, or
redemption, and that Vanguard has received the appropriate assets. The price of
shares bought, exchanged, or sold will be the Portfolio's next-determined net
asset value after Vanguard has processed your request, provided your request has
been received before 4:00 p.m. Eastern time.
Vanguard must consider the interests of all Portfolio shareholders and so
reserves the right to . . .
- - Delay or reject any purchase or exchange request that may disrupt the
Portfolio's operation or performance.
- - Revise or terminate the exchange privilege or limit the amount of an
exchange, at any time, without notice.
- - Take up to seven days to deliver your redemption proceeds.
- - Pay redemption proceeds -- in whole or in part -- through a distribution in
kind of readily marketable securities.
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ONLINESM Use your personal computer to learn more about
KEYWORD: VANGUARD Vanguard Funds and services; map out a long-term
investment strategy; and ask questions, make
suggestions, and send messages to Vanguard. Vanguard
Online is offered through America Online(R) (AOL). To
establish an AOL account, call 1-800-238-6336.
VANGUARD ON THE Use your personal computer to visit Vanguard's
WORLD WIDE WEB education-oriented website, which provides timely
http://www.vanguard.com news and information about Vanguard Funds and
services; an online "university" that offers a
variety of mutual fund classes; and easy-to-use,
interactive tools to help you create your own
investment and retirement strategies.
SHARES OF THE PORTFOLIO MAY ONLY BE SOLD IN THOSE STATES IN WHICH THEY ARE
REGISTERED. THE PORTFOLIO'S SHARES ARE CURRENTLY REGISTERED FOR SALE IN ALL 50
STATES, AND THE PORTFOLIO INTENDS TO MAINTAIN SUCH REGISTRATION.
13
<PAGE> 42
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
Reading this Prospectus will help you to decide whether Vanguard U.S. Growth
Portfolio is suitable for your investment goals. If you decide to invest, don't
throw the Prospectus out; you will no doubt need it for future reference.
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about
Vanguard U.S. Growth Portfolio, including its investment objective, risks,
strategies, and expenses, as well as services available to you as a shareholder.
It is important that you understand these facts so that you can decide
whether an investment in this Portfolio is right for you. The following
questions offer a quick review of some of the subjects covered by this
prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN . . .
- The Portfolio's objective? (page 4)
- The Portfolio's investment strategies? (page 5)
- Who should invest in the Portfolio? (page 4)
- The risks associated with the Portfolio? (pages 4 - 7)
- Whether the Portfolio is Federally insured?
(inside front cover)
- The Portfolio's expenses? (page 2)
- The background of the Portfolio's investment managers?
(page 11)
14
<PAGE> 43
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION MUTUAL FUND
Payment to mutual fund shareholders An investment company that pools the
of gains realized during the year on money of many people and invests it
securities that the fund has sold at in a variety of securities in an
a profit, minus any realized losses. effort to achieve a specific
objective over time.
CASH RESERVES
Cash deposits as well as short-term NET ASSET VALUE (NAV)
bank deposits, money market The market value of a mutual fund's
instruments, and U.S. Treasury bills. total assets, minus liabilities,
divided by the number of shares
COMMON STOCK outstanding. The value of a single
A security representing ownership share is called its share value or
rights in a corporation. A share price.
stockholder is entitled to share in
the company's profits, some of which PORTFOLIO DIVERSIFICATION
may be paid out as dividends. Holding a variety of securities so
that a portfolio's return is not hurt
DIVIDEND INCOME by the poor performance of a single
Payment to shareholders of income security or industry.
from interest or dividends generated
by a fund's investments. PRICE/EARNINGS (P/E) RATIO
The current share price of a stock,
DOLLAR-COST AVERAGING divided by its per-share earnings
Investing equal amounts of money at (profits) from the past year. A stock
regular intervals on an ongoing selling for $20, with earnings of $2
basis. This technique ensures that an per share, has a price/earnings ratio
investor buys fewer shares when of 10.
prices are high and more shares when
prices are low. PRINCIPAL
The amount of your own money you put
EXPENSE RATIO into an investment.
The percentage of a fund's average
net assets used to pay its expenses. SECURITIES
The expense ratio includes management Stocks, bonds, and other investment
fees, administrative fees, and any vehicles.
12b-1 marketing fees.
TOTAL RETURN
FIXED-INCOME SECURITIES A percentage change, over a specified
Investments, such as bonds, that have time period, in a mutual fund's net
a fixed payment schedule. While the asset value, with the ending net
level of income offered by these asset value adjusted to account for
securities is predetermined, their the reinvestment of all distributions
prices may fluctuate. of dividends and capital gains.
GROWTH STOCK FUND VALUE STOCK FUND
A mutual fund that emphasizes stocks A mutual fund that focuses on the
of companies whose strong earnings stocks of companies that, considering
and revenue potential indicate their earnings and dividends, are
above-average prospects for capital attractively priced; these companies
growth, with less emphasis on often pay regular dividend income to
dividend income. shareholders.
INVESTMENT ADVISER VOLATILITY
An organization that makes the The fluctuations in value of a mutual
day-to-day decisions regarding a fund or other security. The greater a
portfolio's investments. fund's volatility, the wider the
fluctuations between its high and low
prices.
YIELD
Current income (interest or
dividends) earned by an investment,
expressed as a percentage of the
investment's price.
<PAGE> 44
<TABLE>
<S> <C> <C>
[ THE VANGUARD GROUP LOGO ]
THE VANGUARD GROUP (R)
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482
FOR PARTICIPANTS IN FOR OTHER INSTITUTIONAL ELECTRONIC ACCESS TO THE
EMPLOYER-SPONSORED PLANS INVESTORS VANGUARD MUTUAL FUND
1-800-523-1036 EDUCATION AND INFORMATION
PARTICIPANT SERVICES For information on Vanguard CENTER
DEPARTMENT Funds and services On America Online(R)
1-800-523-1188 Keyword: Vanguard
TEXT TELEPHONE:
1-800-523-8004 On the World Wide Web
For information on the http://www.vanguard.com
Vanguard Funds in your plan,
Monday through Friday To send e-mail to Vanguard
8:30 a.m. to 7:00 p.m., [email protected]
Eastern time
(C) 1996 Vanguard Marketing
Corporation, Distributor
</TABLE>
P123N
<PAGE> 45
VANGUARD
INTERNATIONAL GROWTH
PORTFOLIO
Prospectus
December 27, 1996
- ---------------
This prospectus
contains financial data
for the portfolio through
the fiscal year ended [Picture of Schooner with Logo bottom right
August 31, 1996. corner]
[VANGUARD GROUP LOGO]
<PAGE> 46
VANGUARD INTERNATIONAL GROWTH PORTFOLIO
An International Stock Mutual Fund
CONTENTS
Portfolio Expenses 2
Financial Highlights 3
A Word About Risk 4
The Portfolio's
Objective 4
Who Should Invest 4
Investment Strategies 5
Investment Policies 7
Investment Limitations 8
Investment
Performance 9
Share Price 9
Dividends, Capital
Gains, and Taxes 10
The Portfolio and
Vanguard 11
Investment Adviser 11
General Information 12
Investing
with Vanguard 14
Services and
Account Features 14
Types of Accounts 15
Distribution Options 16
Buying Shares 16
Redeeming Shares 18
Fund and Account
Updates 20
Prospectus Postscript 22
Risk Quiz 23
An Investment Primer 24
Glossary Inside Back Cover
INVESTMENT OBJECTIVE AND POLICIES
Vanguard International Growth Portfolio (the "Portfolio") is a diversified
mutual fund, a part of Vanguard World Fund, Inc. (the "Fund"), an open-end
investment company.
The Portfolio seeks to provide long-term capital growth by investing in equity
securities of seasoned companies located outside the United States. The
Portfolio invests in up to 30 foreign stock markets, emphasizing companies with
above-average growth potential.
IT IS IMPORTANT TO NOTE THAT THE PORTFOLIO'S SHARES ARE NOT GUARANTEED OR
INSURED BY THE FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT OR FOREIGN
GOVERNMENTS. AS WITH ANY INVESTMENT IN COMMON STOCKS, WHICH ARE SUBJECT TO WIDE
FLUCTUATIONS IN MARKET VALUE, YOU COULD LOSE MONEY BY INVESTING IN THE
PORTFOLIO.
FEES AND EXPENSES
The Portfolio is offered on a no-load basis, which means that you pay no sales
commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the expense ratio.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
A Statement of Additional Information (dated December 27, 1996) containing more
information about the Portfolio is, by reference, part of this prospectus and
may be obtained without charge by writing to Vanguard or by calling our Investor
Information Department at 1-800-662-7447.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of the
International Growth Portfolio. To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk" explanations along the way.
Reading the prospectus will help you to decide whether the Portfolio is the
right investment for you. We suggest that you keep it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY OTHER STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 47
PORTFOLIO PROFILE VANGUARD INTERNATIONAL GROWTH PORTFOLIO
WHO SHOULD INVEST (page 4)
- - Investors seeking investment opportunities outside the United States.
- - Investors seeking growth of their capital over the long term -- at least five
years.
- - Investors willing to accept the additional risks associated with
international investing.
- - Investors wishing to add an international component to an investment mix that
already includes U.S. stock, bond, and money market mutual funds.
WHO SHOULD NOT INVEST
- - Investors seeking dividend income.
- - Investors unwilling to accept significant fluctuations in share price.
RISKS OF THE PORTFOLIO (pages 4 - 8)
This Portfolio's total return will fluctuate within a wide range, so an investor
could lose money over short or even extended periods. In addition to the risks
of U.S. stock funds (market risk, etc.), the Portfolio is subject to the risks
associated with foreign investing. Among these are country risk (the chance that
a country's economy will be hurt by political or financial problems or natural
disasters) and currency risk (the chance that Americans investing abroad could
lose money because of a rise in the value of the U.S. dollar versus foreign
currencies).
DIVIDENDS AND CAPITAL GAINS (page 10)
Paid annually in December.
INVESTMENT ADVISER (page 11)
Schroder Capital Management International, London, England.
INCEPTION DATE: September 30, 1981
NET ASSETS AS OF 8/31/96: $5.0 billion
PORTFOLIO'S EXPENSE RATIO FOR THE YEAR ENDED 8/31/96: 0.56%
LOADS, 12b-1 MARKETING FEES: None
SUITABLE FOR IRAs: Yes
MINIMUM INITIAL INVESTMENT: $3,000; $1,000 for IRAs and custodial accounts for
minors
NEWSPAPER ABBREVIATION: IntlGr
VANGUARD FUND NUMBER: 081
ACCOUNT FEATURES (page 14)
- - Telephone Redemption
- - Vanguard Direct Deposit Service(sm)
- - Vanguard Automatic Exchange Service(sm)
- - Vanguard Fund Express(R)
- - Vanguard Dividend Express(sm)
AVERAGE ANNUAL TOTAL RETURN --
PERIODS ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
--------------------------------------
<S> <C> <C> <C>
International Growth Portfolio 12.7% 11.6% 09.8%
MSCI - EAFE Index 08.2% 09.1% 08.6%
</TABLE>
QUARTERLY RETURNS (%) 1987 - 1996 (intended to show volatility of returns)
[GRAPH]
In evaluating past performance, remember that it is not indicative of future
performance. Performance figures include the reinvestment of any dividends and
capital gains distributions. The returns shown are net of expenses, but they do
not reflect income taxes an investor would have incurred. Note, too, that both
the return and principal value of an investment will fluctuate so that
investors' shares, when redeemed, may be worth more or less than their original
cost.
1
<PAGE> 48
PLAIN TALK ABOUT
The Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time, have
a dramatic impact on a fund's performance.
Portfolio Expenses
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Portfolio.
As noted in this table, you do not pay fees of any kind when you buy, sell, or
exchange shares of the Portfolio:
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
The next table illustrates the operating expenses that you would incur as a
shareholder of the Portfolio. These expenses are deducted from the Portfolio's
income before it is paid to you. Expenses include investment advisory fees as
well as the costs of maintaining accounts, administering the Portfolio,
providing shareholder services, and other activities. The expenses shown in the
table are for the fiscal year ended August 31, 1996.
ANNUAL PORTFOLIO OPERATING EXPENSES
Management and Administrative Expenses: 0.28%
Investment Advisory Expenses: 0.18%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.08%
----
Total Other Expenses: 0.10%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.56%
====
The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes (1) that
the Portfolio provides a return of 5% a year and (2) that you redeem your
investment at the end of each period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------
$6 $18 $31 $70
----------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
PLAIN TALK ABOUT
Fund Expenses
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard International Growth Portfolio's expense ratio in fiscal year
1996 was 0.56%, or $5.60 per $1,000 of average net assets. The average actively
managed international equity mutual fund had expenses in 1995 of 1.58%, or
$15.80 per $1,000 of average net assets, according to Lipper Analytical
Services, Inc., which reports on the mutual fund industry.
2
<PAGE> 49
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended August 31, 1996. The financial
highlights were audited by Price Waterhouse LLP, independent accountants. You
should read this information in conjunction with the Portfolio's financial
statements and accompanying notes, which appear, along with the audit report
from Price Waterhouse, in the Portfolio's most recent Annual Report to
shareholders. The Annual Report is incorporated by reference in the Statement of
Additional Information and in this prospectus, and contains a more complete
discussion of the Portfolio's performance. You may have the Report sent to you
without charge by writing to Vanguard or calling our Investor Information
Department.
PLAIN TALK ABOUT
How to Read the Financial Highlights Table
The Portfolio began fiscal 1996 with a net asset value (price) of $14.70 per
share. During the year, the Portfolio earned $.19 per share from investment
income (interest and dividends) and $1.65 per share from investments that had
appreciated in value or that were sold for higher prices than the Portfolio paid
for them. Of those total earnings of $1.84 per share, $.41 per share was
returned to shareholders in the form of dividend and capital gains
distributions. The earnings ($1.84 per share) less distributions ($.41 per
share) resulted in a share price of $16.13 at the end of the year, an increase
of $1.43 per share (from $14.70 at the beginning of the period to $16.13 at the
end of the period). Assuming that the shareholder had reinvested the dis-
tributions in the purchase of more shares, total return from the Portfolio was
12.72% for the year.
As of August 31, 1996, the Portfolio had $4.99 billion in net assets; an
expense ratio of 0.56% ($5.60 per $1,000 of net assets); and net investment
income amounting to 1.35% of its average net assets. It sold and replaced
securities valued at 22% of its total net assets.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $14.70 $14.36 $12.02 $10.15 $10.31
===========================================================================
INVESTMENT OPERATIONS
Net Investment Income .19 .20 .14 .12 .20
Net Realized and
Unrealized Gain (Loss)
on Investments 1.65 .32 2.31 1.96 (.05)
--------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 1.84 .52 2.45 2.08 .15
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.20) (.18) (.11) (.21) (.19)
Distributions from
Realized Capital Gains (.21) -- -- -- --
--------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.41) (.18) (.11) (.21) (.31)
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $16.13 $14.70 $14.36 $12.02 $10.15
==========================================================================================================
TOTAL RETURN 12.72% 3.76% 20.44% 21.06% 1.49%
==========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $4,997 $3,354 $2,989 $1,477 $ 919
Ratio of Expenses to
Average Net Assets 0.56% 0.59% 0.46% 0.59% 0.58%
Ratio of Net Investment
Income to Average
Net Assets 1.35% 1.53% 1.37% 1.27% 2.04%
Portfolio Turnover Rate 22% 31% 28% 51% 58%
Average Commission
Rate Paid $.0223 N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended August 31,
-------------------------------------------------------------------------------------
1991 1990 1989 1988 1987
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $11.81 $11.61 $10.45 $14.21 $11.67
=====================================================================================
Investment Operations
Net Investment Income .18 .32 .13 .16 .12
Net Realized and
Unrealized Gain (Loss)
on Investments (.80) .31 2.26 (1.36) 3.29
-------------------------------------------------------------------------------------
Total from Investment
Operations (.62) .632 .39 (1.20) 3.41
- -----------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net
Investment Income (.20) (.15) (.16) (.13) (.07)
Distributions from
Realized Capital Gains (.12) (.68) (.28) (2.43) (.80)
-------------------------------------------------------------------------------------
Total Distributions (.88) (.43) (1.23) (2.56) (.87)
- -----------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $10.31 $11.81 $11.61 $10.45 $14.21
=================================================================================================================
Total Return - 5.11 5.25% 24.49% - 9.92% 32.01%
=================================================================================================================
Ratios/Supplemental Data
Net Assets, End of
Period (Millions) $ 846 $ 796 $ 550 $ 454 $ 607
Ratio of Expenses to
Average Net Assets 0.67% 0.68% 0.64% 0.67% 0.66%
Ratio of Net Investment
Income to Average
Net Assets 1.80% 3.01% 1.27% 1.39% 1.00%
Portfolio Turnover Rate 49% 45% 50% 71% 77%
Average Commission
Rate Paid N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
From time to time, the Vanguard Funds advertise yield and total return
figures. Yield is an historical measure of dividend income, and total return is
a measure of past dividend income (assuming that it has been reinvested) plus
capital appreciation. Neither yield nor total return should be used to predict
the future performance of a fund.
3
<PAGE> 50
PLAIN TALK ABOUT
Growth Funds and
Value Funds
Growth investing and value investing are two styles employed by stock fund
managers. Growth funds generally focus on companies that, due to their strong
earnings and revenue potential, offer above-average prospects for capital
growth, with less emphasis on dividend income. Value funds generally emphasize
companies that, considering their assets and earnings history, are attractively
priced; these companies often pay regular dividend income to shareholders.
Growth and value stocks have, in the past, produced similar long-term returns,
though each has periods when it outperforms the other. In general, growth funds
appeal to investors who will accept more volatility in hope of a greater
increase in share price, while value funds are appropriate for investors who
want some dividend income and the potential for capital gains but are less
tolerant of share-price fluctuations.
A WORD ABOUT RISK
This prospectus describes the risks you will face as an investor in Vanguard
International Growth Portfolio. It is important to keep in mind one of the main
axioms of investing: the higher the risk of losing money, the higher the
potential reward. The reverse, also, is generally true: the lower the risk, the
lower the potential reward. However, as you consider an investment in the
International Growth Portfolio, you should also take into account your personal
tolerance for the daily fluctuations of the stock market.
Look for this "warning flag" symbol [GRAPHIC IMAGE OF A WAVING FLAG]
throughout the prospectus. It is used to mark detailed information about each
type of risk that you, as a shareholder of the Portfolio, will confront.
THE PORTFOLIO'S OBJECTIVE
The Portfolio seeks to provide long-term growth of capital. This objective is
fundamental, which means that it cannot be changed unless a majority of
shareholders vote to do so.
[GRAPHIC IMAGE OF A WAVING FLAG] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED
ON THE FOLLOWING PAGES, YOUR INVESTMENT IN THE PORTFOLIO, AS WITH ANY
INVESTMENT IN COMMON STOCKS, COULD LOSE MONEY.
WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:
- - You wish to add an international stock fund to your existing holdings, which
could include U.S. stock, bond, money market, and tax-exempt investments.
- - You are willing to accept the additional risks (country risk, currency risk,
etc.) associated with international investments.
- - You are seeking growth of capital over the long term -- at least five years.
- - You are not looking for current income.
- - You characterize your investment temperament as "relatively aggressive."
This Portfolio is not an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of the Portfolio's shareholders. To
minimize such costs, which reduce the ultimate returns achieved by you and other
shareholders, the Portfolio has adopted the following policies:
- - The Portfolio reserves the right to reject any purchase request -- including
exchanges from other Vanguard Funds -- that it regards
PLAIN TALK ABOUT
Investing for the Long Term
The Portfolio is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on short-term
fluctuations in the stock market.
4
<PAGE> 51
as disruptive to the efficient management of the Portfolio. This could be
because of the timing of the investment or because of a history of excessive
trading by the investor.
- - There is a limit on the number of times you can exchange into or out of the
Portfolio (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Portfolio reserves the right to stop offering shares at any time.
INVESTMENT STRATEGIES
This section explains how the Portfolio's investment adviser pursues its
objective. It also explains several of the risks -- market risk, objective risk,
country risk, manager risk, and currency risk -- faced by investors in the
Portfolio. Unlike the Portfolio's investment objective, the adviser's investment
strategies are not fundamental and can be changed by the Portfolio's Board of
Directors without shareholder approval. However, before making any important
change in its policies, the Portfolio will give shareholders 30-days notice, in
writing.
MARKET EXPOSURE
The Portfolio invests in stocks of non-U.S. companies. About two-thirds of the
Portfolio's assets are invested in long-term growth stocks; the remaining third
may be invested in stocks that pursue shorter-term opportunities.
[GRAPHIC IMAGE OF A WAVING FLAG] THE PORTFOLIO IS SUBJECT TO MARKET RISK, WHICH
IS THE POSSIBILITY THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN
EXTENDED PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF
RISING STOCK PRICES AND PERIODS OF FALLING STOCK PRICES. IN ADDITION,
INVESTMENTS IN FOREIGN STOCK MARKETS CAN BE AS RISKY, IF NOT MORE RISKY,
THAN U.S. STOCK INVESTMENTS.
To illustrate the volatility of international stock prices, the following
table shows the best, worst, and average total returns (dividend income plus
change in market value) for foreign stock markets over various periods as
measured by the Morgan Stanley Capital International - Europe, Australasia, Far
East (EAFE) Index, a widely used barometer of international stock market
activity. Note that the returns shown do not include the costs of buying and
selling stocks or other expenses that a real-world investment portfolio would
incur.
- --------------------------------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969 - 1995)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
--------------------------------------------------
<S> <C> <C> <C> <C>
Best 69.9% 36.5% 22.8% 16.3%
Worst - 23.2 1.5 7.0 12.0
Average 15.3 14.2 16.2 14.9
=================================================================================
</TABLE>
PLAIN TALK ABOUT
Costs and Market Timing
Some investors try to profit from "market timing" -- switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Portfolio discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
PLAIN TALK ABOUT
The Risks of
International Investing
Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign countries are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies, and may not be as liquid as similar U.S. companies. In addition,
foreign stock exchanges, brokers, and companies generally have less government
supervision and regulation than in the U.S. These factors -- as well as possible
country risk and currency risk (which are described in detail in this
prospectus) -- could negatively impact the returns that Americans receive from a
foreign investment. For more information about foreign investment risk, see the
Statement of Additional Information.
5
<PAGE> 52
Note, also, how the gap between best and worst tends to narrow over the long
term.
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969 through
1995. Keep in mind that this was a particularly favorable period for foreign
markets. For instance, over 10-year periods, foreign stocks provided an average
return of 16.2%, compared to 13.1% for U.S. stocks (as measured by the Standard
& Poor's 500 Composite Stock Price Index) during the same time frame. These
average returns reflect past performance and should not be regarded as an
indication of future returns from either foreign markets as a whole or this
Portfolio in particular.
Keep in mind, too, that because the International Growth Portfolio does not
hold the same securities held in the EAFE Index or any other market index, the
performance of the Portfolio will not mirror the returns of any particular
index.
[GRAPHIC IMAGE OF A WAVING FLAG] THE PORTFOLIO IS SUBJECT TO OBJECTIVE RISK,
WHICH IS THE POSSIBILITY THAT RETURNS FROM INTERNATIONAL STOCKS WILL TRAIL
RETURNS FROM THE U.S. STOCK MARKETS. THE PRICES OF INTERNATIONAL STOCKS AND
THE PRICES OF U.S. STOCKS HAVE OFTEN MOVED IN OPPOSITE DIRECTIONS. THESE
PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
SECURITY SELECTION
Schroder Capital Management International (Schroder Capital), adviser to the
Portfolio, believes that the two most important factors in managing the
investments of an international stock fund are country selection and stock
selection. Schroder Capital evaluates up to 30 financial markets -- including
Japan, the United Kingdom, the Netherlands, Germany, France, Switzerland,
Sweden, Australia, Hong Kong, Singapore, Malaysia, and Italy -- and identifies
those countries with, in the adviser's opinion, the most favorable business
climates.
[GRAPHIC IMAGE OF A WAVING FLAG] THE PORTFOLIO IS SUBJECT TO COUNTRY RISK, WHICH
IS THE POSSIBILITY THAT POLITICAL EVENTS (A WAR, NATIONAL ELECTIONS),
FINANCIAL PROBLEMS (RISING INFLATION, GOVERNMENT DEFAULT), OR NATURAL
DISASTERS (AN EARTHQUAKE, A FLOOD) WILL WEAKEN A COUNTRY'S ECONOMY AND CAUSE
INVESTMENTS IN THAT COUNTRY TO LOSE MONEY.
Once an attractive market has been identified, Schroder Capital analyzes and
ranks the companies in that country that, Schroder believes, offer the potential
for above-average earnings growth. Schroder Capital considers on-site
evaluations a vital part of the security selection process, visiting more than
2,000 companies in more than 20 countries each year. The companies chosen by
Schroder Capital reflect a wide variety of countries and industries.
6
<PAGE> 53
The top ten holdings (which amounted to 23% of the Portfolio's total net
assets) as of August 31, 1996, follow.
COMPANY COUNTRY
1. Ciba-Geigy AG (Reg) Switzerland
2. ING Groep NV Netherlands
3. British Petroleum Co. PLC United Kingdom
4. Veba AG Germany
5. ABB AG (BER) Switzerland
6. Fuji Photo Film Co., Ltd. Japan
7. Heineken NV Netherlands
8. Ito-Yokado Co., Ltd. Japan
9. Takeda Chemical Industries Japan
10. Bayer AG Germany
Keep in mind that, because the makeup of the Portfolio changes daily, this
listing is only a "snapshot" at one point in time.
The Portfolio is run by Schroder Capital according to traditional methods of
active investment management, which means securities are bought and sold
according to Schroder Capital's judgments about companies and their financial
prospects, and about foreign stock markets and economies in general.
[GRAPHIC IMAGE OF A WAVING FLAG] THE PORTFOLIO IS SUBJECT TO MANAGER RISK, WHICH
IS THE POSSIBILITY THAT SCHRODER CAPITAL MAY DO A POOR JOB OF EVALUATING
FOREIGN MARKETS AND SELECTING STOCKS.
PORTFOLIO TURNOVER
Although the Portfolio generally seeks to invest for the long-term, it retains
the right to sell securities regardless of how long they have been held. The
Portfolio's average turnover rate for the past ten years has been about 48%. (A
turnover rate of 100% would occur, for example, if the Portfolio sold and
replaced securities valued at 100% of its total net assets within a one-year
period.)
INVESTMENT POLICIES
Besides investing in stocks of foreign companies, the Portfolio may follow a
number of investment policies to achieve its objective.
The Portfolio may enter into forward foreign currency contracts, which help
protect the Portfolio's securities against unfavorable short-term changes in
exchange rates. A forward foreign currency contract is an agreement to buy or
sell a country's currency at a specific price usually 30, 60, or 90 days in the
future. In other words, the contract guarantees an exchange rate on a given
date. Managers of international stock funds use these contracts to guard against
sudden, unfavorable changes in U.S. dollar/foreign currency exchange rates. The
contracts will not prevent the fund's securities from falling in value during
foreign market downswings. Schroder Capital will use these contracts to
eliminate some of the uncertainty of foreign exchange rates -- but will not
speculate on changes in the market.
PLAIN TALK ABOUT
Portfolio Diversification
In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average foreign equity mutual fund
has about 25% of its assets invested in its ten largest holdings, while some
less-diversified international mutual funds have more than 50% of their assets
invested in the stocks of just ten companies.
PLAIN TALK ABOUT
Portfolio Turnover
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. Also, funds with high portfolio turnover rates
may be more likely than low-turnover-rate funds to generate capital gains that
must be distributed to shareholders as taxable income. The average turnover rate
for actively managed international stock funds is 53%.
7
<PAGE> 54
PLAIN TALK ABOUT
Derivatives
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new, exotic types of derivatives -- some of which
can carry considerable risks.
PLAIN TALK ABOUT
Cash Reserves
With mutual funds, holding cash reserves -- or "cash" -- does not mean literally
that the fund holds a stack of currency. Rather, cash reserves refer to
short-term, interest-bearing securities that can easily and quickly be converted
to cash. (Most mutual funds hold at least a small percentage of assets in cash
to accommodate shareholder redemptions.) While some equity funds strive to keep
cash levels at a minimum and to always remain fully invested in stocks, other
equity funds allow investment advisers to hold up to 20% or more of a fund's
assets in cash reserves.
[GRAPHIC IMAGE OF A WAVING FLAG] THE PORTFOLIO IS SUBJECT TO CURRENCY RISK,
WHICH IS THE POSSIBILITY THAT A "STRONGER" U.S. DOLLAR WILL REDUCE RETURNS
FOR AMERICANS INVESTING OVERSEAS. GENERALLY, WHEN THE DOLLAR RISES IN VALUE
AGAINST A FOREIGN CURRENCY, YOUR INVESTMENT IN THAT COUNTRY LOSES VALUE
BECAUSE ITS CURRENCY IS WORTH FEWER U.S. DOLLARS. ON THE OTHER HAND, A
"WEAKER" DOLLAR GENERALLY LEADS TO HIGHER RETURNS FOR AMERICANS HOLDING
FOREIGN INVESTMENTS.
The Portfolio may also invest in derivatives.
[GRAPHIC IMAGE OF A WAVING FLAG] ALTHOUGH IT HAS NOT DONE SO IN THE PAST, THE
PORTFOLIO RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN STOCK
FUTURES AND OPTIONS CONTRACTS, WHICH ARE TRADITIONAL TYPES OF DERIVATIVES.
Losses (or gains) involving futures can sometimes be substantial -- in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a Portfolio. This Portfolio will
not use futures and options for speculative purposes or as leveraged investments
that magnify the gains or losses of an investment. Rather, the Portfolio will
keep separate cash reserves or short-term cash-equivalent securities in the
amount of the obligation underlying the futures or options contract. Only a
limited percentage of the Portfolio's assets -- no more than 20% of total assets
- -- may be committed to such contracts.
The reasons for which the Portfolio may use futures and options contracts are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To make it easier to trade.
- - To reduce costs by buying futures instead of actual stocks when futures are
cheaper.
The Portfolio will usually hold only a small percentage of its assets in cash
reserves, although if the investment adviser believes that market conditions
warrant a temporary defensive measure, the Portfolio may hold cash reserves
without limit.
INVESTMENT LIMITATIONS
To reduce risk and maintain diversification, the Portfolio has adopted limits on
some of its investment policies. Specifically, the Portfolio will not:
- - Invest more than 5% of its assets in the securities of companies that have
been in business for less than three years.
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for the purpose of meeting shareholder requests to redeem
shares.
8
<PAGE> 55
With respect to 75% of its assets, this Portfolio will not:
- - Invest more than 5% in the securities of any one company.
- - Buy more than 10% of the outstanding voting securities of any company.
The limitations listed in this prospectus and in the Statement of Additional
Information are fundamental and may be changed only by approval of a majority of
the Portfolio's shareholders.
INVESTMENT PERFORMANCE
Vanguard International Growth Portfolio invests in foreign stocks, so its
performance is tied to the performance of many stock markets outside the United
States. Historically, stock market performance, both foreign and domestic, has
been characterized by sharp up-and-down swings in the short term and by more
stable growth over the long term.
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 8/31/96
<TABLE>
<CAPTION>
INTERNATIONAL MSCI-EAFE
GROWTH INDEX
<S> <C> <C>
1 YEAR 12.7% 8.2%
3 YEARS 12.1% 6.6%
5 YEARS 11.6% 9.1%
10 YEARS 9.8% 8.6%
</TABLE>
The results shown above represent the Portfolio's "average annual total
return" performance, which assumes that any distributions of capital gains and
dividends were reinvested for the indicated periods. Also included is
comparative information on the unmanaged Morgan Stanley Capital International -
Europe, Australasia, Far East (EAFE) Index. The chart does not make any
allowance for Federal, state, or local income taxes that shareholders must pay
on a current basis.
SHARE PRICE
The Portfolio's share price, called its net asset value, is calculated each
business day after the close of regular trading (generally 4:00 p.m. Eastern
time) of the New York Stock Exchange. Net asset value per share is computed by
adding up the total value of the Portfolio's
PLAIN TALK ABOUT
Past Performance
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns. This is
particularly true of international markets, which historically have been more
volatile than U.S. markets.
9
<PAGE> 56
investments and other assets, subtracting any of its liabilities, or debts, and
then dividing by the number of Portfolio shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = ---------------------------------------
NUMBER OF SHARES OUTSTANDING
Daily net asset value, or NAV, is useful to you as a shareholder because the
NAV, multiplied by the number of Portfolio shares you own, gives you the dollar
amount you would have received had you sold all of your shares back to the
Portfolio that day.
To help determine its daily share price, the Portfolio calculates the value of
its foreign securities in U.S. dollars. The Portfolio uses the daily exchange
rate employed by Morgan Stanley Capital International in the calculation of its
own indexes. If Morgan Stanley's exchange rate is not available, the Portfolio
uses a rate according to policies set by the Portfolio's Board of Directors.
The Portfolio's share price can be found daily in the mutual fund listings of
most major newspapers under the heading Vanguard Group. Different newspapers use
different abbreviations of the Portfolio's name, but the most common is INTLGR.
PLAIN TALK ABOUT
Distributions
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from the dividends that the fund earns from its holdings as well
as interest it receives from its money market and bond investments. Capital
gains are realized when the fund sells securities for higher prices than it paid
for them. These capital gains are either short-term or long-term depending on
whether the fund held the securities for less than or more than one year.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each December, the Portfolio distributes to shareholders virtually all of its
income from interest and dividends, as well as any capital gains realized from
the sale of securities. You can receive distributions of income or capital gains
in cash, or you may have them automatically reinvested in more shares of the
Portfolio. In either case, distributions of dividends and capital gains that are
declared in December -- even if paid to you in January -- are taxed as if they
had been paid to you in December. Vanguard will process your dividend
distribution and send you a statement each year showing the tax status of all
your distributions.
- - The dividends and short-term capital gains that you receive are taxable to you
as ordinary dividend income. Any distributions of net long-term capital gains
by the Portfolio are taxable to you as long-term capital gains, no matter how
long you've owned shares in the Portfolio. Both dividends and capital gains
distributions are taxable to you whether received in cash or reinvested in
additional shares. Although the Portfolio does not seek to realize any
particular amount of capital gains during a year, such gains are realized from
time to time as byproducts of the ordinary investment activities of the
Portfolio. Consequently, distributions may vary considerably from year to
year.
- - If you sell or exchange shares of the Portfolio, any gain or loss you have is
a taxable event, which means that you may have a capital gain to report as
income, or a capital loss to report as a deduction, when you complete your
Federal income tax return.
PLAIN TALK ABOUT
"Buying a Dividend"
Unless you are investing in a tax-deferred retirement account (such as an IRA),
it is not to your advantage to buy shares of a fund shortly before it makes a
distribution, because part of your investment will come back to you as a taxable
distribution. This is known as "buying a dividend." For example: on December 15,
you invest $5,000, buying 250 shares for $20 each. If the fund pays a
distribution of $1 per share on December 16, its share price would drop to $19
(not counting market change). You would still have only $5,000 (250 shares x $19
= $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you
would owe tax on the $250 distribution you received, even if you had reinvested
the dividends in more shares. To avoid "buying a dividend," check a fund's
distribution schedule before you invest.
10
<PAGE> 57
- - Distributions of dividends or capital gains, and capital gains or losses from
your sale or exchange of Portfolio shares, may be subject to state and local
income taxes as well.
The Portfolio may "pass through" to shareholders any foreign income taxes it
is required to pay. As a shareholder, you need to report your "share" of these
taxes as part of your gross income. You can treat the tax either as an itemized
deduction or as a foreign tax credit on your tax return.
The tax information in this prospectus is provided as general information and
will not apply to you if you are investing in a tax-deferred account such as an
IRA. You should consult your own tax adviser about the tax consequences of an
investment in the Portfolio.
THE PORTFOLIO AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 30 investment
companies with more than 90 distinct investment portfolios and total net assets
of more than $230 billion. All of the Vanguard Funds share in the expenses
associated with business operations, such as personnel, office space, equipment,
and advertising.
Vanguard also provides marketing services to the Funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each Fund pays its
allocated share of The Vanguard Group's costs.
A list of the Fund's Directors and Officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.
INVESTMENT ADVISER
The Portfolio employs Schroder Capital Management International, 33 Gutter Lane,
London, England EC2V 8AS, as its investment adviser. Schroder Capital manages
the Portfolio subject to the control of the Officers and Directors of the Fund.
Schroder Capital's base advisory fee is calculated using the Portfolio's
average month-end net assets during the most recent fiscal quarter:
------------------------------------------
ASSETS MANAGED FEE
------------------------------------------
First $50 million 0.350%
Next $950 million 0.175
Assets over $1 billion 0.125
------------------------------------------
In addition, Schroder Capital's advisory fee is increased or decreased, based
on the cumulative total return performance of the Portfolio as compared to the
cumulative total return performance of the MSCI - EAFE Index over the past 36
months.
PLAIN TALK ABOUT
Vanguard's Unique
Corporate Structure
The Vanguard Group, Inc. is the only MUTUAL mutual fund company. It is owned
jointly by the Funds it oversees and by the shareholders in those Funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its Funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to Fund shareholders in
the form of lower operating expenses.
11
<PAGE> 58
PLAIN TALK ABOUT
The Portfolio's Adviser
Schroder Capital Management International, is part of a worldwide group of banks
and financial services companies known as The Schroder Group. The Group manages
more than $130 billion in assets. The manager responsible for overseeing
Schroder Capital's strategy for Vanguard International Growth Portfolio is:
RICHARD FOULKES, Executive Vice President of Schroder Capital; 29 years with
Schroder Capital; educated at the Sorbonne, France; M.A., Cambridge University,
England.
He has served in this capacity since the Portfolio's inception in 1981.
For the Portfolio's first $1 billion in assets:
<TABLE>
<CAPTION>
-------------------------------------------------
DIFFERENCE BETWEEN PORTFOLIO PERFORMANCE FEE
AND MSCI - EAFE INDEX ADJUSTMENT
-------------------------------------------------
<S> <C>
-12% and below -0.0750%
Between -6% and -12% -0.0375
Between -6% and +6% 0
Between +6% and +12% +0.0375
+12% and above +0.0750
-------------------------------------------------
</TABLE>
For the portion of the Portfolio's assets over $1 billion:
<TABLE>
<CAPTION>
-------------------------------------------------
DIFFERENCE BETWEEN PORTFOLIO PERFORMANCE FEE
AND MSCI - EAFE INDEX ADJUSTMENT
-------------------------------------------------
<S> <C>
-12% and below -0.050%
Between -6% and -12% -0.025
Between -6% and +6% 0
Between +6% and +12% +0.025
+12% and above +0.050
-------------------------------------------------
</TABLE>
For the year ended August 31, 1996, the investment advisory fee paid to
Schroder Capital was $7.44 million, which included a base fee of $5.89 million
and, because the Portfolio's cumulative total return performance bettered that
of the MSCI - EAFE Index over the past 36 months, an additional $1.55 million.
The advisory agreement authorizes Schroder Capital to choose brokers or
dealers to handle the purchases and sales of the Portfolio's securities, and
directs Schroder Capital to use every effort to get the best available price and
most favorable execution from these brokers with respect to all transactions.
The Board of Directors may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser, either as
a replacement for Schroder Capital or as an additional adviser. However, no such
change would be made before giving shareholders 30-days notice, in writing.
GENERAL INFORMATION
The International Growth Portfolio is one of two Portfolios of Vanguard World
Fund, Inc. The other Portfolio is the U.S. Growth Portfolio. Vanguard World Fund
was originally formed as a corporation in 1959 and is now organized under the
laws of the State of Maryland. The Portfolios are combined under one corporation
for administrative purposes, but in virtually all respects operate like separate
corporations.
12
<PAGE> 59
Shareholders of the International Growth Portfolio have rights and privileges
similar to those enjoyed by other corporate shareholders. For example,
shareholders will not be responsible for any liabilities of the corporation. If
any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of directors), each share
outstanding at that point would be entitled to one vote. Annual meetings will
not be held by the Portfolio except as required by the Investment Company Act of
1940. A meeting will be scheduled (for example, to vote on the removal of a
director) if the holders of at least 10% of the Portfolio's shares request a
meeting in writing.
13
<PAGE> 60
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES 1-800-662-2739
- TELE-ACCOUNT 1-800-662-6273
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to Fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer you as a Vanguard International Growth Portfolio shareholder. Booklets
providing detailed information are available on the services marked with a
[graphic image of an open book]. Please call us to request copies.
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares.
TELEPHONE REDEMPTIONS Automatically set up for this Portfolio
(SALES AND EXCHANGES) unless you notify us otherwise.
VANGUARD DIRECT DEPOSIT Automatic method for depositing your paycheck
SERVICE or U.S. Government payment (including Social
[graphic image of an open book] Security and Government pension checks) into
your account.
VANGUARD AUTOMATIC EXCHANGE Automatic method for moving a fixed amount of
SERVICE money from one Vanguard Fund account to
[graphic image of an open book] another.*
VANGUARD FUND EXPRESS Electronic method for buying or selling
[graphic image of an open book] shares. You can transfer money between your
Vanguard Fund account and an account at your
bank, savings and loan, or credit union on a
systematic schedule or whenever you wish.*
VANGUARD DIVIDEND EXPRESS Electronic method for transferring dividends
[graphic image of an open book] and/or capital gains distributions directly
from your Vanguard Fund account to your bank,
savings and loan, or credit union account or
to another Vanguard Fund account.
VANGUARD BROKERAGE SERVICES A cost-effective way to trade stocks, bonds,
(VBS) and options on major exchanges, Nasdaq, and
[graphic image of an open book] other domestic over-the-counter markets at
reduced rates, and to buy and sell shares of
non-Vanguard mutual funds. Call VBS
(1-800-992-8327) for additional information
and the appropriate forms.
*Can be used to "dollar-cost average" [graphic image of an open book] or to
contribute to an IRA or other retirement plan.
14
<PAGE> 61
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES 1-800-662-2739
- TELE-ACCOUNT 1-800-662-6273
TYPES OF ACCOUNTS
INDIVIDUAL OR OTHER ENTITY
Vanguard's account registration form can be used to establish a variety of
non-retirement accounts.
FOR ONE OR MORE PEOPLE To open an account in the name of one
(individual) or more (joint tenants) people.
$3,000 minimum initial investment.
FOR A MINOR CHILD To open an account as an UGMA/UTMA (Uniform
[graphic image of an open book] Gifts/Transfers to Minors Act). Age of
majority and other transfer requirements are
set by state law. $1,000 minimum initial
investment.
FOR HOLDING TRUST ASSETS To invest assets held in an existing trust.
[graphic image of an open book] $3,000 minimum initial investment.
FOR THIRD-PARTY TRUSTEE To open an account as a retirement trust or
RETIREMENT INVESTMENTS plan based on an existing corporate or
(Vanguard is not the custodian institutional plan. These accounts are
or trustee.) established by the custodian or trustee of
the existing plan.
FOR AN ORGANIZATION To open an account as a corporation,
partnership, or other entity. These accounts
may require a corporate resolution or other
documents to name the individuals authorized
to act. $3,000 minimum initial investment.
RETIREMENT
You establish these accounts with a Vanguard adoption agreement--not a Vanguard
account registration form. To request the appropriate adoption agreement and
forms, or to ask questions about investing for retirement, call Investor
Information.
FOR AN INDIVIDUAL RETIREMENT To open a retirement account in the name of
ACCOUNT (IRA) an individual. IRAs can be established with a
(Vanguard Fiduciary Trust contribution, a direct rollover from an
Company is the custodian.) employer's plan such as a 401(k), or an asset
transfer or rollover from another financial
institution such as a bank or mutual fund
company. $1,000 minimum initial investment.
FOR A SIMPLIFIED EMPLOYEE To open a retirement account in the name of
PENSION PLAN ACCOUNT (SEP-IRA) an employee. SEPs allow employers to make
(Vanguard Fiduciary Trust deductible contributions directly to IRAs
Company is the custodian.) established by their employees. A SEP can
be established by people who are
self-employed, small-business owners,
partnerships, or corporations.
FOR A QUALIFIED RETIREMENT To open a retirement account that allows
PROGRAM ACCOUNT small-business owners or people who are
(Vanguard Fiduciary Trust self-employed to make tax-deductible
Company can be the custodian.) retirement contributions for themselves and
their employees into Profit-Sharing and Money
Purchase Pension (Keogh) plans.
15
<PAGE> 62
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES 1-800-662-2739
- TELE-ACCOUNT 1-800-662-6273
TYPES OF ACCOUNTS (CONTINUED)
FOR A 403(b)(7) CUSTODIAL To open a retirement account that allows
ACCOUNT employees of tax-exempt institutions (for
(Vanguard Fiduciary Trust example, schools or hospitals) to make
Company is the custodian.) pre-tax retirement contributions.
DISTRIBUTION OPTIONS
You can receive distributions of dividends and/or capital gains in a number of
ways:
REINVESTMENT Dividends and capital gains are automatically
reinvested in additional shares of the
Portfolio.
DIVIDENDS IN CASH Dividends are paid by check and mailed to
your account's address of record, and capital
gains are reinvested in additional shares of
the Portfolio.
DIVIDENDS AND CAPITAL GAINS Both dividends and capital gains are paid by
IN CASH check and mailed to your account's address of
record.
To electronically transfer cash dividends and/or capital gains to your bank,
savings and loan, or credit union account, or to another Vanguard Fund
account, see Vanguard Dividend Express under "Services and Account Features."
BUYING SHARES
You buy your shares at the Portfolio's next-determined net asset value after
Vanguard receives your request, provided we receive your request before 4:00
p.m. Eastern time (the close of trading on the New York Stock Exchange). The
Portfolio is offered on a no-load basis, meaning that you do not pay sales
commissions or 12b-1 marketing fees.
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
<S> <C> <C>
MINIMUM INVESTMENT $3,000 (regular $100 by mail or exchange; $1,000
account); $1,000 (IRAs by wire.
and custodial accounts
for minors).
BY MAIL Complete and sign the Mail your check with an
[graphic image of an envelope] application form. Invest-By-Mail form detached from
your confirmation statement to
the address listed on the form.
FIRST-CLASS mail to:
The Vanguard Group
P.O. Box 2600 Make your check payable Make your check payable to: The
Valley Forge, PA 19482 to: The Vanguard Vanguard Group-81
Group-81
EXPRESS or REGISTERED mail to:
The Vanguard Group All purchases must be All purchases must be made in
455 Devon Park Drive made in U.S. dollars, U.S. dollars, and checks must be
Wayne, PA 19087 and checks must be drawn on U.S. banks.
drawn on U.S. banks.
</TABLE>
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
16
<PAGE> 63
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES 1-800-662-2739
- TELE-ACCOUNT 1-800-662-6273
BUYING SHARES (continued)
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
<S> <C> <C>
BY TELEPHONE Call Vanguard Tele-Account* 24 Call Vanguard Tele-Account* 24
[GRAPHIC OF A PHONE] hours a day--or Client Services hours a day--or Client Services
1-800-662-6273 during business hours--to exchange during business hours--to exchange
Vanguard Tele-Account(R) from another Vanguard Fund account from another Vanguard Fund account
1-800-662-2739 with the same registration (name, with the same registration (name,
Client Services address, taxpayer I.D., and account address, taxpayer I.D., and account
type). type).
Use Vanguard Fund Express (see
"Services and Account Features") to
transfer assets from your bank
account. Call Client Services
before your first use to verify
that this option is in place.
</TABLE>
*You must obtain a Personal Identification Number through
Tele-Account at least seven days before you request your first
exchange.
IMPORTANT NOTE: Once a telephone transaction has been approved by you and a
confirmation number assigned, it cannot be revoked. We reserve the right to
refuse any purchase.
<TABLE>
<S> <C> <C>
BY WIRE Call Client Services to arrange Call Client Services to arrange
[GRAPHIC OF A WIRE] your wire transaction. your wire transaction.
Wire to: Wire transactions are not available Wire transactions are not available
CoreStates Bank, N.A. for retirement accounts. for retirement accounts.
ABA 031000011
CoreStates No 01019897
[Temporary Account Number]
Vanguard International
Growth Portfolio
[Account Registration]
Attn Vanguard
AUTOMATICALLY -- Vanguard offers a variety of ways
[AUTOMATIC GRAPHIC] that you can add to your account
automatically. See "Services and
Account Features."
</TABLE>
You can redeem (that is, sell or exchange) shares purchased by check or
Vanguard Fund Express at any time. However, while your redemption request will
be processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten days.
It is important that you call Vanguard before you invest a large dollar amount
by wire or check. We must consider the interests of all Portfolio shareholders
and so reserve the right to delay or refuse any purchase that will disrupt the
Portfolio's operation or performance.
17
<PAGE> 64
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES 1-800-662-2739
- TELE-ACCOUNT 1-800-662-6273
REDEEMING SHARES
IMPORTANT TAX NOTE: Any sale or exchange of shares in a non-retirement account
could result in a taxable gain or a loss.
The ability to redeem (that is, sell or exchange) Portfolio shares by telephone
is automatically established for your account unless you tell us in writing that
you do not want this option.
To protect your account from unauthorized or fraudulent telephone
instructions, Vanguard follows specific security procedures. When we receive a
call requesting an account transaction, we require the caller to provide:
/x/ Portfolio name.
/x/ 10-digit account number.
/x/ Name and address exactly as registered on that account.
/x/ Social Security or Employer Identification number as registered on that
account.
If you call to sell shares, the sale proceeds will be made payable to you, as
the registered shareholder, and mailed to your account's address of record.
If we follow reasonable security procedures, neither the Portfolio nor
Vanguard will be responsible for the authenticity of transaction instructions
received by telephone. We believe that these procedures are reasonable and that,
if we follow them, you bear the risk of any losses resulting from unauthorized
or fraudulent telephone transactions on your account. However, if we do not
follow these or other reasonable procedures, Vanguard may be liable for any
losses resulting from unauthorized or fraudulent transactions.
HOW TO SELL SHARES
You may withdraw any part of your account, at any time, by selling shares. Sale
proceeds are normally mailed within two business days after Vanguard receives
your request. The sale price of your shares will be the Portfolio's
next-determined net asset value after Vanguard receives all required documents
in good order.
Good order means that the request includes:
/x/ Portfolio name and account number.
/x/ Amount of the transaction (in dollars or shares).
/x/ Signatures of all owners exactly as registered on the account.
/x/ Signature guarantees (if required).
/x/ Any supporting legal documentation that may be required.
/x/ Any certificates you are holding for the account.
Sales or exchange requests received after the close of trading on the New
York Stock Exchange (generally 4:00 p.m. Eastern time) are processed at the next
business day's net asset value.
The Portfolio reserves the right to close any non-retirement or UGMA/UTMA
account whose balance falls below the minimum initial investment. The Portfolio
will deduct a $10 annual fee if your non-retirement account balance falls below
$2,500 or if your UGMA/UTMA account balance falls below $500. The fee is waived
if your total Vanguard account assets are $50,000 or more.
Some written requests require a signature guarantee from a bank, broker, or
other acceptable institution.
A notary public cannot provide a signature guarantee.
18
<PAGE> 65
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES 1-800-662-2739
- TELE-ACCOUNT 1-800-662-6273
REDEEMING SHARES (continued)
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one Vanguard Fund to purchase shares of
another.
Although we make every effort to maintain the exchange privilege, Vanguard
reserves the right to revise or terminate the exchange privilege, limit the
amount of an exchange, or reject any exchange, at any time, without notice.
Because excessive exchanges can potentially disrupt the management of the
Portfolio and increase transaction costs, Vanguard limits exchange activity to
TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (at least 30 days apart) from the Portfolio
during any 12-month period. "Substantive" means either a dollar amount large
enough to have a negative impact on the Portfolio or a series of movements
between Vanguard Funds.
Before you exchange into a new Vanguard Fund, be sure to read its prospectus.
For a copy and for answers to questions you might have, call Investor
Information.
<TABLE>
<CAPTION>
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
BY TELEPHONE ALL TYPES EXCEPT RETIREMENT:
<S> <C>
[PHONE GRAPHIC] Call Vanguard Tele-Account* 24 hours a day--or
1-800-662-6273 Client Services during business hours--to sell
Vanguard Tele-Account or exchange shares. You can exchange shares
1-800-662-2739 from this Portfolio to open an account in
Client Services another Vanguard Fund or to add to an existing
Vanguard Fund account with an identical
registration.
RETIREMENT:
You can exchange--but not sell--shares by
calling Tele-Account or Client Services.
*You must obtain a Personal Identification
Number through Tele-Account at least seven days
before you request your first redemption.
BY MAIL ALL TYPES EXCEPT RETIREMENT:
[ENVELOPE GRAPHIC] Send a letter of instruction signed by all
FIRST-CLASS mail to: registered account holders. Include the
The Vanguard Group Portfolio name and account number and (if you
Vanguard International are selling) a dollar amount or number of
Growth Portfolio shares OR (if you are exchanging) the name of
P.O. Box 1120 the Fund you want to exchange into and a dollar
Valley Forge, PA 19482 amount or number of shares.
Express or Registered mail RETIREMENT:
to The Vanguard Group
Vanguard International For information on how to request distributions from . . .
Growth Portfolio
455 Devon Park Drive - IRAs, call Client Services.
Wayne, PA 19087
- SEP-IRAs, 403(b)(7) custodial accounts, and
Profit-Sharing and Money Purchase Pension
(Keogh) Plans, call Individual Retirement
Services at 1-800-662-2003.
Depending on your account registration type,
additional documentation may be required.
AUTOMATICALLY ALL TYPES EXCEPT RETIREMENT:
[AUTOMATIC GRAPHIC] Vanguard offers several ways to sell or
exchange shares automatically (see "Services
and Account Features"). Call Investor
Information for the appropriate booklet and
application if you did not elect a feature when
you opened your account.
</TABLE>
19
<PAGE> 66
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES 1-800-662-2739
- TELE-ACCOUNT 1-800-662-6273
REDEEMING SHARES (continued)
It is important that you call Vanguard before you redeem a large dollar
amount. We must consider the interests of all Portfolio shareholders and so
reserve the right to delay your redemption proceeds--up to seven days--if the
amount will disrupt the Portfolio's operation or performance.
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the United States
Securities and Exchange Commission. If you experience difficulty making a
telephone redemption during periods of drastic economic or market change, you
can send us your request by regular or express mail. Follow the instructions
on selling or exchanging shares by mail in the "Redeeming Shares" section.
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you clear, concise account and tax statements to help you keep
track of your Vanguard International Growth Portfolio account throughout the
year as well as when you are preparing your income tax returns.
In addition, you will receive financial reports about the Portfolio twice a
year. These comprehensive reports include an assessment of the Portfolio's
performance (and a comparison to its industry benchmark), an overview of the
markets, a report from the adviser, as well as a listing of its holdings and
other financial statements.
CONFIRMATION STATEMENT Sent each time you buy, sell, or exchange
shares; confirms the date and the amount of
your transaction.
PORTFOLIO SUMMARY Mailed quarterly; shows the market value of
your account at the close of the statement
period, as well as distributions, purchases,
sales, and exchanges for the current calendar
year.
FUND FINANCIAL REPORTS Mailed in April and October for this Portfolio.
TAX STATEMENTS Generally mailed in January; report
previous year's dividend distributions,
proceeds from the sale of shares, and
distributions from IRAs or other retirement
accounts.
AVERAGE COST STATEMENT Issued quarterly for taxable accounts
[GRAPHIC IMAGE OF (accompanies your Portfolio Summary); shows the
AN OPEN BOOK] average cost of shares that you redeemed
during the previous quarter, using the
average cost single category method.
20
<PAGE> 67
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES 1-800-662-2739
- TELE-ACCOUNT 1-800-662-6273
FUND AND ACCOUNT UPDATES (continued)
AUTOMATED TELEPHONE ACCESS
VANGUARD TELE-ACCOUNT Toll-free access to Vanguard Fund and account
1-800-662-6273 information--as well as some
Any time seven days a week transactions--through any
from anywhere in the TouchTone(TM)telephone. Tele-Account provides
continental United States total return, share price, price change, and
and Canada yield quotations for all Vanguard Funds; gives
[GRAPHIC OF OPEN BOOK] your account balances and history (e.g., last
transaction, latest dividend distribution); and
allows you to sell or exchange Fund shares.
COMPUTER ACCESS
VANGUARD ONLINES- Use your personal computer to learn more about
Keyword: Vanguard Vanguard Funds and services; keep in touch with
your Vanguard accounts; map out a long-term
investment strategy; and ask questions, make
suggestions, and send messages to Vanguard.
Vanguard Online is offered through America
Online(R) (AOL). To establish an AOL account,
call 1-800-238-6336.
VANGUARD ON THE Use your personal computer to visit Vanguard's
WORLD WIDE WEB education-oriented website, which provides
http://www.vanguard.com timely news and information about Vanguard Funds
and services; an online "university" that offers
a variety of mutual fund classes; and
easy-to-use, interactive tools to help you
create your own investment and retirement
strategies.
SHARES OF THE PORTFOLIO MAY ONLY BE SOLD IN THOSE STATES IN WHICH THEY ARE
REGISTERED. THE PORTFOLIO'S SHARES ARE CURRENTLY REGISTERED FOR SALE IN ALL 50
STATES, AND THE PORTFOLIO INTENDS TO MAINTAIN SUCH REGISTRATION.
22
<PAGE> 68
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
Reading this prospectus will help you to decide whether Vanguard International
Growth Portfolio is suitable for your investment goals. If you decide to invest,
don't throw the prospectus out; you will no doubt need it for future reference.
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about
Vanguard International Growth Portfolio, including its investment objective,
risks, strategies, and expenses, as well as services available to you as a
shareholder.
It is important that you understand these facts so that you can decide
whether an investment in this Portfolio is right for you. The following
questions offer a quick review of some of the subjects covered by this
prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN . . .
- The Portfolio's objective? (page 4)
- The Portfolio's investment strategies? (page 5)
- Who should invest in the Portfolio? (page 4)
- The risks associated with the Portfolio? (pages 4-8)
- Whether the Portfolio is Federally insured? (inside front cover)
- The Portfolio's expenses? (page 2)
- The background of the Portfolio's investment manager? (page 11)
- How to open an account? (page 16)
- How to sell or exchange shares? (page 18)
- How often you'll receive statements and financial reports? (page 20)
22
<PAGE> 69
A SIMPLE RISK QUIZ
A. I HAVE BEEN INVESTING IN STOCK AND BOND MUTUAL FUNDS (OR IN INDIVIDUAL
STOCKS OR BONDS) FOR . . .
1. Less than a year
2. 1-2 years
3. 3-4 years
4. 5-9 years
5. 10 years or more
B. WHEN IT COMES TO INVESTING IN STOCK OR BOND MUTUAL FUNDS (OR INDIVIDUAL
STOCKS OR BONDS), I WOULD SAY I'M . . .
1. A very inexperienced investor
2. A somewhat inexperienced investor
3. A somewhat experienced investor
4. An experienced investor
5. A very experienced investor
C. I AM COMFORTABLE WITH INVESTMENTS THAT MAY LOSE MONEY FROM TIME TO TIME IF
THEY OFFER THE POTENTIAL FOR HIGHER RETURNS.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
D. I WILL KEEP AN INVESTMENT EVEN IF IT LOSES 10% OF ITS VALUE OVER THE COURSE
OF A YEAR.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
E. IN ADDITION TO MY LONG-TERM INVESTMENTS, I HAVE EMERGENCY SAVINGS EQUAL TO
____ MONTHS OF MY TAKE-HOME PAY.
1. Zero
2. One
3. Two
4. Three
5. Four or more
F. I FIND IT EASY TO PAY MY MONTHLY BILLS FROM MY CURRENT PAY.
1. I strong disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
G. OVERALL, MY PERSONAL FINANCIAL SITUATION IS SECURE.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
ABOUT THE QUIZ
Knowing your risk tolerance is important when you are making an investment
decision. To give you a general idea of your comfort level with investing,
circle the response that most closely matches your personal situation. Keep in
mind, though, that there is no "foolproof" way to accurately gauge your risk
tolerance. Scoring for the quiz is below.
HOW TO SCORE THE QUIZ
Use the number of your answer as the number of points scored. For instance, if
you chose answer #3 to a question, that's worth three points. Add up your points
and check below for the type of investor you are. (Note: if you chose answer #1
or #2 to Question C, subtract five points from your total score.)
- - If you scored between 0 and 25 points, you are considered a conservative
investor.
- - If you scored between 26 and 32 points, you are considered a moderate
investor.
- - If you scored between 33 and 35 points, you are considered an aggressive
investor.
23
<PAGE> 70
PLAIN TALK ABOUT
INFLATION AND YOUR INVESTMENTS
No matter how you invest your money, inflation--the rising cost of living--is a
constant threat to your investment returns. The chart below shows how stocks,
bonds, and cash reserves have fared against inflation over time.
INFLATION'S EFFECT ON
INVESTMENT RETURNS
(1926-1995)
<TABLE>
<CAPTION>
CASH
RESERVES BONDS STOCKS
<S> <C> <C> <C>
REAL RETURN AFTER INFLATION 1.3% 2.5% 5.3%
AVERAGE ANNUAL RATE
OF INFLATION 5.4% 5.4% 5.4%
TOTAL 6.7% 7.9% 10.7%
</TABLE>
Source: (C) Stocks, Bonds, Bills, and Inflation 1996 Yearbook(TM), Ibbotson
Associates, Chicago (annual updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved.
AN INVESTMENT PRIMER
Whether you are investing for the short or long term, keep these three points in
mind:
1. INVEST IN ALL THREE OF THE MAJOR ASSET CLASSES.
Most people use a combination of . . .
- - Stocks, which are considered the "riskiest" of the three asset classes. Day
to day, or even year to year, stocks tend to have wide price swings. Despite
this potential for significant price fluctuation, however, stocks have
historically offered higher returns than the other major asset classes over
longer periods.
- - Bonds, which are chiefly influenced by changes in interest rates. When
interest rates climb, bond prices drop; when interest rates fall, bond
prices rise.
- - Cash reserves, which offer more share-price (or capital) stability than
stocks or bonds--but also generate lower returns. Some examples are Treasury
bills and money market funds.
2. REMEMBER THAT SAFETY HAS A PRICE.
Many people want a "no-risk" investment. Remember, though, that the more safety
you seek, the less potential reward you can expect--and the less you can expect
in returns after inflation. Inflation affects not only the price you pay for
goods and services; it also eats away at your investment returns over time. What
is left is known as your "real" return--the actual return you receive after you
factor in inflation (see the chart at left).
3. CHANCES ARE GOOD THAT YOU CAN AFFORD TO TAKE MORE RISK.
As the chart shows, inflation cuts into the returns of all three asset classes.
However, stocks and bonds have had an easier time of outpacing inflation over
time--which means that, to beat inflation, you may need to invest more
aggressively.
Don't be put off by potential downswings in the value of your investment,
especially if you are investing for long periods. Time acts as a shock absorber,
letting you ride out the short-term bumps that investments often provide. The
longer you hold an investment, the more likely it is that you will earn a
positive return.
24
<PAGE> 71
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments, and
U.S. Treasury bills.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
COUNTRY RISK
The possibility that events such as political or financial troubles or natural
disasters will weaken a country's economy.
CURRENCY RISK
The possibility that an American's foreign investment will lose money because of
unfavorable exchange rates.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by the
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
marketing fees.
FIXED-INCOME SECURITIES
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
INTERNATIONAL STOCK FUND
A mutual fund that invests in the stocks of companies located outside the United
States.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a portfolio's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security or industry.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
PRINCIPAL
The amount of your own money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 72
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
For information on our Funds,
Fund services, and retirement
accounts; requests for
literature
CLIENT SERVICES DEPARTMENT
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-662-2738
For information on your
account, account transactions,
account statements
VANGUARD BROKERAGE
SERVICES
1-800-992-8327
For information on trading
stocks, bonds, and options
at reduced commissions
VANGUARD TELE-ACCOUNT(R)
1-800-662-6273 (ON-BOARD)
For 24-hour automated access
to price and yield, information
on your account, certain
transactions
ELECTRONIC ACCESS TO THE
VANGUARD MUTUAL FUND
EDUCATION AND INFORMATION
CENTER
On America Online(R)
Keyword: Vanguard
On the World Wide Web
http://www.vanguard.com
To send e-mail to Vanguard
[email protected]
(C) 1996 Vanguard Marketing
Corporation, Distributor
<PAGE> 73
VANGUARD
INTERNATIONAL GROWTH
PORTFOLIO
Institutional Prospectus
December 27, 1996
This prospectus [Picture of Schooner with Logo bottom right
contains financial data Corner]
for the Portfolio through
the fiscal year ended
August 31, 1996.
<PAGE> 74
VANGUARD INTERNATIONAL GROWTH PORTFOLIO An International Stock Mutual Fund
CONTENTS
<TABLE>
<S> <C>
Portfolio Expenses 2
Financial Highlights 3
A Word About Risk 4
The Portfolio's
Objective 4
Who Should Invest 4
Investment Strategies 5
Investment Policies 7
Investment Limitations 8
Investment
Performance 9
Share Price 9
Dividends, Capital
Gains, and Taxes 10
The Portfolio and
Vanguard 10
Investment Adviser 11
General Information 12
Investing
with Vanguard
- - For Plan Participants 13
- - For Other
Institutional Investors 13
Accessing Fund
Information by
Computer 14
Prospectus Postscript 15
Risk Quiz 16
Glossary Inside Back Cover
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
Vanguard International Growth Portfolio (the "Portfolio") is a diversified
mutual fund, a part of Vanguard World Fund, Inc. (the "Fund"), an open-end
management company.
The Portfolio seeks to provide long-term capital growth by investing in
equity securities of seasoned companies located outside the United States. The
Portfolio invests in up to 30 foreign stock markets, emphasizing companies with
above-average growth potential.
IT IS IMPORTANT TO NOTE THAT THE PORTFOLIO'S SHARES ARE NOT GUARANTEED OR
INSURED BY THE FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT OR FOREIGN
GOVERNMENTS. AS WITH ANY INVESTMENT IN COMMON STOCKS, WHICH ARE SUBJECT TO WIDE
FLUCTUATIONS IN MARKET VALUE, YOU COULD LOSE MONEY BY INVESTING IN THE
PORTFOLIO.
FEES AND EXPENSES
The Portfolio is offered on a no-load basis, which means that you pay no sales
commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the expense ratio.
IMPORTANT NOTE
This prospectus is intended for institutional clients and for participants in
employer-sponsored retirement or savings plans.
Another version -- for investors who would like to open a personal account --
can be obtained by calling Vanguard at 1-800-662-7447.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
A Statement of Additional Information (dated December 27, 1996) containing more
information about the Portfolio is, by reference, part of this prospectus and
may be obtained without charge by contacting Vanguard (see back cover).
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of the
International Growth Portfolio. To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk" explanations along the way.
Reading the prospectus will help you to decide whether the Portfolio is the
right investment for your needs. We suggest that you keep it for future
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE> 75
PORTFOLIO PROFILE Vanguard International Growth Portfolio
WHO SHOULD INVEST (page 4)
- - Investors seeking investment opportunities outside the United States.
- - Investors seeking growth of their capital over the long term -- at least five
years.
- - Investors willing to accept the additional risks associated with
international investing.
- - Investors wishing to add an international component to an investment mix that
already includes U.S. stock, bond, and money market mutual funds.
WHO SHOULD NOT INVEST
- - Investors unwilling to accept significant fluctuations in share price.
- - Investors seeking dividend income.
RISKS OF THE PORTFOLIO (pages 4 - 8)
This Portfolio's total return will fluctuate within a wide range, so an investor
could lose money over short or even extended periods. In addition to the risks
of U.S. stock funds (market risk, etc.), the Portfolio is subject to the risks
associated with foreign investing. Among these are country risk (the chance that
a country's economy will be hurt by political or financial problems or natural
disasters) and currency risk (the chance that Americans investing abroad could
lose money because of a rise in the value of the U.S. dollar versus foreign
currencies).
DIVIDENDS AND CAPITAL GAINS (page 10)
Paid annually in December. In participant accounts, all distributions are
automatically reinvested.
INVESTMENT ADVISER (page 11)
Schroder Capital Management International, London, England.
INCEPTION DATE: September 30, 1981
NET ASSETS AS OF 8/31/96: $5.0 billion
PORTFOLIO'S EXPENSE RATIO FOR THE
YEAR ENDED 8/31/96: 0.56%
NEWSPAPER ABBREVIATION: IntlGr
VANGUARD FUND NUMBER: 081
AVERAGE ANNUAL TOTAL RETURN --
PERIODS ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
--------------------------------------
<S> <C> <C> <C>
International Growth Portfolio 12.7% 11.6% 9.8%
MSCI - EAFE Index 8.2 9.1 8.6
</TABLE>
QUARTERLY RETURNS (%) 1987 - 1996 (INTENDED TO SHOW VOLATILITY OF RETURNS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30 8.6
9.8
20
- ----------------------------------------------------------------------------------------------------------------------
10 [PLOT POINTS TO COME] 10-Year
Average
0 Annual
Returns
- -10
- -20 - International Growth Portfolio
- ----------------------------------------------------------------------------------------------------------------------
-- MSCI-EAFE Index
- -30
- ----------------------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
In evaluating past performance, remember that it is not indicative of future
performance. Performance figures include the reinvestment of any dividends and
capital gains distributions. The returns shown are net of expenses, but they do
not reflect income taxes an investor would have incurred. Note, too, that both
the return and principal value of an investment will fluctuate so that
investors' shares, when redeemed, may be worth more or less than their original
cost.
1
<PAGE> 76
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time, have
a dramatic impact on a fund's performance.
PORTFOLIO EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Portfolio.
As noted in this table, you do not pay fees of any kind when you buy, sell, or
exchange shares of the Portfolio:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
</TABLE>
The next table illustrates the operating expenses that you would incur as a
shareholder of the Portfolio. These expenses are deducted from the Portfolio's
income before it is paid to you. Expenses include investment advisory fees as
well as the costs of maintaining accounts, administering the Portfolio,
providing shareholder services, and other activities. The expenses shown in the
table are for the fiscal year ended August 31, 1996.
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard International Growth Portfolio's expense ratio in fiscal year
1996 was 0.56%, or $5.60 per $1,000 of average net assets. The average actively
managed international equity mutual fund had expenses in 1995 of 1.58%, or
$15.80 per $1,000 of average net assets, according to Lipper Analytical
Services, Inc., which reports on the mutual fund industry.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO OPERATING EXPENSES
<S> <C> <C>
Management and Administrative Expenses: 0.28%
Investment Advisory Expenses: 0.18%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.08%
----
Total Other Expenses: 0.10%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.56%
====
</TABLE>
The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes (1) that
the Portfolio provides a return of 5% a year and (2) that you redeem your
investment at the end of each period.
<TABLE>
<CAPTION>
------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------
<S> <C> <C> <C> <C>
$6 $18 $31 $70
------------------------------------------
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 77
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended August 31, 1996. The financial
highlights were audited by Price Waterhouse LLP, independent accountants. You
should read this information in conjunction with the Portfolio's financial
statements and accompanying notes, which appear, along with the audit report
from Price Waterhouse, in the Portfolio's most recent Annual Report to
shareholders. The Annual Report is incorporated by reference in the Statement of
Additional Information and in this prospectus, and contains a more complete
discussion of the Portfolio's performance. You may have the Report sent to you
without charge by calling Vanguard (see back cover).
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
1996 1995 1994 1993 1992 1991 1990 1989
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $14.70 $14.36 $12.02 $10.15 $10.31 $11.81 $11.61 $10.45
---------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .19 .20 .14 .12 .20 .18 .32 .13
Net Realized and
Unrealized Gain (Loss)
on Investments 1.65 .32 2.31 1.96 (.05) (.80) .31 2.26
----------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 1.84 .52 2.45 2.08 .15 (.62) .63 2.39
----------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.20) (.18) (.11) (.21) (.19) (.20) (.15) (.16)
Distributions from
Realized Capital Gains (.21) -- -- -- (.12) (.68) (.28) (1.07)
----------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.41) (.18) (.11) (.21) (.31) (.88) (.43) (1.23)
----------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $16.13 $14.70 $14.36 $12.02 $10.15 $10.31 $11.81 $11.61
========================================================================================
TOTAL RETURN 12.72% 3.76% 20.44% 21.06% 1.49% -5.11% 5.25% 24.49%
========================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $4,997 $3,354 $2,989 $1,477 $ 919 $ 846 $ 796 $ 550
Ratio of Expenses to
Average Net Assets 0.56% 0.59% 0.46% 0.59% 0.58% 0.67% 0.68% 0.64%
Ratio of Net Investment
Income to Average
Net Assets 1.35% 1.53% 1.37% 1.27% 2.04% 1.80% 3.01% 1.27%
Portfolio Turnover Rate 22% 31% 28% 51% 58% 49% 45% 50%
Average Commission
Rate Paid $.0223 N/A N/A N/A N/A N/A N/A N/A
----------------------------------------------------------------------------------------
<CAPTION>
-------------------
YEAR ENDED AUGUST 31,
1988 1987
-------------------
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $14.21 $11.67
-------------------
INVESTMENT OPERATIONS
Net Investment Income .16 .12
Net Realized and
Unrealized Gain (Loss)
on Investments (1.36) 3.29
-------------------
TOTAL FROM INVESTMENT
OPERATIONS (1.20) 3.41
-------------------
DISTRIBUTIONS
Dividends from Net (.13) (.07)
Investment Income
Distributions from (2.43) (.80)
Realized Capital Gains
-------------------
TOTAL DISTRIBUTIONS (2.56) (.87)
-------------------
NET ASSET VALUE,
END OF PERIOD $10.45 $14.21
===================
TOTAL RETURN -9.92% 32.01%
===================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $ 454 $ 607
Ratio of Expenses to
Average Net Assets 0.67% 0.66%
Ratio of Net Investment
Income to Average
Net Assets 1.39% 1.00%
Portfolio Turnover Rate 71% 77%
Average Commission
Rate Paid N/A N/A
-------------------
</TABLE>
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL
HIGHLIGHTS TABLE
The Portfolio began Fiscal 1996 with a net asset value (price) of $14.70 per
share. During the year, the Portfolio earned $.19 per share from investment
income (interest and dividends) and $1.65 per share from investments that had
appreciated in value or that were sold for higher prices than the Portfolio paid
for them. Of those total earnings of $1.84 per share, $.41 per share was
returned to shareholders in the form of dividend and capital gains
distributions. The earnings ($1.84 per share) less distributions ($.41 per
share) resulted in a share price of $16.13 at the end of the year, an increase
of $1.43 per share (from $14.70 at the beginning of the period to $16.13 at the
end of the period). Assuming that the shareholder had reinvested the
distributions in the purchase of more shares, total return from the Portfolio
was 12.72% for the year.
As of August 31, 1996, the Portfolio had $4.99 billion in net assets; an
expense ratio of 0.56% ($5.60 per $1,000 of net assets); and net investment
income amounting to 1.35% of its average net assets. It sold and replaced
securities valued at 22% of its total net assets.
From time to time, the Vanguard Funds advertise yield and total return
figures. Yield is an historical measure of dividend income, and total return is
a measure of past dividend income (assuming that it has been reinvested) plus
capital appreciation. Neither yield nor total return should be used to predict
the future performance of a fund.
3
<PAGE> 78
PLAIN TALK ABOUT
GROWTH FUNDS AND
VALUE FUNDS
Growth investing and value investing are two styles employed by stock fund
managers. Growth funds generally focus on companies that, due to their strong
earnings and revenue potential, offer above-average prospects for capital
growth, with less emphasis on dividend income. Value funds generally emphasize
companies that, considering their assets and earnings history, are attractively
priced; these companies often pay regular dividend income to shareholders.
Growth and value stocks have, in the past, produced similar long-term returns,
though each has periods when it outperforms the other. In general, growth funds
appeal to investors who will accept more volatility in hope of a greater
increase in share price, while value funds are appropriate for investors who
want some dividend income and the potential for capital gains but are less
tolerant of share-price fluctuations.
A WORD ABOUT RISK
This prospectus describes the risks you will face as an investor in Vanguard
International Growth Portfolio. It is important to keep in mind one of the main
axioms of investing: the higher the risk of losing money, the higher the
potential reward. The reverse, also, is generally true: the lower the risk, the
lower the potential reward. However, as you consider an investment in the
International Growth Portfolio, you should also take into account your personal
tolerance for the daily fluctuations of the stock market.
Look for this "warning flag" symbol [GRAPHIC IMAGE OF A FLAG] throughout the
prospectus. It is used to mark detailed information about each type of risk that
you, as a shareholder of the Portfolio, will confront.
THE PORTFOLIO'S OBJECTIVE
The Portfolio seeks to provide long-term growth of capital. This objective is
fundamental, which means that it cannot be changed unless a majority of
shareholders vote to do so.
[GRAPHIC IMAGE OF A FLAG]
BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING PAGES,
YOUR INVESTMENT IN THE PORTFOLIO, AS WITH ANY INVESTMENT IN COMMON STOCKS,
COULD LOSE MONEY.
WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:
- - You wish to add an international stock fund to your existing holdings, which
could include U.S. stock, bond, and money market investments.
- - You are willing to accept the additional risks (country risk, currency risk,
etc.) associated with international investments.
- - You are seeking growth of capital over the long term -- at least five years.
- - You are not looking for income.
- - You characterize your investment temperament as "relatively aggressive."
This Portfolio is not an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of the Portfolio's shareholders. To
minimize such costs, which reduce the ultimate returns achieved by you and other
shareholders, the Portfolio has adopted the following policies:
- - The Portfolio reserves the right to reject any purchase request -- including
exchanges from other Vanguard Funds -- that it regards
PLAIN TALK ABOUT
INVESTING FOR THE LONG TERM
The Portfolio is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on short-term
fluctuations in the stock market.
4
<PAGE> 79
PLAIN TALK ABOUT
COSTS AND MARKET TIMING
Some investors try to profit from "market timing" -- switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the portfolio discourages short-term trading by, among other things,
closely monitoring daily transactions.
as disruptive to the efficient management of the Portfolio. This could be
because of the timing of the investment or because of a history of excessive
trading by the investor.
- - There is a limit on the number of times you can exchange into or out of the
Portfolio. If you own shares of the Portfolio as an investment option in an
employer-sponsored retirement or savings plan, your plan dictates the rules
governing exchanges. Contact your plan administrator for details.
- - The Portfolio reserves the right to stop offering shares at any time.
INVESTMENT STRATEGIES
This section explains how the Portfolio's investment adviser pursues its
objective. It also explains several of the risks -- market risk, objective risk,
country risk, manager risk, and currency risk -- faced by investors in the
Portfolio. Unlike the Portfolio's investment objective, the adviser's investment
strategies are not fundamental and can be changed by the Portfolio's Board of
Directors without shareholder approval. However, before making any important
change in its policies, the Portfolio will give shareholders 30-days notice, in
writing.
MARKET EXPOSURE
The Portfolio invests in stocks of non-U.S. companies. About two-thirds of the
Portfolio's assets are invested in long-term growth stocks; the remaining third
may be invested in stocks that pursue shorter-term opportunities.
[GRAPHIC IMAGE OF FLAG]
THE PORTFOLIO IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT
STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN EXTENDED PERIODS.
STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING STOCK PRICES
AND PERIODS OF FALLING STOCK PRICES. IN ADDITION, INVESTMENTS IN FOREIGN
STOCK MARKETS CAN BE AS RISKY, IF NOT MORE RISKY, THAN U.S. STOCK
INVESTMENTS.
To illustrate the volatility of international stock prices, the following
table shows the best, worst, and average total returns (dividend income plus
change in market value) for foreign stock markets over various periods as
measured by the Morgan Stanley Capital International - Europe, Australasia, Far
East (EAFE) Index, a widely used barometer of international stock market
activity. Note that the returns shown do not include the costs of buying and
selling stocks or other expenses that a real-world investment portfolio would
incur.
INTERNATIONAL STOCK MARKET RETURNS (1969 - 1995)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
<S> <C> <C> <C> <C>
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 7.0 12.0
Average 15.3 14.2 16.2 14.9
</TABLE>
PLAIN TALK ABOUT
THE RISKS OF
INTERNATIONAL INVESTING
Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign countries are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies, and may not be as liquid as similar U.S. companies. In addition,
foreign stock exchanges, brokers, and companies generally have less government
supervision and regulation than in the U.S. These factors -- as well as possible
country risk and currency risk (which are described in detail in this
prospectus) -- could negatively impact the returns that Americans receive from a
foreign investment. For more information about foreign investment risk, see the
Statement of Additional Information.
5
<PAGE> 80
Note, also, how the gap between best and worst tends to narrow over the long
term.
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1995. Keep in mind that this was a particularly favorable period for
foreign markets. For instance, over 10-year periods, foreign stocks provided an
average return of 16.2%, compared to 13.1% for U.S. stocks (as measured by the
Standard & Poor's 500 Composite Stock Price Index) during the same time frame.
These average returns reflect past performance and should not be regarded as an
indication of future returns from either foreign markets as a whole or this
Portfolio in particular.
Keep in mind, too, that because the International Growth Portfolio does not
hold the same securities held in the EAFE Index or any other market index, the
performance of the Portfolio will not mirror the returns of any particular
index.
[GRAPHIC IMAGE OF FLAG]
THE PORTFOLIO IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE POSSIBILITY THAT
RETURNS FROM INTERNATIONAL STOCKS WILL TRAIL RETURNS FROM THE U.S. STOCK
MARKETS. THE PRICES OF INTERNATIONAL STOCKS AND THE PRICES OF U.S. STOCKS
HAVE OFTEN MOVED IN OPPOSITE DIRECTIONS. THESE PERIODS HAVE, IN THE PAST,
LASTED FOR AS LONG AS SEVERAL YEARS.
SECURITY SELECTION
Schroder Capital Management International (Schroder Capital), adviser to the
Portfolio, believes that the two most important factors in managing the
investments of an international stock fund are country selection and stock
selection. Schroder Capital evaluates up to 30 financial markets -- including
Japan, the United Kingdom, the Netherlands, Germany, France, Switzerland,
Sweden, Australia, Hong Kong, Singapore, Malaysia, and Italy -- and identifies
those countries with, in the adviser's opinion, the most favorable business
climates.
[GRAPHIC IMAGE OF FLAG]
THE PORTFOLIO IS SUBJECT TO COUNTRY RISK, WHICH IS THE POSSIBILITY THAT
POLITICAL EVENTS (A WAR, NATIONAL ELECTIONS), FINANCIAL PROBLEMS (RISING
INFLATION, GOVERNMENT DEFAULT), OR NATURAL DISASTERS (AN EARTHQUAKE, A
FLOOD) WILL WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN THAT
COUNTRY TO LOSE MONEY.
Once an attractive market has been identified, Schroder Capital analyzes and
ranks the companies in that country that, Schroder believes, offer the potential
for above-average earnings growth. Schroder Capital considers on-site
evaluations a vital part of the security selection process, visiting more than
2,000 companies in more than 20 countries each year. The companies chosen by
Schroder Capital reflect a wide variety of countries and industries.
6
<PAGE> 81
PLAIN TALK ABOUT
PORTFOLIO DIVERSIFICATION
In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average foreign equity mutual fund
has about 25% of its assets invested in its ten largest holdings, while some
less-diversified international mutual funds have more than 50% of their assets
invested in the stocks of just ten companies.
The top ten holdings (which amounted to 23% of the Portfolio's total net
assets) as of August 31, 1996, follow.
<TABLE>
<CAPTION>
COMPANY COUNTRY
<S> <C> <C>
1. Ciba-Geigy AG (Reg) Switzerland
2. ING Groep NV Netherlands
3. British Petroleum Co. PLC United Kingdom
4. Veba AG Germany
5. ABB AG (BER) Switzerland
6. Fuji Photo Film Co., Ltd. Japan
7. Heineken NV Netherlands
8. Ito-Yokado Co., Ltd. Japan
9. Takeda Chemical Industries Japan
10. Bayer AG Germany
</TABLE>
Keep in mind that, because the makeup of the Portfolio changes daily, this
listing is only a "snapshot" at one point in time.
The Portfolio is run by Schroder Capital according to traditional methods of
active investment management, which means securities are bought and sold
according to Schroder Capital's judgments about companies and their financial
prospects, and about foreign stock markets and economies in general.
[GRAPHIC IMAGE OF FLAG]
THE PORTFOLIO IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT
SCHRODER CAPITAL MAY DO A POOR JOB OF EVALUATING FOREIGN MARKETS AND
SELECTING STOCKS.
PORTFOLIO TURNOVER
Although the Portfolio generally seeks to invest for the long term, it retains
the right to sell securities regardless of how long they have been held. The
Portfolio's average turnover rate for the past ten years has been about 48%. (A
turnover rate of 100% would occur, for example, if the Portfolio sold and
replaced securities valued at 100% of its total net assets within a one-year
period.)
INVESTMENT POLICIES
Besides investing in stocks of foreign companies, the Portfolio may follow a
number of investment policies to achieve its objective.
The Portfolio may enter into forward foreign currency contracts, which help
protect the Portfolio's securities against unfavorable short-term changes in
exchange rates. A forward foreign currency contract is an agreement to buy or
sell a country's currency at a specific price usually 30, 60, or 90 days in the
future. In other words, the contract guarantees an exchange rate on a given
date. Managers of international stock funds use these contracts to guard against
sudden, unfavorable changes in U.S. dollar/foreign currency exchange rates. The
contracts will not prevent the fund's securities from falling in value during
foreign market downswings. Schroder Capital will use these contracts to
eliminate some of the uncertainty of foreign exchange rates -- but will not
speculate on changes in the market.
PLAIN TALK ABOUT
PORTFOLIO TURNOVER
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. The average turnover rate for actively managed
international stock funds is 53%.
7
<PAGE> 82
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new, exotic types of derivatives -- some of which
can carry considerable risks.
PLAIN TALK ABOUT
CASH RESERVES
With mutual funds, holding cash reserves -- or "cash" -- does not mean literally
that the fund holds a stack of currency. Rather, cash reserves refer to
short-term, interest-bearing securities that can easily and quickly be converted
to cash. (Most mutual funds hold at least a small percentage of assets in cash
to accommodate shareholder redemptions.) While some equity funds strive to keep
cash levels at a minimum and to always remain fully invested in stocks, other
equity funds allow investment advisers to hold up to 20% or more of a fund's
assets in cash reserves.
THE PORTFOLIO IS SUBJECT TO CURRENCY RISK, WHICH IS THE POSSIBILITY THAT A
"STRONGER" U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS INVESTING
OVERSEAS. GENERALLY, WHEN THE DOLLAR RISES IN VALUE AGAINST A FOREIGN
CURRENCY, YOUR INVESTMENT IN THAT COUNTRY LOSES VALUE BECAUSE ITS CURRENCY
IS WORTH FEWER U.S. DOLLARS. ON THE OTHER HAND, A "WEAKER" DOLLAR
GENERALLY LEADS TO HIGHER RETURNS FOR AMERICANS HOLDING FOREIGN
INVESTMENTS.
The Portfolio may also invest in derivatives.
ALTHOUGH IT HAS NOT DONE SO IN THE PAST, THE PORTFOLIO RESERVES THE RIGHT
TO INVEST, TO A LIMITED EXTENT, IN STOCK FUTURES AND OPTIONS CONTRACTS,
WHICH ARE TRADITIONAL TYPES OF DERIVATIVES.
Losses (or gains) involving futures can sometimes be substantial -- in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a Portfolio. This Portfolio will
not use futures and options for speculative purposes or as leveraged investments
that magnify the gains or losses of an investment. Rather, the Portfolio will
keep separate cash reserves or short-term cash-equivalent securities in the
amount of the obligation underlying the futures or options contract. Only a
limited percentage of the Portfolio's assets -- no more than 20% of total assets
- -- may be committed to such contracts.
The reasons for which the Portfolio may use futures and options contracts
are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- To make it easier to trade.
- To reduce costs by buying futures instead of actual stocks when futures are
cheaper.
The Portfolio will usually hold only a small percentage of its assets in cash
reserves, although if the investment adviser believes that market conditions
warrant a temporary defensive measure, the Portfolio may hold cash reserves
without limit.
INVESTMENT LIMITATIONS
To reduce risk and maintain diversification, the Portfolio has adopted limits on
some of its investment policies. Specifically, the Portfolio will not:
- Invest more than 5% of its assets in the securities of companies that have
been in business for less than three years.
- Invest more than 25% of its assets in any one industry.
- Borrow money, except for the purpose of meeting shareholder requests to
redeem shares.
8
<PAGE> 83
With respect to 75% of its assets, this Portfolio will not:
- Invest more than 5% in the securities of any one company.
- Buy more than 10% of the outstanding voting securities of any company.
The limitations listed in this prospectus and in the Statement of Additional
Information are fundamental and may be changed only by approval of a majority of
the Portfolio's shareholders.
INVESTMENT PERFORMANCE
Vanguard International Growth Portfolio invests in foreign stocks, so its
performance is tied to the performance of many stock markets outside the United
States. Historically, stock market performance, both foreign and domestic, has
been characterized by sharp up-and-down swings in the short term and by more
stable growth over the long term.
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 8/31/96
<TABLE>
<CAPTION>
International Growth MSCI-EAFE Index
-------------------- ---------------
<S> <C> <C>
1 Year 12.7% 8.2%
3 Years 12.1% 6.6%
5 Years 11.6% 9.1%
10 Years 9.8% 8.6%
</TABLE>
The results shown above represent the Portfolio's "average annual total
return" performance, which assumes that any distributions of capital gains and
dividends were reinvested for the indicated periods. Also included is
comparative information on the unmanaged Morgan Stanley Capital International -
Europe, Australasia, Far East (EAFE) Index. The chart does not make any
allowance for Federal, state, or local income taxes that shareholders must pay
on a current basis.
PLAIN TALK ABOUT
PAST PERFORMANCE
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns. This is
particularly true of international markets, which historically have been more
volatile than U.S. markets.
SHARE PRICE
The Portfolio's share price, called its net asset value, is calculated each
business day after the close of regular trading (generally 4:00 p.m. Eastern
time) of the New York Stock Exchange. Net asset value per share is computed by
adding up the total value of the Portfolio's investments and other assets,
9
<PAGE> 84
subtracting any of its liabilities, or debts, and then dividing by the number of
Portfolio shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE =----------------------------------------
NUMBER OF SHARES OUTSTANDING
Daily net asset value, or NAV, is useful to you as a shareholder because the
NAV, multiplied by the number of Portfolio shares you own, gives you the dollar
amount you would have received had you sold all of your shares back to the
Portfolio that day.
To help determine its daily share price, the Portfolio calculates the value
of its foreign securities in U.S. dollars. The Portfolio uses the daily exchange
rate employed by Morgan Stanley Capital Inter-national in the calculation of its
own indexes. If Morgan Stanley's exchange rate is not available, the Portfolio
uses a rate according to policies set by the Portfolio's Board of Directors.
The Portfolio's share price can be found daily in the mutual fund listings of
most major newspapers under the heading Vanguard Group. Different newspapers use
different abbreviations of the Portfolio's name, but the most common is IntlGr.
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from the dividends that the fund earns from its holdings as well
as interest it receives from its money market and bond investments. Capital
gains are realized when the fund sells securities for higher prices than it paid
for them. These capital gains are either short-term or long-term depending on
whether the fund held the securities for less than or more than one year.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each December, the Portfolio distributes to shareholders virtually all of its
income from interest and dividends, as well as any capital gains realized from
the sale of securities.
If you own shares of the Portfolio as an investment option in an
employer-sponsored retirement or savings plan, these dividend and capital gains
distributions will be reinvested in additional Portfolio shares and accumulate
on a tax-deferred basis. You will not owe taxes on these distributions until you
begin withdrawals. You should consult your plan administrator, your plan's
Summary Plan Document, or your own tax adviser about the tax consequences of an
investment in the Portfolio and of any plan withdrawals.
If your Vanguard International Growth Portfolio investment is not part of an
employer-sponsored plan, you can receive distributions of income or capital
gains in cash, or you may have them automatically reinvested in more shares of
the Portfolio. Both dividend and capital gains distributions -- whether received
in cash or reinvested in additional shares -- are subject to Federal (and
possibly state and local) income taxes, no matter how long you have held the
shares in the Portfolio. You should consult your own tax adviser about other tax
consequences of an investment in the Portfolio.
THE PORTFOLIO AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 30 investment
companies with more than 90 distinct investment portfolios and total net assets
of more than $230 billion. All of the Vanguard Funds share in the expenses
associated with business operations, such as personnel, office space, equipment,
and advertising.
10
<PAGE> 85
PLAIN TALK ABOUT
VANGUARD'S UNIQUE
CORPORATE STRUCTURE
The Vanguard Group, Inc. is the only MUTUAL mutual fund company. It is owned
jointly by the Funds it oversees and by the shareholders in those Funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its Funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to Fund shareholders in
the form of lower operating expenses.
Vanguard also provides marketing services to the Funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each Fund pays its
allocated share of The Vanguard Group's costs.
A list of the Fund's Directors and Officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.
INVESTMENT ADVISER
The Portfolio employs Schroder Capital Management International, 33 Gutter Lane,
London, England EC2V 8AS, as its investment adviser. Schroder Capital manages
the Portfolio subject to the control of the Officers and Directors of the Fund.
Schroder Capital's base advisory fee is calculated using the Portfolio's
average month-end net assets during the most recent fiscal quarter:
<TABLE>
<CAPTION>
-------------------------------
ASSETS MANAGED FEE
-------------------------------
<S> <C> <C>
First $50 million 0.350%
Next $950 million 0.175
Assets over $1 billion 0.125
</TABLE>
In addition, Schroder Capital's advisory fee is increased or decreased, based
on the cumulative total return performance of the Portfolio as compared to the
cumulative total return performance of the MSCI - EAFE Index over the past 36
months.
For the Portfolio's first $1 billion in assets:
<TABLE>
<CAPTION>
---------------------------------------------
DIFFERENCE BETWEEN PORTFOLIO PERFORMANCE FEE
AND MSCI - EAFE INDEX ADJUSTMENT
---------------------------------------------
<S> <C>
- 12% and below - 0.0750%
Between - 6% and - 12% - 0.0375
Between - 6% and +6% 0
Between +6% and +12% +0.0375
+12% and above +0.0750
</TABLE>
For the portion of the Portfolio's assets over $1 billion:
<TABLE>
<CAPTION>
--------------------------------------------------
DIFFERENCE BETWEEN PORTFOLIO PERFORMANCE FEE
AND MSCI - EAFE INDEX ADJUSTMENT
--------------------------------------------------
<S> <C>
- 12% and below - 0.050%
Between - 6% and - 12% - 0.025
Between - 6% and +6% 0
Between +6% and +12% +0.025
+12% and above +0.050
</TABLE>
11
<PAGE> 86
For the year ended August 31, 1996, the investment advisory fee paid to
Schroder Capital was $7.44 million, which included a base fee of $5.89 million
and, because the Portfolio's cumulative total return performance bettered that
of the MSCI - EAFE Index over the past 36 months, an additional $1.55 million.
The advisory agreement authorizes Schroder Capital to choose brokers or
dealers to handle the purchases and sales of the Portfolio's securities, and
directs Schroder Capital to use every effort to get the best available price
and most favorable execution from these brokers with respect to all
transactions.
The Board of Directors may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser, either as
a replacement for Schroder Capital or as an additional adviser. However, no such
change would be made before giving shareholders 30-days notice, in writing.
GENERAL INFORMATION
The International Growth Portfolio is one of two Portfolios of Vanguard World
Fund, Inc. The other Portfolio is the U.S. Growth Portfolio. Vanguard World Fund
was originally formed as a corporation in 1959 and is now organized under the
laws of the State of Maryland. The Portfolios are combined under one corporation
for administrative purposes, but in virtually all respects operate like separate
corporations.
Shareholders of the International Growth Portfolio have rights and privileges
similar to those enjoyed by other corporate shareholders. For example,
shareholders will not be responsible for any liabilities of the corporation. If
any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of directors), each share
outstanding at that point would be entitled to one vote. Annual meetings will
not be held by the Portfolio except as required by the Investment Company Act of
1940. A meeting will be scheduled (for example, to vote on the removal of a
director) if the holders of at least 10% of the Portfolio's shares request a
meeting in writing.
PLAIN TALK ABOUT
THE PORTFOLIO'S ADVISER
Schroder Capital Management International is part of a worldwide group of
banks and financial services companies known as The Schroder Group. The Group
manages more than $130 billion in assets. The manager responsible for overseeing
Schroder Capital's strategy for Vanguard International Growth Portfolio is:
Richard Foulkes, Executive Vice President of Schroder Capital; 29 years with
Schroder Capital; educated at the Sorbonne, France; M.A., Cambridge University,
England.
He has served in this capacity since the Portfolio's inception in 1981.
12
<PAGE> 87
INVESTING WITH VANGUARD
FOR PLAN PARTICIPANTS
Vanguard International Growth Portfolio is an investment option in your
retirement or savings plan. Your plan administrator or your employee benefits
office can provide you with detailed information on how to participate in your
plan and how to elect the Portfolio as an investment option.
- - If you have any questions about a Portfolio or Vanguard, including the
Portfolio's investment objective, strategies, or risks, contact Vanguard's
Participant Services Department, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator or
the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Portfolio's shares are processed
as soon as they have been received by Vanguard in good order. Good order means
that your request includes complete information on your contribution, exchange,
or redemption, and that Vanguard has received the appropriate assets.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. However,
because excessive exchanges can potentially disrupt the management of the
Portfolio and increase its transaction costs, Vanguard reserves the right to
refuse any exchange request. In addition, certain investment options,
particularly funds made up of company stock or investment contracts, may be
subject to unique restrictions. Contact your plan administrator for details on
the exchange policies that apply to your plan.
Before making an exchange, you should consider the following:
- - Before you exchange to another Vanguard Fund available in your plan, you
should read that Fund's prospectus. Contact Participant Services, toll-free,
at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Your plan
administrator can explain how frequently exchanges are allowed.
FOR OTHER INSTITUTIONAL INVESTORS
If you have questions about Vanguard International Growth Portfolio, including
how to establish an account, call Vanguard, toll-free, at 1-800-523-1036.
If you have questions about an existing account, contact your Vanguard
account administrator.
TRANSACTIONS
Purchases, exchanges, or redemptions of the Portfolio's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request
13
<PAGE> 88
INVESTING WITH VANGUARD (continued)
includes complete information on your purchase, exchange, or redemption, and
that Vanguard has received the appropriate assets. The price of shares bought,
exchanged, or sold will be the Portfolio's next-determined net asset value after
Vanguard has processed your request, provided your request has been received
before 4:00 p.m. Eastern time.
Vanguard must consider the interests of all Portfolio shareholders and so
reserves the right to . . .
- - Delay or reject any purchase or exchange request that may disrupt the
Portfolio's operation or performance.
- - Revise or terminate the exchange privilege or limit the amount of an
exchange, at any time, without notice.
- - Take up to seven days to deliver your redemption proceeds.
- - Pay redemption proceeds -- in whole or in part -- through a distribution in
kind of readily marketable securities.
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ONLINE(SM) Use your personal computer to learn more
KEYWORD: Vanguard about Vanguard Funds and services; map
out a long-term investment strategy; and
ask questions, make suggestions, and
send messages to Vanguard. Vanguard
Online is offered through America
Online(R) (AOL). To establish an AOL
account, call 1-800-238-6336.
VANGUARD ON THE Use your personal computer to visit
WORLD WIDE WEB Vanguard's education-oriented website,
http://www.vanguard.com which provides timely news and
information about Vanguard Funds
and services; an online "university"
that offers a variety of mutual fund
classes; and easy-to-use, interactive
tools to help you create your own
investment and retirement strategies.
SHARES OF THE PORTFOLIO MAY ONLY BE SOLD IN THOSE STATES IN WHICH THEY ARE
REGISTERED. THE PORTFOLIO'S SHARES ARE CURRENTLY REGISTERED FOR SALE IN ALL 50
STATES, AND THE PORTFOLIO INTENDS TO MAINTAIN SUCH REGISTRATION.
14
<PAGE> 89
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about
Vanguard International Growth Portfolio, including its investment objective,
risks, strategies, and expenses, as well as services available to you as a
shareholder.
It is important that you understand these facts so that you can decide
whether an investment in this Portfolio is right for you. The following
questions offer a quick review of some of the subjects covered by this
prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN . . .
- The Portfolio's objective? (page 4)
- The Portfolio's investment strategies? (page 5)
- Who should invest in the Portfolio? (page 4)
- The risks associated with the Portfolio? (pages 4 - 8)
- Whether the Portfolio is Federally insured?
(inside front cover)
- The Portfolio's expenses? (page 2)
- The background of the Portfolio's investment manager?
(page 11)
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
READING THIS PROSPECTUS WILL HELP YOU TO DECIDE WHETHER VANGUARD INTERNATIONAL
GROWTH PORTFOLIO IS SUITABLE FOR YOUR INVESTMENT GOALS. IF YOU DECIDE TO INVEST,
DON'T THROW THE PROSPECTUS OUT; YOU WILL NO DOUBT NEED IT FOR FUTURE REFERENCE.
15
<PAGE> 90
A SIMPLE RISK QUIZ
ABOUT THE QUIZ
Knowing your risk tolerance is important when you are making an investment
decision. To give you a general idea of your comfort level with investing,
circle the response that most closely matches your personal situation. Keep in
mind, though, that there is no "foolproof" way to accurately gauge your risk
tolerance. Scoring for the quiz is below.
HOW TO SCORE THE QUIZ
Use the number of your answer as the number of points scored. For instance, if
you chose answer #3 to a question, that's worth three points. Add up your points
and check below for the type of investor you are. (Note: if you chose answer #1
or #2 to question c, subtract five points from your total score.)
o If You Scored Between 0 And 25 Points, You Are Considered A Conservative
Investor.
o If You Scored Between 26 And 32 Points, You Are Considered A Moderate
Investor.
o If You Scored Between 33 And 35 Points, You Are Considered An Aggressive
Investor.
A. I HAVE BEEN INVESTING IN STOCK AND BOND MUTUAL FUNDS (OR IN INDIVIDUAL STOCKS
OR BONDS) FOR . . .
1. Less than a year
2. 1 - 2 years
3. 3 - 4 years
4. 5 - 9 years
5. 10 years or more
B. WHEN IT COMES TO INVESTING IN STOCK OR BOND MUTUAL FUNDS (OR INDIVIDUAL
STOCKS OR BONDS), I WOULD SAY I'M . . .
1. A very inexperienced investor
2. A somewhat inexperienced investor
3. A somewhat experienced investor
4. An experienced investor
5. A very experienced investor
C. I AM COMFORTABLE WITH INVESTMENTS THAT MAY LOSE MONEY FROM TIME TO TIME IF
THEY OFFER THE POTENTIAL FOR HIGHER RETURNS.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
D. I WILL KEEP AN INVESTMENT EVEN IF IT LOSES 10% OF ITS VALUE OVER THE COURSE
OF A YEAR.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
E. IN ADDITION TO MY LONG-TERM INVESTMENTS, I HAVE EMERGENCY SAVINGS EQUAL TO
____ MONTHS OF MY TAKE-HOME PAY.
1. Zero
2. One
3. Two
4. Three
5. Four or more
F. I FIND IT EASY TO PAY MY MONTHLY BILLS FROM MY CURRENT PAY.
1. I strong disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
G. OVERALL, MY PERSONAL FINANCIAL SITUATION IS SECURE.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
16
<PAGE> 91
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments, and
U.S. Treasury bills.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
COUNTRY RISK
The possibility that events such as political or financial troubles or natural
disasters will weaken a country's economy.
CURRENCY RISK
The possibility that an American's foreign investment will lose money because of
unfavorable exchange rates.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by the
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
marketing fees.
FIXED-INCOME SECURITIES
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
INTERNATIONAL STOCK FUND
A mutual fund that invests in the stocks of companies located outside the United
States.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a portfolio's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security or industry.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
PRINCIPAL
The amount of your own money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 92
[Logo}
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482
FOR PARTICIPANTS IN
EMPLOYER-SPONSORED PLANS
PARTICIPANT SERVICES DEPARTMENT
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
For information on the
Vanguard Funds in your plan,
Monday through Friday
8:30 a.m. to 7:00 p.m.,
Eastern time
FOR OTHER INSTITUTIONAL
INVESTORS
1-800-523-1036
for information on Vanguard
Funds and services
ELECTRONIC ACCESS TO THE
VANGUARD MUTUAL FUND
EDUCATION AND INFORMATION
CENTER
On America Online(R)
Keyword: Vanguard
On the World Wide Web
http://www.vanguard.com
To send e-mail to Vanguard
[email protected]
(C) 1996 Vanguard Marketing
Corporation, Distributor
<PAGE> 93
PART B
VANGUARD WORLD FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 27, 1996
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectuses (dated December 27, 1996). To obtain the
Prospectuses please call:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies..................................................... 1
Yield and Total Return................................................................ 6
Purchase of Shares.................................................................... 6
Redemption of Shares.................................................................. 6
Dividends, Capital Gains and Taxes.................................................... 7
Investment Limitations................................................................ 7
Management of the Fund................................................................ 9
Investment Advisory Services.......................................................... 12
Portfolio Transactions................................................................ 15
Financial Statements.................................................................. 17
Performance Measures.................................................................. 17
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the Fund's investment objective and
policies set forth in the Prospectus for each of the Fund's Portfolios.
FUTURES AND OPTIONS Each Portfolio may enter into stock futures contracts,
options, and options on futures contracts for the following reasons: to maintain
cash reserves while simulating full investment, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns when a futures contract
is priced more attractively than the underlying equity security or index.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified future
time and at a specified price. Futures contracts which are standardized as to
maturity date and underlying financial instrument are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a U.S.
Government Agency. Assets committed to futures contracts will be segregated at
the Fund's custodian bank to the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are
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<PAGE> 94
higher than the exchange minimums. Futures contracts are customarily purchased
and sold on margin that may range upward from less than 5% of the value of the
contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the market value of the underlying securities. Each Portfolio intends to use
futures contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to each Portfolio require that all of
its futures transactions constitute bona fide hedging transactions. Each
Portfolio will only sell futures contracts to protect securities it owns against
price declines or purchase contracts to protect against an increase in the price
of securities it intends to purchase. As evidence of this hedging interest, each
Portfolio expects that approximately 75% of its futures contract purchases will
be "completed;" that is, equivalent amounts of related securities will have been
purchased or are being purchased by each Portfolio upon sale of open futures
contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the exposure of a Portfolio's income to fluctuations in
the market value of the underlying securities, the use of futures contracts may
be a more effective means of hedging this exposure. While the Portfolio will
incur commission expenses in both opening and closing out futures positions,
these costs are lower than transaction costs incurred in the purchase and sale
of portfolio securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS Each Portfolio will not enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of the Portfolio's total assets. In addition, each Portfolio will
not enter into futures contracts to the extent that its outstanding obligations
to purchase securities under these contracts would exceed 20% of the Portfolio's
total assets.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, each Portfolio would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if the Portfolio
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. In
addition, each Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the ability to
effectively hedge it.
Each Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures contracts which are traded on
national futures exchanges and for which there appears to be a liquid secondary
market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if, at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the
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<PAGE> 95
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract. However, because the futures strategies of each
Portfolio are engaged in only for hedging purposes, the investment advisers do
not believe that the Portfolios are subject to the risks of loss frequently
associated with futures transactions. Each Portfolio would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying financial instrument and sold it after the decline.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS Except for transactions each
Portfolio has identified as hedging transactions, each Portfolio is required for
federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on futures contracts held as of the end of the year
as well as those actually realized during the year. In most cases, any gain or
loss recognized with respect to a futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. Furthermore, sales of futures
contracts which are intended to hedge against a change in the value of
securities held by each Portfolio may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition.
In order for each Portfolio to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or foreign currencies, or other income derived with respect to its
business of investing in such stock, securities, or currencies. In addition,
gains realized on the sale or other disposition of securities held for less than
three months must be limited to less than 30% of the Portfolio's annual gross
income. It is anticipated that any net gain realized from the closing out of
futures contracts will be considered gain from the sale of securities and
therefore be qualifying income for purposes of the 90% requirement. In order to
avoid realizing excessive gains on securities held less than three months, each
Portfolio may be required to defer the closing out of futures contracts beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on futures contracts, which have been open for less than
three months as of the end of the Portfolio's fiscal year and which are
recognized for tax purposes, will not be considered gains on securities held
less than three months for the purpose of the 30% test.
Each Portfolio will distribute to shareholders annually any net capital
gains which have been recognized for federal income tax purposes (including
unrealized gains at the end of the Portfolio's fiscal year) on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Portfolio's other investments and shareholders will be
advised on the nature of the payments.
FOREIGN INVESTMENTS The International Growth Portfolio seeks to diversify
its assets among various foreign stock markets. With respect to 65% of its
assets, the Portfolio will invest in the securities of at least three different
countries. Investors should recognize that investing in foreign companies
involves certain special considerations which are not typically associated with
investing in U.S. companies. Since the stocks of foreign companies are
frequently denominated in foreign currencies, and since the International Growth
Portfolio may temporarily hold uninvested reserves in bank deposits in foreign
currencies, the International Growth Portfolio will be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations,
and may incur costs in connection with conversions
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<PAGE> 96
between various currencies. The investment policies of the International Growth
Portfolio permit it to enter into forward foreign currency exchange contracts in
order to hedge the Portfolio's holdings and commitments against changes in the
level of future currency rates. Such contracts involve an obligation to purchase
or sell a specific currency at a future date at a price set at the time of the
contract.
Special rules govern the Federal income tax treatment of certain
transactions denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules include the
following: (i) the acquisition of, or becoming the obligor under, a bond or
other debt instrument (including, to the extent provided in Treasury
regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option and similar financial instrument if such
instrument is not marked to market. The disposition of a currency other than the
U.S. dollar by a U.S. taxpayer is also treated as a transaction subject to the
special currency rules. However, foreign currency-related regulated futures
contracts and nonequity options are generally not subject to the special
currency rules if they are or would be treated as sold for their fair market
value at year-end under the marking-to-market rules applicable to other futures
contracts unless an election is made to have such currency rules apply. With
respect to transactions covered by the special rules, foreign currency gain or
loss is calculated separately from any gain or loss on the underlying
transaction and is normally taxable as ordinary gain or loss. A taxpayer may
elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts, futures contracts and options that
are capital assets in the hands of the taxpayer and which are not part of a
straddle. The Treasury Department has authority to issue regulations under which
certain transactions subject to the special currency rules that are part of a
"section 988 hedging transaction" (as defined in the Internal Revenue Code of
1986, as amended, and the Treasury regulations) will be integrated and treated
as a single transaction or otherwise treated consistently for purposes of the
Code. Any gain or loss attributable to the foreign currency component of a
transaction engaged in by a Portfolio which is not subject to the special
currency rules (such as foreign equity investments other than certain preferred
stocks) will be treated as capital gain or loss and will not be segregated from
the gain or loss on the underlying transaction. It is anticipated that some of
the non-U.S. dollar-denominated investments and foreign currency contracts the
International Growth Portfolio may make or enter into will be subject to the
special currency rules described above.
As foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
Although the International Growth Portfolio will endeavor to achieve most
favorable execution costs in its portfolio transactions, fixed commissions on
many foreign stock exchanges are generally higher than negotiated commissions on
U.S. exchanges. In addition, it is expected that the expenses for custodian
arrangements of the Portfolio's foreign securities will be somewhat greater than
the expenses for the custodian arrangements for handling the U.S. Growth
Portfolio's securities of equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from the companies comprising the International Growth
Portfolio. However, these foreign withholding taxes are not expected to have a
significant impact on the International Growth Portfolio, since the Portfolio's
investment objective is to seek long-term capital appreciation and any income
should be considered incidental.
PORTFOLIO TURNOVER While the rate of portfolio turnover is not a limiting
factor when management deems changes appropriate, it is anticipated that the
annual turnover rate for each Portfolio will not
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<PAGE> 97
normally exceed 100%. A rate of turnover of 100% could occur, for example, if
all of the securities held by a Portfolio are replaced within a period of one
year. The portfolio turnover rate for each Portfolio for each of the fiscal
years presented is set forth under "Financial Highlights," in each Portfolio's
Prospectus.
REPURCHASE AGREEMENTS Each Portfolio along with other members of the
Vanguard Group may invest in repurchase agreements with commercial banks,
brokers or dealers either for defensive purposes due to market conditions or to
generate income from its excess cash balances. A repurchase agreement is an
agreement under which the Portfolio acquires a money market instrument
(generally a security issued by the U.S. Government or an agency thereof, a
banker's acceptance or a certificate of deposit) from a commercial bank, broker
or dealer, subject to resale to the seller at an agreed upon price and date
(normally, the next business day). A repurchase agreement may be considered a
loan collateralized by securities. The resale price reflects an agreed upon
interest rate effective for the period the instrument is held by the Portfolio
and is unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by the Portfolio (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by a custodian bank until repurchased. In
addition, the Fund's Board of Directors will monitor repurchase agreement
transactions generally and will establish guidelines and standards for review by
the investment adviser of the creditworthiness of any bank, broker or dealer
party to a repurchase agreement. No more than an aggregate of 15% of the
Portfolio's assets, at the time of investment, will be invested in repurchase
agreements having maturities longer than seven days and securities subject to
legal or contractual restrictions on resale for which there are no readily
available market quotations. From time to time, the Fund's Board of Directors
may determine that certain restricted securities known as Rule 144A securities
are liquid and not subject to the 15% limitation described above.
LENDING OF SECURITIES Each Portfolio may lend its investment securities
for either short-term or long-term purposes to qualified institutional investors
who need to borrow securities in order to complete certain transactions, such as
covering short sales, avoiding failures to deliver securities or completing
arbitrage operations. By lending its investment securities, a Portfolio attempts
to increase its net investment income through the receipt of interest on the
loan. Any gain or loss in the market price of the securities loaned that might
occur during the term of the loan would be for the account of the Portfolio.
Each Portfolio may lend its investment securities to qualified brokers, dealers,
banks or other financial institutions, so long as the terms and the structure
and the aggregate amount of such loans are not inconsistent with the Investment
Company Act of 1940, or the Rules and Regulations or interpretations of the
Securities and Exchange Commission (the "Commission") thereunder, which
currently require that (a) the borrower pledge and maintain with the Portfolio
collateral consisting of cash, an irrevocable letter of credit or securities
issued or guaranteed by the United States Government having at all times not
less than 100% of the value of the securities loaned, (b) the borrower add to
such collateral whenever the price of the securities loaned rises (i.e. the
borrower "marks to the market" on a daily basis), (c) the loan be made subject
to termination by the Portfolio at any time and (d) the Portfolio receive
reasonable interest on the loan (which may include the Portfolio's investing any
cash collateral in interest bearing short-term investments), any distribution on
the loaned securities and any increase in their market value. The Portfolio will
not lend investment securities if as a result, the aggregate of such loans
exceeds 33 1/3% of the value of the Portfolio's total assets. Loan arrangements
made by the Portfolio will comply with all other applicable regulatory
requirements, including the rules of the New York Stock Exchange, which
presently require the borrower, after notice, to redeliver the securities within
the normal settlement time of three business days. All relevant facts and
circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Fund's Board of Directors.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in written contract and approved
by the investment company's Directors. In addition, voting rights pass with the
loaned securities, but if a material event will occur affecting an investment on
loan, the loan must be called and the securities voted.
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YIELD AND TOTAL RETURN
The yield of the U.S. Growth Portfolio of the Fund for the 30-day period
ended August 31, 1996, was 1.33%.
The average annual total return of each Portfolio of the Fund for certain
periods ended August 31, 1996, is set forth below:
<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
8/31/96 8/31/96 8/31/96
------------ ------------- --------------
<S> <C> <C> <C>
U.S. Growth Portfolio............... +25.28% + 12.73% +12.80%
International Growth Portfolio...... +12.72% + 11.60% + 9.85%
</TABLE>
Total return is computed by determining the average compounded rates of
return over the periods set forth above that would equate an initial amount
invested at the beginning of the periods to the ending redeemable value of the
investment.
PURCHASE OF SHARES
The purchase price of shares of each Portfolio of the Fund is the net asset
value per share next determined after the order is received. The net asset value
per share is calculated as of the close of the New York Stock Exchange on each
day the Exchange is open for business. An order received prior to the close of
the Exchange will be executed at the price computed on the date of receipt; and
an order received after the close of the Exchange will be executed at the price
computed on the next day the Exchange
is open.
Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts such as employee
benefit plans or under circumstances where certain economies can be achieved in
sales of a Portfolio's shares.
STOCK CERTIFICATES Your purchase will be made in full and fractional
shares of each Portfolio calculated to three decimal places. Shares are normally
held on deposit for shareholders by the Fund, which will send to shareholders a
statement of shares owned at the time of each transaction. This saves the
shareholders the trouble of safekeeping the certificates, and saves the Fund the
cost of issuing certificates. Share certificates are, of course, available at
any time upon written request at no additional cost to shareholders. No
certificates will be issued for fractional shares.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"), (ii) during any period when an emergency
exists as defined by the rules of the Commission as a result of which it is not
reasonably practicable for a Portfolio to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
No charge is made by a Portfolio for redemptions. Any redemption may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Portfolio.
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of a Portfolio to make payment
wholly or partly in cash, a Portfolio may pay the redemption price in whole or
in part by a distribution in kind of readily marketable securities held by the
Portfolio in lieu of cash in conformity with applicable rules of the Commission.
Investors may incur brokerage charges on the sale of such securities so received
in payment of redemptions.
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<PAGE> 99
SIGNATURE GUARANTEES To protect your account, the Fund and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Fund to verify the identity of a person who has authorized
a redemption from your account. Signature guarantees are required in connection
with: (1) all redemptions, regardless of the amount involved, when the proceeds
are to be paid to someone other than the registered owner(s); and (2) share
transfer requests. These requirements are not applicable to redemptions in
Vanguard's prototype plans except in connection with: (1) distributions made
when the proceeds are to be paid to someone other than the plan participant; (2)
certain authorizations to effect exchanges by telephone; and (3) when proceeds
are to be wired. These requirements may be waived by the Fund in certain
instances.
Signature guarantees can be obtained from a bank, broker or any other
guarantor that Vanguard deems acceptable. Notaries public are not acceptable
guarantors.
The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
DIVIDENDS, CAPITAL GAINS AND TAXES
The Fund's policy is to distribute annually substantially all of its net
investment income from each Portfolio, if any, together with any net realized
capital gains, after the close of the Fund's fiscal year. Any dividend or
capital gains distribution paid shortly after the purchase of shares by an
investor may have the effect of reducing the per share net asset value by the
per share amount of the dividend or distribution. Furthermore, such dividends or
distributions, although in effect a return of capital, are subject to income
taxes.
Unless the shareholder elects otherwise, dividends and capital gain
distributions are paid in additional shares which are credited to the
shareholder's account. Any dividend and distribution election will remain in
effect until the Fund's Transfer Agent is notified by the shareholder in writing
or by calling Customer Service to change the election at least three days prior
to the record date. An account statement is sent to shareholders whenever an
income dividend or capital gains distribution is paid.
INVESTMENT LIMITATIONS
Each Portfolio of the Fund is subject to the following restrictions which
may not be changed without the approval of the lesser of (i) 67 percent or more
of the voting securities present at a meeting if the holders of more than 50
percent of the outstanding voting securities of the Portfolio are present or
represented by proxy, or (ii) more than 50 percent of the outstanding voting
securities of the Portfolio. Each Portfolio will not:
(1) make investments in commodities except that each Portfolio may
invest in stock futures contracts, stock options, options on stock futures
contracts and, in the case of the International Growth Portfolio foreign
currency futures contracts and options, to the extent that not more than 5%
of the Portfolio's assets are used as initial margin deposit at any time
and not more than 20% of the Portfolio's assets are invested in futures
contracts and/or options at any time;
(2) make investments in real estate, although it may purchase and sell
securities of companies which deal in real estate or interests therein;
(3) each Portfolio of the Fund may lend its investment securities to
qualified brokers, dealers, banks or other financial institutions, so long
as the terms and the structure of such loans are not inconsistent with the
Investment Company Act of 1940, as amended, or the Rules and Regulations or
interpretations of the Securities and Exchange Commission thereunder, which
currently require that (a) the borrower pledge and maintain with the
Portfolio collateral consisting of cash, an irrevocable letter of credit or
securities issued or guaranteed by the United States Government having a
value at all
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<PAGE> 100
times not less than 100 percent of the value of the securities loaned, (b)
the borrower add to such collateral whenever the price of the securities
loaned rises (i.e. the borrower "marks to the market" on a daily basis),
(c) the loan be made subject to termination by the Portfolio at any time
and (d) the Portfolio receive reasonable interest on the loan (which may
include the Portfolio's investing any cash collateral in interest bearing
short-term investments), and distributions on the loaned securities and any
increase in their market value. Each Portfolio of the Fund will not lend
securities if, as a result, the aggregate of such loans exceeds 33 1/3% of
the value of the Portfolio's total assets. Loan arrangements made by the
Fund will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange, which rules presently
require the borrower, after notice, to redeliver the securities within the
normal settlement time of three business days;
(4) engage in the business of underwriting securities issued by others
except to the extent that a Portfolio may technically be deemed to be an
underwriter under the Securities Act of 1933 in disposing of portfolio
securities;
(5) purchase securities on margin or make short sales except as
described above in (1);
(6) borrow except from banks and not in excess of the lesser of 10% of
its gross assets taken at cost (before such borrowings) or 33 1/3% of its
gross assets, less liabilities other than such borrowings, taken at market
or other fair value, and any borrowing may be undertaken only as a
temporary measure for extraordinary or emergency purposes to facilitate the
meeting of redemption requests (not for leverage); or pledge, mortgage or
hypothecate assets to an extent greater than 15% of the value of its gross
assets, taken at cost (as a matter of policy each Portfolio will limit any
such pledging, mortgaging or hypothecating to 10% of its assets);
(7) invest for the purpose of exercising control over or management of
any company;
(8) invest in securities of other investment companies, except as may
be acquired as a part of a merger, consolidation or acquisition of assets
or otherwise to the extent permitted by Section 12 of the 1940 Act. A
Portfolio will invest only in investment companies which have investment
objectives and investment policies consistent with those of the Portfolio;
(9) with respect to 75% of its assets, purchase securities of any
issuer (except obligations of the United States government and its
instrumentalities) if as a result the Fund would hold more than 10% of the
voting securities of the issuer, or more than 5% of the value of the
Portfolio's total assets would be invested in the securities of the issuer;
(10) purchase or retain securities of an issuer if an officer or
director of the Fund or its investment adviser owns beneficially more than
1/2% of the shares or securities of such issuer and all such directors and
officers owning more than 1/2% of such shares or securities together own
more than 5% of such shares or securities;
(11) purchase securities of any company which has (with predecessors)
a record of less than three years' continuous operation if as a result more
than 5% of the Portfolio's assets would be invested in securities of such
companies;
(12) invest more than 25% of the value of its total assets in any one
industry; and
(13) purchase or otherwise acquire any security if as a result more
than 15% of its net assets would be invested in securities that are
illiquid (this limitation applies to the Fund's investment in The Vanguard
Group, Inc.).
These investment limitations are considered at the time that investment
securities are purchased. Notwithstanding these limitations, the Fund may own
all or any portion of the securities of, or make loans to, or contribute to the
costs or other financial requirements of any company which will be wholly owned
by the Fund and one or more other investment companies and is primarily engaged
in the business of providing, at-cost, management, administrative or related
services to the Fund and other investment companies. See "Management of the
Fund."
8
<PAGE> 101
Although not fundamental policies subject to shareholder vote, as long as
the Fund's shares are registered for sale in certain states, a Portfolio will
not (i) invest in put, call, straddle or spread options, except as set forth
above in (1), (ii) invest in interests in oil, gas or other mineral exploration
or development programs, and (iii) pledge, mortgage or hypothecate assets to an
extent greater than 10% of the value of its net assets at market value.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for each Portfolio of the Fund and choose its Officers. The following is a list
of the Directors and Officers of the Fund and a statement of their present
positions and principal occupations during the past five years. As of August 31,
1996, the Directors and Officers of the Fund owned less than 1% of the Fund's
outstanding shares. The mailing address of the Directors and Officers of the
Fund is Post Office Box 876, Valley Forge, PA 19482.
<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman and Director * JOHN C. SAWHILL, Director
Chairman and Director of The Vanguard President and Chief Executive Officer, The
Group, Inc., and of each of the investment Nature Conservancy; formerly, Director and
companies in The Vanguard Group. Senior Partner, McKinsey & Co.; and
President, New York University; Director of
JOHN J. BRENNAN, President, Chief Executive Pacific Gas and Electric Company and NACCO
Officer & Director * Industries.
President, Chief Executive Officer and
Director of The Vanguard Group, Inc., and JAMES O. WELCH, JR., Director
of each of the other investment companies Retired Chairman of Nabisco Brands, Inc.;
in The Vanguard Group. retired Vice Chairman and Director of RJR
Nabisco; Director of TECO Energy, Inc. and
ROBERT E. CAWTHORN, Director Kmart Corporation.
Chairman Emeritus of Rhone-Poulenc Rorer,
Inc.; Director of Sun Company, Inc. and J. LAWRENCE WILSON, Director
Westinghouse Electric Corporation. Chairman and Chief Executive Officer of Rohm
& Haas Company; Director of Cummins Engine
BARBARA BARNES HAUPTFUHRER, Director Company; and Trustee of Vanderbilt
Director of The Great Atlantic and Pacific University.
Tea Company, ALCO Standard Corp., Raytheon
Company, Knight-Ridder, Inc., and RAYMOND J. KLAPINSKY, Secretary *
Massachusetts Mutual Life Insurance Co.; Senior Vice President and Secretary of The
and Trustee Emerita of Wellesley College. Vanguard Group, Inc.; Secretary of each of
the investment companies in The Vanguard
BRUCE K. MACLAURY, Director Group.
President Emeritus of The Brookings
Institution; Director of the American RICHARD F. HYLAND, Treasurer *
Express Bank, Ltd., the St. Paul Companies, Treasurer of The Vanguard Group, Inc., and of
Inc., and National Steel Corporation. each of the investment companies in The
BURTON G. MALKIEL, Director Vanguard Group.
Chemical Bank Chairman's Professor of KAREN E. WEST, Controller *
Economics, Princeton University; Director Principal of The Vanguard Group, Inc.;
of Prudential Insurance Co. of America, Controller of each of the investment
Amdahl Corporation, Baker Fentress & Co., companies in The Vanguard Group.
The Jeffrey Co. and Southern New England ---------------------------------------------
Communications Company. *Officers of the Fund are "interested
ALFRED M. RANKIN, JR., Director persons" as defined in the Investment Company
Chairman, President and Chief Executive Act of 1940.
Officer of NACCO Industries, Inc.; Director
of The BFGoodrich Company and The Standard
Products Company.
</TABLE>
THE VANGUARD GROUP
Vanguard World Fund, Inc. is a member of The Vanguard Group of Investment
Companies. Through their jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other Funds in the Group obtain at-cost virtually
all of their corporate management, administrative and distribution
9
<PAGE> 102
services. Vanguard also provides investment advisory services on an at-cost
basis to several of the Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services, furnishings and equipment.
Each fund pays its share of Vanguard's total expenses which are allocated among
the funds under methods approved by the Board of Directors (Trustees) of each
Fund. In addition, each Fund bears its own direct expenses such as legal,
auditing and custodian fees. In order to generate additional revenues for
Vanguard and thereby reduce the Funds' expenses, Vanguard also provides certain
administrative services to other organizations.
The Fund's officers are also officers and employees of Vanguard. No officer
or employee owns, or is permitted to own, any securities of any external adviser
for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-l under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
Vanguard was established and operates under a Funds' Service Agreement
which was approved by the shareholders of each of the Funds. The amounts which
each of the Funds have invested are adjusted from time to time in order to
maintain the proportionate relationship between each Fund's relative net assets
and its contribution to Vanguard's capital. At August 31, 1996, the Fund had
contributed capital of $937,000 to Vanguard, representing 4.7% of Vanguard's
capitalization. The Funds' Service Agreement provides as follows: (a) each
Vanguard Fund may invest up to .40% of its current assets in Vanguard, and (b)
there is no other limitation on the amount each Vanguard Fund may contribute to
Vanguard's capitalization.
MANAGEMENT Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended August 31, 1996, the Fund's allocated share of Vanguard's
actual net costs of operation relating to management and administrative services
(including transfer agency) totaled approximately $20,776,000.
DISTRIBUTION Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for the shares of
the Funds, in connection with any sales made directly to investors in the states
of Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon relative net assets. The remaining one
half of those expenses is allocated among the Funds based upon each Fund's sales
for the preceding 24 months relative to the total sales of the Funds as a Group,
provided, however, that no Fund's aggregate quarterly rate of contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
the average distribution expense rate for the Group, and that no Fund shall
incur annual distribution expenses in excess of 20/100 of 1% of its average
month-end net assets. During the fiscal year ended August 31, 1996, the Fund
paid approxi-
10
<PAGE> 103
mately $1,761,000 of the Group's distribution and marketing expenses, which
represented an effective annual rate of .02% of 1% of the Fund's average net
assets.
INVESTMENT ADVISORY SERVICES Vanguard also provides investment advisory
services to Vanguard Municipal Bond Fund, Vanguard California Tax-Free Fund,
Vanguard New Jersey Tax-Free Fund, Vanguard New York Insured Tax-Free Fund,
Vanguard Pennsylvania Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard
Florida Insured Tax-Free Fund, Vanguard Admiral Funds, Vanguard Bond Index Fund,
Vanguard Index Trust, Vanguard International Equity Index Fund, Vanguard
Balanced Index Fund, the Money Market, High-Grade Bond, and Equity Index
Portfolios of Vanguard Variable Insurance Fund, Vanguard Money Market Reserves,
Vanguard Institutional Index Fund, several portfolios of Vanguard Fixed Income
Securities Fund, Vanguard Tax-Managed Fund, the Aggressive Growth Portfolio of
Vanguard Horizon Fund, the Total International Portfolio of Vanguard STAR Fund,a
portion of Vanguard/ Windsor, a portion of Vanguard/Morgan Growth Fund as well
as several indexed separate accounts. These services are provided on an at-cost
basis from a money management staff employed directly by Vanguard. The
compensation and other expenses of this staff are paid by the Funds utilizing
these services.
REMUNERATION OF DIRECTORS AND OFFICERS The Fund pays each Director, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Fund's officers and employees are paid by Vanguard
which, in turn, is reimbursed by the Fund and each other Fund in the Group, for
its allocated share of Officers' and employees' salaries and retirement
benefits. The Fund's proportionate share of remuneration paid by Vanguard (and
reimbursed by the Fund) during the 1996 fiscal year to John C. Bogle, Chairman
was approximately $137,999 and to all Officers of the Fund, as a group, was
approximately $253,357.
Directors who are not Officers are paid an annual fee based on the number
of years of service on the Board upon retirement. The fee is equal to $1,000 for
each year of service (up to fifteen years) and each investment company member of
the Vanguard Group contributes a proportionate amount to this fee based on its
relative net assets. Under its retirement plan, Vanguard contributes annually an
amount equal to 10% of each eligible officer's annual compensation plus 5.7% of
that part of an eligible officer's compensation during the year, if any, that
exceeds the Social Security Taxable Wage Base then in effect. Under its thrift
plan, all eligible officers are permitted to make pre-tax contributions in an
amount up to 4% of total compensation, subject to federal tax limitations, which
are matched by Vanguard on a 100% basis. The Fund's proportionate share of
retirement contributions made by Vanguard under its retirement and thrift plans
on behalf of all Officers of the Fund, as a group, during the 1996 fiscal year
was approximately $7,050.
11
<PAGE> 104
The following table provides detailed information with respect to the
amounts paid or accrued for the Directors of the Fund, for the fiscal year ended
August 31, 1996.
VANGUARD WORLD FUND, INC.
DIRECTORS COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAME OF DIRECTORS FROM FUND PART OF FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS(2)
- ---------------------------- ------------ --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1)............ -- -- -- --
John J. Brennan(1).......... -- -- -- --
Barbara Barnes
Hauptfuhrer............... $3,076 $ 478 $15,000 $65,000
Robert E. Cawthorn.......... $3,076 $ 398 $13,000 $65,000
Bruce K. MacLaury........... $3,333 $ 467 $12,000 $60,000
Burton G. Malkiel........... $3,076 $ 318 $15,000 $65,000
Alfred M. Rankin, Jr. ...... $3,076 $ 251 $15,000 $65,000
John C. Sawhill............. $3,076 $ 299 $15,000 $65,000
James O. Welch, Jr. ........ $3,076 $ 367 $15,000 $65,000
J. Lawrence Wilson.......... $3,076 $ 265 $15,000 $65,000
</TABLE>
(1) As "Interested Directors," Messrs. Bogle and Brennan receive no compensation
for their service as Directors.
(2) The amounts reported in this column reflect the total compensation paid to
each Director for his or her service as Director or Trustee of 34 Vanguard
Funds (33 in the case of Mr. Malkiel; 27 in the case of Mr. MacLaury).
INVESTMENT ADVISORY SERVICES
THE U.S. GROWTH PORTFOLIO INVESTMENT ADVISORY AGREEMENT
The Fund entered into an investment advisory agreement with Lincoln Capital
Management Company (Lincoln) as of April 1, 1993, under which Lincoln manages
the investment and reinvestment of the assets included in the Fund's U.S. Growth
Portfolio and continuously reviews, supervises and administers the Fund's U.S.
Growth Portfolio. Lincoln will invest or reinvest such assets primarily in U.S.
securities. Lincoln discharges its responsibilities subject to the control of
the Officers and Directors of the Fund. Under this agreement the Fund pays
Lincoln an advisory fee at the end of each fiscal quarter, calculated by
applying a quarterly rate, based on the following annual percentage rates, to
the Portfolio's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
----------------------------------------------------- ----
<S> <C>
First $25 million.................................... .40%
Next $125 million.................................... .35%
Next $350 million.................................... .25%
Next $500 million.................................... .20%
Next $1.5 billion.................................... .15%
Over $2.5 billion.................................... .10%
</TABLE>
For the fiscal years ended August 31, 1994, 1995, and 1996, the Fund paid
advisory fees of $3,688,000, $4,523,000 and $6,139,000, respectively, to
Lincoln.
DESCRIPTION OF LINCOLN
Lincoln is an Illinois corporation in which a controlling interest is held
by the following persons: John W. Croghan, Chairman; J. Parker Hall III,
President; Kenneth R. Meyer, Executive Vice President; and Timothy H. Ubben,
Executive Vice President.
Because Lincoln provides only investment advisory services to the Fund and
has no control over the Fund's expenses, Lincoln has not undertaken to guarantee
expenses of the Fund. The Officers of the
12
<PAGE> 105
Fund have worked out alternative arrangements with the state authorities which
do not require an expense guarantee.
The agreement with Lincoln continues until March 31, 1997. The agreement is
renewable thereafter, for successive one-year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Directors, including the
affirmative votes of a majority of the directors who are not parties to the
agreement or "interested persons" (as defined in the Investment Company Act of
1940) of any such party, cast in person at a meeting called for the purpose of
considering such approval. The agreement is automatically terminated if
assigned, and may be terminated without penalty at any time (1) by vote of the
Board of Directors of the Portfolio on sixty (60) days' written notice to
Lincoln, or (2) by Lincoln upon ninety (90) days' written notice to the Fund.
The Directors may make any of these changes without the approval of
shareholders, however, shareholders will receive 30 days' advance written notice
of any such changes.
THE INTERNATIONAL GROWTH PORTFOLIO INVESTMENT ADVISORY AGREEMENT
The Fund has entered into an investment advisory agreement dated as of
April 1, 1993 with Schroder Capital Management Inc. ("Schroder Capital") under
which Schroder Capital, through its Schroder Capital Management International,
London, England branch, supervises and administers the International Growth
Portfolio's investment program. In this regard, it is the responsibility of
Schroder Capital to make decisions relating to the International Growth
Portfolio's investment in foreign securities and to place the International
Growth Portfolio's purchase and sale orders for such securities. Schroder
Capital will invest or reinvest the assets of the International Growth Portfolio
only in foreign (non-U.S.) securities. Schroder Capital discharges its
responsibilities subject to the control of the Officers and Directors of the
Fund.
As compensation for the services rendered by Schroder Capital under the
agreement, the Fund pays Schroder Capital a Basic Fee calculated by applying a
quarterly rate, based on the following annual percentage rates, to the average
value of the month-end net assets of the International Growth Portfolio for the
quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------------------------------------------------- ----
<S> <C>
First $50 million................................... .350%
Next $950 million................................... .175%
Over $1 billion..................................... .125%
</TABLE>
The Basic Fee, as provided above, shall be increased or decreased by
applying an adjustment formula based on the investment performance of the
International Growth Portfolio relative to that of the Morgan Stanley Capital
Europe, Australasia, Far East Index ("EAFE") as follows:
(a) On assets of the Portfolio of $1 billion or less:
<TABLE>
<CAPTION>
THREE-YEAR PERFORMANCE ANNUAL INCENTIVE (+)/
DIFFERENTIAL VS. EAFE PENALTY (-) FEE RATE
---------------------------------------- ---------------------
<S> <C>
+12% or above........................... +0.0750%
Between +6% and +12%.................... +0.0375%
Between +6% and -6%..................... -0-
Between -6% and -12%.................... -0.0375%
-12% or below........................... -0.0750%
</TABLE>
13
<PAGE> 106
(b) On assets of the Portfolio of more than $1 billion:
<TABLE>
<CAPTION>
THREE-YEAR PERFORMANCE ANNUAL INCENTIVE (+)/
DIFFERENTIAL VS. EAFE PENALTY (-) FEE RATE
---------------------------------------- ---------------------
<S> <C>
+12% or above........................... +0.0500%
Between +6% and +12%.................... +0.0250%
Between +6% and -6%..................... -0-
Between -6% and -12%.................... -0.0250%
-12% or below........................... -0.0500%
</TABLE>
The incentive/penalty fee adjustment for assets in excess of $1 billion was
not fully operable until the quarter ended February 29, 1996, and, until that
date, was calculated according to certain transition rules. From April 1, 1993
through November 30, 1993, the incentive/penalty fee on assets in excess of $1
billion was not operable. For quarters ending after this period, the
incentive/penalty fee adjustment on assets in excess of $1 billion will be
computed based on a comparison of the investment performance of the Portfolio
and that of the EAFE Index over the number of months that have elapsed between
March 1, 1993 and the end of the quarter for which the fee is computed.
For the purpose of determining the fee adjustment for investment
performance, as described above, the net assets of the International Growth
Portfolio are averaged over the same period as the investment performance of the
International Growth Portfolio and the investment record of the EAFE Index are
computed.
The investment performance of the International Growth Portfolio for such
period, expressed as a percentage of the net asset value per share of the
International Growth Portfolio at the beginning of such period, shall be the sum
of: (i) the change in the net asset value per share of the International Growth
Portfolio during such period; (ii) the value of the cash distributions per share
of the International Growth Portfolio accumulated to the end of such period; and
(iii) the value of capital gains taxes per share paid or payable by the
International Growth Portfolio on undistributed realized long-term capital gains
accumulated to the end of such period. For this purpose, the value of
distributions per share of realized capital gains, of dividends per share paid
from investment income and of capital gains taxes per share paid or payable on
undistributed realized long-term capital gains shall be treated as reinvested in
shares of the International Growth Portfolio at the net asset value per share in
effect at the close of business on the record date for the payment of such
distributions and dividends and the date on which provision is made for such
taxes, after giving effect to such distributions, dividends and taxes. The
investment record of the EAFE Index for any period, expressed as a percentage of
the EAFE Index level at the beginning of such period, shall be the sum of (i)
the change in the level of the EAFE Index during such period and (ii) the value,
computed consistently with the EAFE Index, of cash distributions made by
companies whose securities comprise the EAFE Index accumulated to the end of
such period. For this purpose cash distributions on the securities which
comprise the EAFE Index shall be treated as reinvested in the EAFE Index at
least as frequently as the end of each calendar quarter following the payment of
the dividend.
14
<PAGE> 107
The foregoing notwithstanding, any computation of the investment performance of
the International Growth Portfolio and the investment record of the EAFE Index
shall be in accordance with any then applicable rules of the Securities and
Exchange Commission.
The Directors believe that the EAFE Index is an appropriate standard
against which the investment performance of the Fund's International Growth
Portfolio can be measured. The EAFE Index is the only index available which
covers the major international markets outside North America. The weighting of
securities in the EAFE Index is based on each stock's relative total market
value, that is, its market price per share times the number of shares
outstanding.
The agreement with Schroder Capital continues until March 31, 1997. The
agreement may be terminated prior to that date, or continued after March 31,
1997, in accordance with the same provisions applicable to the Fund's agreement
with Lincoln.
During the three fiscal years ending August 31, 1994, 1995 and 1996,
respectively, the Fund paid Schroder Capital the following advisory fees:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Basic Fee............................................... $3,577,000 $4,369,000 $5,892,000
Increase/(Decrease) for Performance Adjustment.......... 195,000 518,000 1,545,000
---------- ---------- ----------
Total.............................................. $3,772,000 $4,887,000 $7,437,000
========== ========== ==========
</TABLE>
DESCRIPTION OF SCHRODER CAPITAL
Schroder Capital Management International ("Schroder Capital"), is the
London branch office of Schroder Capital. Schroder Capital is a wholly-owned
subsidiary of Schroders Incorporated, One State Street, New York, New York.
Schroders PLC is the holding company parent of a large world-wide group of
banks and financial service companies (referred to as "The Schroder Group") with
associated companies and branch and representative offices located in seventeen
countries.
The Schroder Group specializes in providing investment management services,
with Group funds under management currently in excess of $120 billion. Schroder
Capital Management International was established in London in 1979 to manage
international portfolios for U.S. institutions.
PORTFOLIO TRANSACTIONS
The investment advisory agreements with Lincoln and Schroder Capital
authorize the investment advisers (with the approval of the Fund's Board of
Directors) to select the brokers or dealers that will execute the purchases and
sales of portfolio securities for the Fund and direct each investment adviser to
use its best efforts to obtain the best available price and most favorable
execution with respect to all transactions for each Portfolio of the Fund. Each
investment adviser has undertaken to execute each investment transaction at a
price and commission which provides the most favorable total cost or proceeds
reasonably obtainable under the circumstances.
In placing portfolio transactions, each investment adviser will use its
best judgment to choose the broker most capable of providing the brokerage
services necessary to obtain best available price and most favorable execution.
The full range and quality of brokerage services available will be considered in
making these determinations. In those instances where it is reasonably
determined that more than one broker can offer the brokerage services needed to
obtain the best available price and most favorable execution, consideration may
be given to those brokers which supply investment research statistical
information, and provide other services in addition to execution services to the
Portfolios and/or the investment adviser. Each investment adviser considers the
investment services it receives useful in the performance of its obligations
under the agreement but is unable to determine the amount by which such services
may reduce its expenses.
15
<PAGE> 108
The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Directors, each investment adviser may cause the
Fund to pay a broker-dealer which furnishes brokerage and research services a
higher commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the investment adviser to the Fund and the other Funds in
the Group.
Currently, it is the Fund's policy that each investment adviser may at
times pay higher commissions in recognition of brokerage services felt necessary
for the achievement of better execution of certain securities transactions than
otherwise might not be available. An investment adviser will only pay such
higher commissions if it believes this to be in the best interest of the
Portfolio. Some brokers or dealers who may receive such higher commissions in
recognition of brokerage services related to execution of securities
transactions are also providers of research information to the investment
adviser and/or the Portfolios. However, the investment adviser has informed the
Fund that it will not pay higher commission rates specifically for the purpose
of obtaining research services.
The Fund's Board of Directors has authorized Schroder Capital to utilize
Schroders Asia Limited, an affiliated company 75% owned by the Schroder Group,
in the capacity of broker in connection with the execution of the International
Growth Portfolio transactions in Hong Kong securities; provided, however, that
Schroder Capital believes that doing so will result in an economic advantage (in
the form of lower execution costs or otherwise) being obtained for the
Portfolio. This authorization was made in accordance with Section 17(e) of the
Investment Company Act of 1940 and Rule 17e-1 which require the Fund's
non-interested Directors to approve the procedures under which such brokerage
allocation is to be made and to monitor such allocations on a continuing basis.
Except with respect to tender offers, it is not expected that any portion of the
commissions, fees, brokerage, or similar payments received by Schroders Asia
Limited in such transactions will be recaptured by the Portfolio. The Directors
have reviewed and intend to continue to review whether other recapture
opportunities are legally permissible and available and, if they appear to be,
determine whether it would be advisable for the Portfolio to seek to take
advantage of them.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, each Portfolio may place orders with qualified broker-dealers
who recommend the Fund and its Portfolios to clients, or who act as agent in the
purchase of shares of the Fund for their clients, and may, when a number of
brokers and dealers can provide comparable best price and execution on a
particular transaction, consider the sale of Fund shares by a broker or dealer
in selecting among qualified broker-dealers.
During the fiscal years ending August 31, 1994, 1995 and 1996, the Fund
paid $6,863,785, $6,681,209 and $10,614,940 in brokerage commissions,
respectively.
Some securities considered for investment by the Portfolios may also be
appropriate for other Funds or clients served by the investment advisers. If
purchase or sale of securities consistent with the investment policies of the
Portfolio and one or more of these other Funds or clients served by the
investment advisers are considered at or about the same time, transactions in
such securities will be allocated among the Portfolios and the several Funds and
clients in a manner deemed equitable by the respective investment adviser.
Although there will be no specified formula for allocating such transactions,
the allocation methods used, and the results of such allocations, will be
subject to periodic review by the Fund's Board of Directors.
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FINANCIAL STATEMENTS
The Financial Statements of U.S. Growth and International Growth Portfolios
for the year ended August 31, 1996, including the financial highlights for each
of the five years in the period ended August 31, 1996, appearing in the
Portfolios' respective 1996 Annual Reports to Shareholders, and the reports
thereon of Price Waterhouse LLP, independent accountants, also appearing
therein, are incorporated by reference in this Statement of Additional
Information. The Portfolios' 1996 Annual Reports to Shareholders are enclosed
with this Statement of Additional Information.
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of The Vanguard Group, including
Vanguard World Fund, may from time to time, use one or more of the following
unmanaged indexes for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well
diversified list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEX -- consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard and Poor's 500 Index.
RUSSELL 3000 STOCK INDEX -- a diversified portfolio of approximately 3,000
common stocks accounting for over 90% of the market value of publicly traded
stocks in the U.S.
RUSSELL 2000 STOCK INDEX -- composed of the 2,000 smallest stocks contained
in the Russell 3000, representing approximately 7% of the Russell 3000 total
market capitalization.
RUSSELL 2000(R) VALUE INDEX -- contains stocks from the Russell 2000 Index
with a less-than-average growth orientation.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australasia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and
29 preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or greater.
LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
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LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current
coupon high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the
average yield of four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial
issues. It is a value-weighted index calculated on price change only and does
not include income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ
Industrial Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index
and a 35% weighting in a blended equity composite (75% Standard & Poor's/BARRA
Value Index and 25% Standard & Poor's Utilities Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all
publicly issued, fixed rate, nonconvertible investment grade,
dollar-denominated, SEC registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that
contains individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated Baa - or better. The Index has a market
value of over $4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB - or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE
INDEX -- is a market weighted index that contains individually priced U.S.
Treasury, agency, and corporate securities rated BBB - or better with maturities
between 5 and 10 years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB - or better with maturities greater than 10
years. The index has a market value of over $900 billion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of
small company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)
LIPPER BALANCED FUND AVERAGE -- an industry benchmark of average balanced
funds with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
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