<PAGE> 1
VANGUARD
U.S. GROWTH FUND
Annual Report - August 31, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
<PAGE> 2
AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 8,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
This year, our report cover pays homage to three anniversaries, each of great
significance to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August 1,
1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto-- "Leading the way"--serves as a guiding principle
for our company.
- - The 100th birthday, on July 23, of Walter L. Morgan, founder of Wellington
Fund, the oldest member of what became The Vanguard Group. Mr. Morgan was
friend and mentor to Vanguard founder John C. Bogle, and helped to shape the
standards and business principles that Mr. Bogle laid down for Vanguard at
its beginning nearly 25 years ago: a stress on balanced, diversified
investments; insistence on fair dealing and candor with clients; and a focus
on long-term investing. To our great regret, Mr. Morgan died on September 2.
- - The 70th anniversary, on December 28, of the incorporation of Vanguard
Wellington Fund. It was the nation's first balanced mutual fund, and is one
of only a handful of funds created in the 1920s that are still in operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
5
REPORT FROM
THE ADVISER
7
PERFORMANCE SUMMARY
9
FUND PROFILE
10
FINANCIAL STATEMENTS
12
REPORT OF
INDEPENDENT ACCOUNTANTS
19
All comparative mutual fund data are from Lipper Analytical Services, Inc.,
or Morningstar unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman and CEO Senior Chairman
Despite turbulence in the domestic stock market, Vanguard U.S. Growth
Fund earned an excellent return of +14.0% in the fiscal year ended August 31,
1998. This result was tremendous in comparison with that of the average growth
mutual fund, which suffered a small decline, and was well ahead of the
performance of the Standard & Poor's 500 Composite Stock Price Index.
The adjacent table presents the fiscal-year total returns (capital change
plus reinvested dividends) of the U.S. Growth Fund, the unmanaged S&P 500 Index,
and our average competitor. Our fund's return is based on an increase in net
asset value from $27.74 per share on August 31, 1997, to $30.36 on August 31,
1998, with the ending net asset value adjusted for a dividend of $0.27 per share
paid from net investment income and a distribution of $0.89 per share paid from
net realized capital gains.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
AUGUST 31, 1998
- ----------------------------------------------------------
<S> <C>
Vanguard U.S. Growth Fund +14.0%
- ----------------------------------------------------------
Average Growth Fund - 2.0%
- ----------------------------------------------------------
S&P 500 Index + 8.1%
- ----------------------------------------------------------
</TABLE>
FINANCIAL MARKETS IN REVIEW
Through the first 10 1/2 months of the fiscal year that ended August 31, 1998,
the U.S. stock market continued the remarkable climb that began 16 years ago.
The market's advance--spearheaded by a relatively few large-capitalization
growth stocks--had boosted the S&P 500 Index to a +33.8% gain as of July 17.
However, the market took back most of that gain during the following six weeks,
culminating in a -6.8% drop on August 31 that left the S&P 500 Index up just
+8.1% for the fiscal year. The rest of the market lagged the large-cap dominated
S&P 500 on the way up, and fell further during the July-August downdraft. For
the full fiscal year, stocks outside of the S&P 500, represented by the Wilshire
4500 Index, declined -12.3%.
The sharp decline in interest rates during the fiscal year helped raise
the valuations of stocks--especially growth stocks. The yield on the 30-year
U.S. Treasury bond, which began the year at 6.61%, fell precipitously to 5.27%
on August 31, the lowest level for long-term Treasury bonds in 30 years. Yields
on 3-month Treasury bills declined by a relatively modest 39 basis points (0.39
percentage point) to 4.83% on August 31. Thus, as of the fiscal year-end, a
minuscule gap of only 44 basis points separated the yield on 3-month T-bills
from the yield on 30-year Treasuries.
Although serious problems in Asia began to surface over a year ago, in
summer 1997, investors soon shrugged them off because the U.S. economy, powered
by strong consumer spending, continued to expand at a rapid pace, driving the
nation's unemployment rate to 4.3%, the lowest rate since early 1970. Indeed,
Asia's economic woes seemed for a time to have mainly beneficial side effects
for the United States: Sharply lower prices for oil and many other commodities
eased the inflationary pressures that might have been expected to develop in
response to low unemployment and rising wages.
Investor attitudes shifted abruptly in mid-July. Analysts cited many
causes for the shift, including the persistence of the Asian crisis, which
dampened demand for U.S. exports;
1
<PAGE> 4
worsening political and economic troubles in Russia; and uncertainty about U.S.
political leadership due to the investigation of President Clinton.
Our own guess is that the market's summer swoon might have another
explanation: After 16 years of a bull market--the last three of which provided
stupendous gains--stock prices may simply have gotten too far ahead of corporate
earnings, the key fundamental that ultimately drives the stock market. Earnings
during the first half of 1998 were flat or slightly lower in comparison with the
first half of 1997. Without earnings growth, even optimists found it hard to
justify stock prices that were averaging some 25 times projected earnings for
the year ahead.
FISCAL 1998 PERFORMANCE OVERVIEW
Your fund's return of +14.0% during fiscal 1998 bested the performance of 97.5%
of all growth funds and was a full 16 percentage points ahead of the -2.0%
decline registered by the average growth fund, according to Lipper Analytical
Services. This remarkable margin of superiority stemmed primarily from our
customary emphasis on very large growth stocks, which during the past twelve
months were the market's star performers. The growth component of the S&P 500
Index gained +16.4% during the fiscal year, while the growth stocks in the
small-cap Russell 2000 Index fell -26.3%, an astounding disparity between
large-cap and small-cap growth stocks. Many competing growth funds hold small-
and mid-cap stocks, which was a clear disadvantage during the past twelve
months.
Our edge over the S&P 500 Index resulted from an unusually wide split of
another kind--between returns on growth and value stocks. Investors placed a
premium during the past year on growth stocks that they perceived as reliable
sources of higher earnings. While the S&P 500's growth-stock component was
gaining +16.4% over the past twelve months, its value component had a negative
return of -0.4%.
We believe that large growth stocks won't always be the market's
favorites. History suggests that value stocks and small-cap stocks are sure to
enjoy periods of superior performance, though the timing and length of such
cycles are unpredictable. Indeed, the last time there was a disparity between
growth and value stocks as large as this year's was fiscal 1993, when value
stocks (+23.9%) left growth stocks (+6.4%) in the dust by a margin of 17.5
percentage points. In the long run, as such episodes suggest, the returns from
all investment styles strongly tend to revert to the market norm.
LONG-TERM PERFORMANCE OVERVIEW
A single year's results, good or bad, are not a meaningful basis for judging a
mutual fund's performance. But the U.S. Growth Fund has also distinguished
itself over the longer term. The adjacent table presents the average annual
return of the fund and its comparative benchmarks for the past ten years along
with the results of hypothetical $10,000 investments made a decade ago in the
fund, its average competitor, and the S&P 500 Index.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
TOTAL RETURNS
10 YEARS ENDED AUGUST 31, 1998
-------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- -------------------------------------------------------------------
<S> <C> <C>
Vanguard U.S. Growth Fund +18.5% $54,575
- -------------------------------------------------------------------
Average Growth Fund +14.0% $37,024
- -------------------------------------------------------------------
S&P 500 Index +17.0% $48,268
- -------------------------------------------------------------------
</TABLE>
Over the ten-year period, our average annual return of +18.5% exceeded
the returns of 91.6% of all growth funds and outclassed the average growth fund
by 4.5 percentage points annually. This margin, compounded over a full decade,
2
<PAGE> 5
amounts to a stunning difference in wealth. A $10,000 investment in the U.S.
Growth Fund would have grown over ten years to $54,575, versus $37,024 for an
identical sum invested in the average growth fund. The difference of $17,500 is
equal to 175% of the original investment.
Three principal factors account for our strong relative performance.
First, large-cap growth stocks--our bread and butter--were powerful performers
for most of the past decade. Second, our adviser, Lincoln Capital Management
Company, has provided outstanding portfolio management. And third, our low costs
give us a consistent and powerful advantage over most other funds. Our expense
ratio of 0.41% of average net assets during the past year was less than
one-third the 1.53% expense ratio charged by the average growth fund. That gives
us a nice head start, year after year, in our effort to produce superior
returns.
Your fund also managed to outperform the S&P 500 Index over the past
decade by about 1.5% annually, which translates into an additional $6,300 on a
decade-long investment of $10,000. Beating the index return is no easy feat,
because an index exists only on paper and therefore incurs none of the operating
or transaction costs that any real-world investment portfolio must bear.
We emphasize that our past performance is no guide to how the U.S. Growth
Fund will perform in the future. Indeed, we fully expect the absolute returns
from stocks over the next decade to be lower than those of the past decade, when
the +17.0% return on stocks exceeded by more than 50% their long-term average of
11% a year. And it is hard to imagine that we could continue to outperform our
comparative benchmarks by such wide margins, though we certainly will try to do
so.
IN SUMMARY
In our letter a year ago, after a third consecutive year of big gains for the
stock market, we urged shareholders to be mindful of both risk and reward in
constructing their personal portfolios. The recent volatility of financial
markets has underscored the importance of balanced investing--a program
consisting of stock funds, bond funds, and reserves in proportions suited to
your goals, time horizon, and tolerance for market fluctuations.
Once you've developed a balanced, long-term investment plan, you should
be prepared to stick with it through the inevitable fluctuations in returns and
in market psychology. We assure you that the U.S. Growth Fund will remain
steadfast in its strategy of investing in large, well-seasoned, financially
strong corporations with solid prospects for long-term earnings growth.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
September 14, 1998
NOTE: You'll observe that we've made a minor change in the name of the U.S.
Growth Fund. We replaced the word "portfolio" with "fund" as part of a broader
effort to simplify the names in our fund lineup.
3
<PAGE> 6
NOTICE TO SHAREHOLDERS
At a special meeting on June 30, 1998, shareholders of Vanguard U.S. Growth
Fund overwhelmingly approved five proposals. The proposals and voting results
were:
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. This change will reduce the
amount of state taxes the fund pays annually by an estimated $473,000.
Approved by 98.21% of the shares voted, as follows:
----------------------------------------------------------------
FOR AGAINST ABSTAIN
----------------------------------------------------------------
168,812,145 1,095,889 1,973,650
----------------------------------------------------------------
2a. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. This change
permits the U.S. Growth Fund to participate in Vanguard's interfund lending
program, which allows funds to loan money to each other if--and only if--it
makes good financial sense to do so on both sides of the transaction. The
interfund lending program won't be an integral part of your fund's investment
program; it is a contingency arrangement for managing unusual cash flows.
Approved by 93.01% of shares voted, as follows:
----------------------------------------------------------------
FOR AGAINST ABSTAIN
----------------------------------------------------------------
159,860,112 9,450,650 2,570,922
----------------------------------------------------------------
2b. INVESTMENT LIMITATION CHANGES--BORROWING MONEY AND PLEDGING ASSETS. This
change sets standard limits of 15% of net assets on the amount of money
Vanguard funds can borrow from all sources and on the amount of assets that
can be pledged to secure any loans. Approved by 92.61% of the shares voted,
as follows:
----------------------------------------------------------------
FOR AGAINST ABSTAIN
----------------------------------------------------------------
159,179,684 9,953,364 2,748,636
----------------------------------------------------------------
2c. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN SECURITIES OWNED BY
AFFILIATES. This change eliminates the fund's policy of avoiding investments
in securities that are owned in certain amounts by Trustees, officers, and
key advisory personnel. This policy was well-intentioned but wrongly focused
and unnecessary in light of the fund's Code of Ethics and other regulatory
protections against conflicts of interest on the part of fund management.
Approved by 88.14% of the shares voted, as follows:
----------------------------------------------------------------
FOR AGAINST ABSTAIN
----------------------------------------------------------------
151,495,269 17,367,936 3,018,479
----------------------------------------------------------------
2d. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN UNSEASONED COMPANIES. This
change eliminates the fund's policy of not investing more than 5% of net assets
in securities issued by companies that have fewer than three years of operating
history, taking into account any predecessors. The policy was unduly
restrictive. Approved by 90.24% of the shares voted, as follows:
----------------------------------------------------------------
FOR AGAINST ABSTAIN
----------------------------------------------------------------
155,114,613 13,563,869 3,203,202
----------------------------------------------------------------
4
<PAGE> 7
THE MARKETS IN PERSPECTIVE
YEAR ENDED AUGUST 31, 1998
[PHOTO]
U.S. financial markets were anything but placid during the fiscal year ended
August 31, 1998. Falling interest rates made it a good year for bond investors,
while stock investors experienced both ecstasy and agony.
Disparities abounded in the economic sphere, too. While the U.S. economy
perked along quite nicely and European economies seemed to be coming out of the
doldrums, Asian economies slumped. By fiscal year-end, fears were growing that
the crisis in Asia would cause more worldwide disruption than originally
anticipated.
For most of the fiscal year, the U.S. economy's strong performance made
the stock market forget all about Asia. Growth was strong, led by a powerful
rise in consumer spending. Consumers felt flush because jobs were
plentiful--unemployment fell to levels last seen in 1970--and wages were rising
at the fastest rate in years. Happily, the robust economy did not trigger higher
inflation. Consumer prices rose just 1.6% during the fiscal year, as prices for
oil and many other commodities declined because of weak demand and ample
supplies. Also keeping a lid on prices was the U.S. dollar's rise against the
currencies of Canada, Mexico, and several Asian nations.
<TABLE>
- --------------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED AUGUST 31, 1998
--------------------------------
1 YEAR 3 YEARS 5 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 8.1% 21.8% 18.3%
Russell 2000 Index -19.4 4.8 8.1
MSCI EAFE Index 0.1 5.8 5.8
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 10.6% 8.2% 6.8%
Lehman 10-Year Municipal Bond Index 8.6 7.4 6.5
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.2 5.3 5.0
- --------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.6% 2.2% 2.4%
- --------------------------------------------------------------------------------
</TABLE>
U.S. STOCK MARKETS
The great bull market in U.S. stocks that began in August 1982 was
interrupted--if not terminated--during the final six weeks of fiscal year 1998.
After rising to a record close of 1,186.75 on July 17, the S&P 500 Index fell by
19.2% from its top level and ended the year with a return of 8.1%.
Although widely regarded as a proxy for U.S. stocks, the S&P 500 Index
actually represents about 70% of the market's total value. The "other 30%" did
far worse than the S&P 500, whose performance was led by an exclusive group of
large growth stocks. Small-capitalization stocks, as represented by the Russell
2000 Index, peaked in April and couldn't keep pace with large-cap stocks. But
small stocks were spared none of the pain during the market's summer slide, with
the Russell 2000 falling 31% from its high and 19.4% for the fiscal year.
Within the S&P 500, results from value and growth stocks were like night
and day. Value stocks, whose prices reflect modest market expectations for
future earnings, are characterized by below-average prices in relation to
earnings, dividends, and book value. Usually, value stocks hold up better than
growth stocks during market downturns. Not in 1998. Value stocks within the S&P
fell 16.1% during August, versus a 13.0% drop for growth stocks. For the year,
value stocks were down 0.4%, while growth stocks rose 16.4%.
5
<PAGE> 8
The market flopped in response to a combination of concerns, chiefly that
Asia's problems would restrain U.S. economic growth and that a series of
corporate earnings disappointments--the results of tough competition and rising
wages--presaged widespread profit setbacks. Securities analysts kept cutting
forecasts for corporate earnings all year, though it took a while for the
earnings weakness to deflate investor confidence. But when the letdown came, it
was impressive: The S&P 500's decline in the final six weeks of the fiscal year
came within a whisker of the 20% threshold often used to define a bear market.
Small-cap stocks, as noted, passed well over the 20% threshold.
Among S&P 500 stocks, the best-performing sectors were those often
regarded as relatively safe from economic troubles at home or abroad.
Telecommunications stocks lifted the utilities sector to gains of nearly 40%,
while pharmaceutical companies led a rise of 29% in the health-care sector. The
worst-performing sectors reflected slumping prices for oil, basic metals, and
other commodity products. The "other energy" category, which includes oil
services and exploration companies, declined 41% as low energy prices caused
huge cutbacks in drilling activity. Losses were steep for many stocks in the
producer-durables sector (aircraft, farm equipment, etc.) and the materials &
processing sector (chemicals, paper, steel, etc.).
U.S. BOND MARKETS
The low inflation that took a toll on corporate profits was a tonic for bonds.
The Lehman Brothers Aggregate Bond Index, a proxy for the U.S. fixed-income
market, earned 10.6%. Interest rates fell across the board, especially for
long-term U.S. Treasury securities. Yields on 30-year, 10-year, and 3-year
Treasuries fell by about 1.35 percentage points to 5.27%, 4.98%, and 4.72%,
respectively. Three-month Treasury bills declined 0.39 point to 4.83%.
Treasuries benefited not only from low inflation and from expectations of a
slowing economy, but from investors' perception that such bonds offered a
relatively safe haven from the volatility of the world's stock and currency
markets.
Other bond sectors, which don't benefit directly from the "safe haven"
effect, didn't fare as well. Lower interest rates aren't a clear blessing for
mortgage-backed securities because investors expect low rates to boost mortgage
refinancing, leading to heavy prepayments of principal that would be reinvested
at lower rates. High-yield corporate bonds earned just 3.2%, on average, as
prices fell in response to fears that a slowdown in the economy would hurt
companies' ability to service their debt, resulting in higher defaults.
INTERNATIONAL STOCK MARKETS
For international investors, Europe was the only place to be during the past 12
months. As a group, European stocks gained 24.1% in U.S. dollar terms (21.5% in
local-currency terms), as economic growth picked up and the continent's high
unemployment rates edged lower. Stocks in Europe also benefited from seemingly
smooth progress toward the adoption by 11 nations of a single currency, the
euro, and from the belief that a common currency will force European companies
to become more efficient and profitable if they are to attract investors'
capital.
Nearly everywhere else, stock prices plummeted. In Japan, which was hit
by its worst recession since World War II, stocks fell to 12-year lows,
declining 32.6% in U.S. dollar terms. Shrinking economies and devastated
currency values erased years of gains in many formerly high-flying Asian
markets, including Indonesia (stocks down 76%), Malaysia (-64%), South Korea
(-63%), and Thailand (-61%). Even in Hong Kong, whose currency remained stable
against the U.S. dollar, stock prices fell 52%. Declines in Latin
American stocks ranged from 44% in Mexico to 72% in Venezuela.
6
<PAGE> 9
REPORT FROM THE ADVISER
[PHOTO]
Events during the 12 months ended August 31, 1998, the fiscal year for Vanguard
U.S. Growth Fund, amply fulfilled the sage forecast that stocks will fluctuate.
A great year had been in the making, but a large measure of the high returns
earned during the first 11 months (32.7% for the U.S. Growth Fund and 26.4% for
the S&P 500 Index) evaporated with August's collapse, one of history's more
notable swoons.
In light of such volatility in absolute returns, our focus here will be
on relative returns, or how the fund performed versus its competition. U.S.
Growth's investment philosophy--emphasizing large-capitalization growth
stocks--was one that attracted many investors during the year, a trend that gave
these stocks (and the fund) a nice tailwind. The fund's 14.0% return for the
fiscal year placed it ahead of several benchmarks: by about 6 percentage points
over the returns of the S&P 500 and Russell 1000 Growth Indexes and 16 points
over that of the average growth mutual fund. We lagged by 2 percentage points
the S&P/BARRA Growth Index, which is highly concentrated in large-cap stocks.
Mid-cap and small-cap indexes suffered during the fiscal year, declining about
- -8% and -19%, respectively. It was really tough going in those smaller-cap
sectors.
The divergence in returns between large-cap growth stocks and the rest of
the equity market was striking. Here's our perspective on some of the reasons:
1. Because of weakness in Asia, worldwide business activity was
restrained and domestic inflation stayed benign, making it tougher for many U.S.
commodity-like businesses (paper, aluminum, oil) and export businesses to secure
good sales and pricing.
2. Interest rates declined, producing a lower discount rate, which raises
the theoretical value of the future earnings and dividends from growth stocks.
3. To investors, large companies seem to be strengthening their
competitive advantages, including strong finances, deep pools of management
talent, and leading market positions.
4. Bigger companies have progressed more rapidly in improving their
capital efficiency. Companies that need less capital to generate a given level
of earnings growth are worth more to investors.
5. In an uncertain environment, investors have preferred higher-quality
companies.
Whether these forces will ultimately prove to be durable or to be mere
rationalizations for the high valuations of growth stocks remains to be seen.
Over the past year, the composition of the U.S. Growth Fund remained
relatively stable. In only one industry sector, health care, did the proportion
of fund assets change by more than 3 percentage points, in this instance from
18.5% to 21.6%. The most interesting modification was that the number of stock
holdings rose from 54 to 77. Our seven researchers specializing in market
sectors were particularly productive in uncovering fruitful opportunities,
especially in retailing. The degree of concentration represented by the fund's
ten largest commitments remained at about 38%. Eight of
7
<PAGE> 10
the companies on our "top ten" list as of August 31 were also on the list a year
ago. General Electric and Merck were the two additions, with Philip Morris and
American Home Products leaving the list.
In terms of estimated 1999 earnings, the S&P 500 Index and the U.S.
Growth Fund are selling at price/earnings multiples of 20 and 25, respectively.
Cash dividend yields on their holdings are about 1.5% for the index and 1.0% for
the fund. With dividends so low, it would seem that investors must look to
growth in earnings as the principal source of future investment returns. While
there will always be some earnings disappointments, overall fundamentals seem
good for stocks in the U.S. Growth Fund.
David Fowler, Portfolio Manager
Parker Hall, Portfolio Manager
Lincoln Capital Management Company
September 10, 1998
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be
achieved by emphasizing investments in high-quality, established growth
companies that sell at reasonable prices in relation to expected earnings and
to valuations in the broad stock market.
8
<PAGE> 11
PERFORMANCE SUMMARY
U.S. GROWTH FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely, so an investment in the fund could
lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 31, 1978-AUGUST 31, 1998
- ---------------------------------------------------------
U.S. GROWTH FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
1979 10.5% 2.7% 13.2% 11.6%
1980 11.9 3.7 15.6 18.2
1981 8.5 3.2 11.7 5.4
1982 -4.8 3.5 -1.3 3.2
1983 51.3 4.2 55.5 44.0
1984 0.9 1.9 2.8 6.1
1985 16.4 3.7 20.1 18.3
1986 23.6 3.0 26.6 39.1
1987 15.1 2.7 17.8 34.5
1988 -23.5 1.9 -21.6 -17.8
1989 39.6 1.1 40.7 39.2
1990 3.7 1.3 5.0 -5.0
1991 31.9 2.4 34.3 26.9
1992 7.5 1.3 8.8 7.9
1993 0.5 1.2 1.7 15.2
1994 5.5 1.5 7.0 5.5
1995 21.3 1.5 22.8 21.4
1996 23.5 1.8 25.3 18.7
1997 31.1 1.4 32.5 40.6
1998 12.9 1.1 14.0 8.1
- ---------------------------------------------------------
</TABLE>
See Financial Highlights table on page 16 for dividend and capital gains
information for the past five years.
[GRAPH]
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: AUGUST 31, 1988-AUGUST 31, 1998
- --------------------------------------------------------------------------------
U.S. Growth Average Growth Fund S&P 500 Index
<S> <C> <C> <C>
1988-08 10000 10000 10000
1988-11 10418 10248 10564
1989-02 11092 10997 11247
1989-05 12708 12351 12597
1989-08 14072 13530 13924
1989-11 14381 13326 13822
1990-02 13982 12682 13373
1990-05 16118 14006 14690
1990-08 14779 12615 13230
1990-11 14566 12311 13342
1991-02 17743 14362 15335
1991-05 18990 15514 16423
1991-08 19845 16114 16789
1991-11 19149 15570 16056
1992-02 21509 17498 17786
1992-05 21406 17008 18040
1992-08 21597 16897 18119
1992-11 22947 18271 19022
1993-02 21975 18480 19681
1993-05 21632 19087 20135
1993-08 21961 20048 20876
1993-11 22349 19970 20943
1994-02 23008 20773 21322
1994-05 22736 19968 20993
1994-08 23492 20908 22018
1994-11 23159 19898 21162
1995-02 25054 20966 22892
1995-05 27535 22648 25231
1995-08 28837 25096 26740
1995-11 32405 26121 28988
1996-02 34850 27409 30835
1996-05 36415 29320 32406
1996-08 36128 28283 31748
1996-11 41925 31629 37065
1997-02 43574 32403 38903
1997-05 46835 34516 41938
1997-08 47871 37761 44653
1997-11 50839 38588 47633
1998-02 57236 42251 52520
1998-05 60076 43442 54807
1998-08 54575 37024 48268
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED AUGUST 31, 1998
--------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Growth Fund 14.01% 19.97% 18.49% $54,575
Average Growth Fund -1.95 13.05 13.99 37,024
S&P 500 Index 8.09 18.25 17.05 48,268
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998*
- --------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ---------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Growth Fund 1/6/1959 32.91% 24.08% 18.23% 1.45% 19.68%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
9
<PAGE> 12
FUND PROFILE
U.S. GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of August 31,
1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 11.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------
U.S. GROWTH S&P 500
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 77 500
Median Market Cap $65.3B $43.9B
Price/Earnings Ratio 30.6x 20.9x
Price/Book Ratio 6.9x 3.8x
Yield 0.7% 1.7%
Return on Equity 25.8% 21.8%
Earnings Growth Rate 21.1% 16.1%
Foreign Holdings 1.3% 1.6%
Turnover Rate 48% --
Expense Ratio 0.41% --
Cash Reserves 0.9% --
</TABLE>
INVESTMENT FOCUS
- ----------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
U.S. GROWTH S&P 500
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.93 1.00
Beta 0.99 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ------------------------------------------------------
<S> <C>
Microsoft Corp. 5.2%
General Electric Co. 5.2
The Coca-Cola Co. 4.0
Pfizer, Inc. 4.0
Procter & Gamble Co. 3.9
Cisco Systems, Inc. 3.8
Merck & Co., Inc. 3.4
Intel Corp. 3.3
Monsanto Co. 3.0
Bristol-Myers Squibb Co. 2.7
- ------------------------------------------------------
Top Ten 38.5%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- -----------------------------------------------------------------------------------------------
AUGUST 31, 1997 AUGUST 31, 1998
----------------------------------------------------------
U.S. GROWTH U.S. GROWTH S&P 500
----------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 0.0% 0.0% 3.1%
Consumer Discretionary 9.6 14.0 11.2
Consumer Staples 23.8 17.3 10.0
Financial Services 12.7 11.0 16.8
Health Care 18.5 21.6 12.7
Integrated Oils 0.0 0.0 6.5
Other Energy 1.4 0.0 1.0
Materials & Processing 8.6 5.8 4.4
Producer Durables 3.4 2.3 3.4
Technology 20.0 20.5 13.6
Utilities 0.0 0.0 11.5
Other 2.0 7.5 5.8
- -----------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH RESERVES. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a fund's net assets represented by stocks or
American Depositary Receipts of companies based outside the United States.
INVESTMENT FOCUS. This grid indicates the focus of a fund in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,
the more diversified it is and the more likely to perform in line with the
overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come from
each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 30%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year. Funds
with high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
11
<PAGE> 14
FINANCIAL STATEMENTS
AUGUST 31, 1998
STATEMENT OF NET ASSETS [PHOTO]
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, preferred stocks, bonds,
etc.) and by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the fund's Net
Assets. Finally, Net Assets are divided by the outstanding shares of the fund to
arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the fund's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the fund had available to distribute to shareholders as income dividends or
capital gains as of the statement date. Any Accumulated Net Realized Losses, and
any cumulative excess of distributions over net income or net realized gains,
will appear as negative balances. Unrealized Appreciation (Depreciation) is the
difference between the market value of the fund's investments and their cost,
and reflects the gains (losses) that would be realized if the fund were to sell
all of its investments at their statement-date values.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
MARKET
VALUE*
U.S. GROWTH FUND SHARES (000)
- ----------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (99.1%)
- ----------------------------------------------------------
CONSUMER DISCRETIONARY (13.8%)
- - Abercrombie & Fitch Co. 1,500,000 $ 64,500
Avon Products, Inc. 1,100,000 69,162
Carnival Corp. 3,000,000 86,625
Circuit City Stores, Inc. 300,000 9,263
- - CompUSA, Inc. 2,000,000 23,750
- - Costco Cos., Inc. 500,000 23,531
Dayton Hudson Corp. 900,000 32,400
The Walt Disney Co. 4,400,000 120,725
Gillette Co. 3,600,000 148,050
Home Depot, Inc. 1,600,000 61,600
Lowe's Cos., Inc. 2,000,000 70,125
Mattel, Inc. 1,800,000 58,275
May Department Stores Co. 1,500,000 84,375
McDonald's Corp. 1,300,000 72,881
- - Fred Meyer Inc. 700,000 27,519
Rubbermaid, Inc. 2,100,000 53,419
Sears, Roebuck & Co. 1,000,000 45,437
Time Warner, Inc. 700,000 56,263
Wal-Mart Stores, Inc. 3,700,000 217,375
-----------
1,325,275
-----------
CONSUMER STAPLES (17.2%)
American Stores Co. 400,000 11,600
CVS Corp. 4,200,000 152,775
Campbell Soup Co. 1,100,000 55,412
The Coca-Cola Co. 5,900,000 384,237
Coca-Cola Enterprises, Inc. 900,000 21,375
Colgate-Palmolive Co. 2,100,000 151,462
PepsiCo, Inc. 3,700,000 102,444
Philip Morris Cos., Inc. 5,600,000 232,750
Procter & Gamble Co. 4,900,000 374,850
- - Safeway, Inc. 800,000 31,500
Unilever NV ADR 2,000,000 126,750
-----------
1,645,155
-----------
FINANCIAL SERVICES (10.9%)
American International
Group, Inc. 2,500,000 193,281
Automatic Data
Processing, Inc. 2,600,000 165,750
Banc One Corp. 1,000,000 38,000
The Chase Manhattan Corp. 3,700,000 196,100
First Data Corp. 1,700,000 35,169
First Union Corp. 700,000 33,950
Household International, Inc. 4,800,000 177,300
Norwest Corp. 3,400,000 101,150
Paychex, Inc. 1,900,000 72,200
Wells Fargo & Co. 100,000 28,188
-----------
1,041,088
-----------
HEALTH CARE (21.4%)
- - ALZA Corp. 2,400,000 86,400
American Home
Products Corp. 3,700,000 185,463
- - Amgen, Inc. 1,500,000 91,312
Bristol-Myers Squibb Co. 2,600,000 254,475
Cardinal Health, Inc. 1,200,000 105,000
- - First Health Group Corp. 1,700,000 34,319
Johnson & Johnson 1,200,000 82,800
Eli Lilly & Co. 2,300,000 150,650
Medtronic, Inc. 900,000 46,238
Merck & Co., Inc. 2,800,000 324,625
Pfizer, Inc. 4,100,000 381,300
- - Quintiles Transnational Corp. 1,800,000 64,350
Schering-Plough Corp. 1,900,000 163,400
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- ----------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------
<S> <C> <C>
U.S. Surgical Corp. 1,480 $ 59
Warner-Lambert Co. 1,300,000 84,825
-----------
2,055,216
-----------
MATERIALS & PROCESSING (5.7%)
E.I. du Pont de Nemours & Co. 1,600,000 92,300
W.R. Grace & Co. 2,600,000 33,475
Monsanto Co. 5,300,000 289,844
- - Sealed Air Corp. 1,200,000 43,200
Sealed Air Corp. Pfd. 1,250,000 51,406
Solutia, Inc. 1,600,000 35,900
-----------
546,125
-----------
PRODUCER DURABLES (2.3%)
Northern Telecom Ltd. 2,700,000 128,925
Xerox Corp. 1,000,000 87,812
-----------
216,737
-----------
TECHNOLOGY (20.3%)
- - BMC Software, Inc. 1,500,000 63,469
- - CIENA Corp. 700,000 19,688
- - Cisco Systems, Inc. 4,400,000 360,250
Compaq Computer Corp. 5,100,000 142,481
- - Dell Computer Corp. 2,000,000 200,000
Intel Corp. 4,500,000 320,344
Lucent Technologies, Inc. 3,000,000 212,625
- - Microsoft Corp. 5,200,000 498,875
Motorola, Inc. 1,800,000 77,512
- - 3Com Corp. 2,300,000 54,481
-----------
1,949,725
-----------
OTHER (7.5%)
AlliedSignal Inc. 700,000 24,019
General Electric Co. 6,200,000 496,000
Illinois Tool Works, Inc. 1,700,000 82,344
Tyco International Ltd. 2,100,000 116,550
-----------
718,913
-----------
- ----------------------------------------------------------
TOTAL COMMON STOCKS
(COST $7,058,766) 9,498,234
- ----------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (2.0%)
- ----------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.80%, 9/1/1998
(COST $189,416) $189,416 189,416
- ----------------------------------------------------------
TOTAL INVESTMENTS (101.1%)
(COST $7,248,182) 9,687,650
- ----------------------------------------------------------
OTHER ASSETS AND LIABILITIES
(-1.1%)
- ----------------------------------------------------------
Other Assets--Note C 51,205
Liabilities (152,161)
-----------
(100,956)
- ----------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------
Applicable to 315,754,027 outstanding
$0.001 par value shares of
beneficial interest (unlimited
authorization) $9,586,694
==========================================================
NET ASSET VALUE PER SHARE $30.36
==========================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
AT AUGUST 31, 1998, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------
<S> <C> <C>
Paid in Capital $6,337,626 $20.07
Undistributed Net
Investment Income 35,259 .11
Accumulated Net
Realized Gains 774,341 2.45
Unrealized Appreciation--
Note E 2,439,468 7.73
- ----------------------------------------------------------
NET ASSETS $9,586,694 $30.36
==========================================================
</TABLE>
13
<PAGE> 16
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
U.S. GROWTH FUND
YEAR ENDED AUGUST 31, 1998
(000)
- -------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 80,888
Interest 16,605
-----------
Total Income 97,493
-----------
EXPENSES
Investment Advisory Fees--Note B 11,377
The Vanguard Group--Note C
Management and Administrative 22,036
Marketing and Distribution 2,267
Taxes (other than income taxes) 553
Custodian Fees 15
Auditing Fees 10
Shareholders' Reports 209
Annual Meeting and Proxy Costs 111
Trustees' Fees and Expenses 18
-----------
Total Expenses 36,596
Expenses Paid Indirectly--Note C (1,141)
-----------
Net Expenses 35,455
-----------
NET INVESTMENT INCOME 62,038
- -------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 854,804
- -------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES (6,955)
- -------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $909,887
=============================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
U.S. GROWTH FUND
YEAR ENDED AUGUST 31,
---------------------------------
1998 1997
(000) (000)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 62,038 $ 69,678
Realized Net Gain 854,804 219,862
Change in Unrealized Appreciation (Depreciation) (6,955) 1,317,765
---------------------------------
Net Increase in Net Assets Resulting from Operations 909,887 1,607,305
---------------------------------
DISTRIBUTIONS
Net Investment Income (72,786) (55,435)
Realized Capital Gain (239,928) (345,580)
---------------------------------
Total Distributions (312,714) (401,015)
---------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 2,986,205 2,522,416
Issued in Lieu of Cash Distributions 303,001 391,848
Redeemed (1,744,938) (1,219,565)
---------------------------------
Net Increase from Capital Share Transactions 1,544,268 1,694,699
- ----------------------------------------------------------------------------------------------------
Total Increase 2,141,441 2,900,989
- ----------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 7,445,253 4,544,264
---------------------------------
End of Year $9,586,694 $7,445,253
====================================================================================================
(1)Shares Issued (Redeemed)
Issued 92,058 98,030
Issued in Lieu of Cash Distributions 10,884 16,774
Redeemed (55,595) (47,275)
---------------------------------
Net Increase in Shares Outstanding 47,347 67,529
====================================================================================================
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
U.S. GROWTH FUND
YEAR ENDED AUGUST 31,
------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $27.74 $22.62 $18.83 $15.52 $14.71
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .21 .27 .26 .25 .20
Net Realized and Unrealized Gain (Loss) on Investments 3.57 6.73 4.39 3.24 .82
------------------------------------------------------------
Total from Investment Operations 3.78 7.00 4.65 3.49 1.02
------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.27) (.26) (.29) (.18) (.21)
Distributions from Realized Capital Gains (.89) (1.62) (.57) -- --
------------------------------------------------------------
Total Distributions (1.16) (1.88) (.86) (.18) (.21)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $30.36 $27.74 $22.62 $18.83 $15.52
==========================================================================================================================
TOTAL RETURN 14.01% 32.50% 25.28% 22.75% 6.98%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $9,587 $7,445 $4,544 $2,989 $1,963
Ratio of Total Expenses to Average Net Assets 0.41% 0.42% 0.43% 0.47% 0.52%
Ratio of Net Investment Income to Average Net Assets 0.69% 1.13% 1.32% 1.59% 1.30%
Portfolio Turnover Rate 48% 35% 44% 32% 47%
==========================================================================================================================
</TABLE>
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
Vanguard U.S. Growth Fund is registered under the Investment Company Act of 1940
as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments are valued at cost, which approximates market
value. Securities for which market quotations are not readily available are
valued by methods deemed by the Board of Trustees to represent fair value.
2. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The fund, along with other members of The Vanguard
Group, transfers uninvested cash balances to a Pooled Cash Account, which is
invested in repurchase agreements secured by U.S. government securities.
Securities pledged as collateral for repurchase agreements are held by a
custodian bank until the agreements mature. Each agreement requires that the
market value of the collateral be sufficient to cover payments of interest and
principal; however, in the event of default or bankruptcy by the other party to
the agreement, retention of the collateral may be subject to legal proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Lincoln Capital Management Company provides investment advisory services to
the fund for a fee calculated at an annual percentage rate of average net
assets. For the year ended August 31, 1998, the advisory fee represented an
effective annual rate of 0.13% of the fund's average net assets.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the Board of Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At August 31, 1998, the fund had contributed capital of $2,108,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 3.0% of Vanguard's capitalization. The fund's Trustees and officers are also
Directors and officers of Vanguard.
Vanguard has asked the fund's investment adviser to direct certain security
trades, subject to obtaining the best price and execution, to brokers who have
agreed to rebate to the fund part of the commissions generated. Such rebates are
used solely to reduce the fund's administrative expenses. For the year ended
August 31, 1998, directed brokerage arrangements reduced the fund's expenses by
$1,141,000 (an annual rate of 0.01% of average net assets).
D. During the year ended August 31, 1998, the fund purchased $5,691,397,000 of
investment securities and sold $4,190,043,000 of investment securities other
than temporary cash investments.
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (continued)
E. At August 31, 1998, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $2,439,468,000,
consisting of unrealized gains of $2,744,948,000 on securities that had risen in
value since their purchase and $305,480,000 in unrealized losses on securities
that had fallen in value since their purchase.
18
<PAGE> 21
REPORT OF INDEPENDENT
ACCOUNTANTS
[PHOTO]
To the Shareholders and
Board of Trustees of
Vanguard U.S. Growth Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard U.S. Growth Fund (the "Fund") at August 31, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at August 31, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
September 30, 1998
19
<PAGE> 22
SPECIAL 1998 TAX INFORMATION (UNAUDITED) FOR VANGUARD U.S. GROWTH FUND
This information for the fiscal year ended August 31, 1998, is included pursuant
to provisions of the Internal Revenue Code.
The fund distributed $230,493,000 as capital gain dividends (from net
long-term capital gains) to shareholders in December 1997. Of the $230,493,000
capital gain dividends, the fund designates $73,458,000 as a 20% rate gain
distribution.
For corporate shareholders, 33.4% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
20
<PAGE> 23
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director of The Vanguard Group, Inc.,
and Trustee of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; Trustee Emerita of Wellesley College.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & Johnson-Merck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co., The Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co.,
NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell
Company is the owner of trademarks and copyrights relating to the
Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are
trademarks of Wilshire Associates.
<PAGE> 24
VANGUARD
MILESTONES
[PHOTO]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[PHOTO]
Walter L. Morgan, founder of
Wellington Fund, the nation's
first balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[PHOTO]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
[email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
Q230-10/12/1998
(C) 1998 Vanguard Marketing
Corporation, Distributor.
All rights reserved.
<PAGE> 25
VANGUARD INTERNATIONAL
GROWTH FUND
[PHOTOS]
ANNUAL REPORT - AUGUST 31, 1998
[VANGUARD GROUP LOGO]
<PAGE> 26
AT VANGUARD, WE BELIEVE
THAT TRADITION MATTERS
Our 8,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
This year, our report cover pays homage to three anniversaries, each of great
significance to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August 1,
1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto-- "Leading the way"--serves as a guiding principle for
our company.
- - The 100th birthday, on July 23, of Walter L. Morgan, founder of Wellington
Fund, the oldest member of what became The Vanguard Group. Mr. Morgan was
friend and mentor to Vanguard founder John C. Bogle, and helped to shape the
standards and business principles that Mr. Bogle laid down for Vanguard at its
beginning nearly 25 years ago: a stress on balanced, diversified investments;
insistence on fair dealing and candor with clients; and a focus on long-term
investing. To our great regret, Mr. Morgan died on September 2.
- - The 70th anniversary, on December 28, of the incorporation of Vanguard
Wellington Fund. It was the nation's first balanced mutual fund, and is one of
only a handful of funds created in the 1920s that are still in operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
[GRAPHIC]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
5
REPORT FROM
THE ADVISER
7
PERFORMANCE SUMMARY
9
FUND PROFILE
10
FINANCIAL STATEMENTS
13
REPORT OF
INDEPENDENT ACCOUNTANTS
21
All comparative mutual fund data are from Lipper Analytical Services, Inc.,
or Morningstar unless otherwise noted.
<PAGE> 27
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman
The divergent trajectories of international stock markets took a toll on
Vanguard International Growth Fund during the fiscal year ended August 31, 1998.
Our total return was -3.0%, making this the fund's first negative year since
1991. For the first time in five years, the fund also lagged its competitive
benchmarks, in both cases by fairly small margins.
The adjacent table presents the twelve-month total return (capital change
plus reinvested dividends) for the fund and its benchmarks--the average
international fund (as calculated by Lipper Analytical Services) and the Morgan
Stanley Capital International Europe, Australasia, Far East (EAFE) Index. The
fund's return is based on a decline in net asset value from $17.86 per share on
August 31, 1997, to $16.57 per share on August 31, 1998, with the latter figure
adjusted for our annual dividend of $0.21 per share paid from net investment
income and a distribution of $0.52 per share paid from net realized capital
gains.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
AUGUST 31, 1998
- --------------------------------------------------------------------------------
<S> <C>
Vanguard International Growth Fund -3.0%
- --------------------------------------------------------------------------------
Average International Fund -1.4%
- --------------------------------------------------------------------------------
MSCI EAFE Index +0.1%
- --------------------------------------------------------------------------------
</TABLE>
FINANCIAL MARKETS IN REVIEW
To say that financial markets were volatile during fiscal 1998 is putting it
mildly. The U.S. stock market defied gravity for most of the year, boosting the
Standard & Poor's 500 Composite Stock Price Index to a +33.8% gain from August
31, 1997, through July 17. However, the market took back most of that gain
during the following six weeks, culminating in a -6.8% drop on August 31 that
left the S&P 500 Index up just +8.1% for the fiscal year. Internationally, a
slump in Asian stocks offset remarkable returns from Europe, and the EAFE Index
eked out a slim +0.1% advance in U.S. dollar terms.
Severe declines took place in the Pacific region, which was buffeted by
currency, economic, and political crises. The more developed stock markets ended
the twelve months down -35.5% in U.S. dollar terms. Emerging markets, in the
Pacific and elsewhere, plunged -45.4%, also measured in U.S. dollars. These bear
markets were a stark contrast to the bull market in Europe, which has by far the
largest market capitalization among the regions. European bourses provided an
excellent +24.1% return in U.S. dollar terms for the fiscal year. Stocks in
Europe benefited from corporate merger activity, restructurings, and investors'
optimism about the impending launch of a common currency by eleven European
nations.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
TOTAL RETURNS
12 MONTHS ENDED AUGUST 31, 1998
----------------------------------
BASED ON
LOCAL CURRENCY BASED ON
STOCK MARKET INDEX CURRENCY EFFECT U.S. DOLLARS
<S> <C> <C> <C>
MSCI EAFE + 3.6% - 3.5% + 0.1%
European* +21.5% + 2.6% +24.1%
Pacific* -24.2 -11.3 -35.5
Select Emerging Markets* -25.7 -19.7 -45.4
U.S. (S&P 500 Index) + 8.1% -- + 8.1%
- ---------------------------------------------------------------------------
</TABLE>
*Morgan Stanley Capital International indexes.
1
<PAGE> 28
Not surprisingly, currency exchange rates sharply affected returns for
U.S. investors. During fiscal 1998, the dollar rose in value against most
Pacific currencies and fell slightly against European currencies. These results,
as reflected in the table on page 1, had the effect for U.S.-based investors of
significantly deepening declines in the Pacific and emerging markets but
slightly enhancing European stock gains. Currency fluctuations are part and
parcel of international investing, and help explain why returns on foreign
stocks often move in different directions from those on U.S. stocks.
FISCAL 1998 PERFORMANCE OVERVIEW
Your fund's subpar return versus its benchmarks reflects its relatively strong
weighting in Asia and emerging markets at the outset of the fiscal year. The
fund began the year with a 28.4% stake in Japan--its largest weighting in any
single country. At fiscal year-end, Japanese markets had plummeted -33% in
dollar terms, and the fund's holdings there represented just 14.8% of our stock
holdings. This reduction in weighting was due to the combined force of those
market declines, our adviser's sales of Japanese shares in early 1998, and
increases in the value of the fund's European holdings. The same factors were
involved in the decline of our weighting in Hong Kong from 6.9% to 0.3%. The
market there skidded -52% in dollar terms, and during the year our adviser sold
most of the fund's Hong Kong stocks. On the other side of the globe, Brazil's
weighting in the fund fell from 2.2% to 0.8% as stocks there slid -45% in dollar
terms.
The excellent performance by European stocks and strategic additions by
the adviser mitigated the damage from Asia and emerging markets. The Netherlands
moved up from the fund's third-largest country weighting to become the largest
at 15.7%, as Dutch stocks rose +15% for the fiscal year in U.S. dollar terms.
France, Switzerland, and the United Kingdom, which together comprise about a
third of the fund's holdings, had returns of +36%, +31%, and +15%, respectively,
in dollar terms. Italy's weighting jumped from 0.4% of the fund to 9.4%; this
resulted in part from several purchases, but also from the Italian markets'
superlative returns of +49% in dollar terms.
LONG-TERM PERFORMANCE OVERVIEW
A single year's results, good or bad, are not a meaningful basis for judging a
mutual fund's performance. The International Growth Fund has served its
investors well over the longer term by exceeding the performance of its
competitive standards. The accompanying table presents the average annual
returns of the fund and its benchmarks for the past ten years, along with the
results of hypothetical $10,000 investments made a decade ago in the fund, its
average competitor, and the EAFE Index.
Over the ten-year period, our fund's return exceeded that of the average
international fund by 0.6% annually. The EAFE Index, which is weighted to
reflect the market capitalization of the world's established markets, has been
hobbled over this period by its significant weighting in Japan, which had an
annualized average return during the decade of -5% in U.S. dollar terms. The
Japanese market's poor performance has shrunk its share of the EAFE Index's
market capitalization to 20.4% as of August 31, 1998, from 64% a decade earlier.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL RETURNS
10 YEARS ENDED AUGUST 31, 1998
-------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
<S> <C> <C>
Vanguard International
Growth Fund +9.2% $24,180
Average International Fund +8.6% $22,883
MSCI EAFE Index +6.2% $18,228
- --------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 29
Our fund's long-term advantage over the average international fund can be
attributed largely to our low operating costs. The International Growth Fund has
an expense ratio (expenses as a percentage of average net assets) of 0.59%, more
than one percentage point below the 1.67% in expenses charged by the average
international mutual fund. For the long haul, we believe our adviser, Schroder
Capital Management International, has the skill and experience to meaningfully
add to the head start provided by our low costs.
We acknowledge that, in aggregate, returns on international stocks have
fallen far short of those on U.S. stocks in recent years. The S&P 500 Index
gained an average of +17.0% annually during the decade ended August 31, 1998,
nearly three times the +6.2% return on the EAFE Index. However, we note that a
similar snapshot a decade ago would have shown international stocks holding the
advantage. For the decade ended August 31, 1988, the EAFE Index gained +20.4%
annually while the S&P 500 Index advanced +14.8% a year on average.
Interestingly, the weakening of the U.S. dollar early in the 1988-1998 period
together with its more recent strengthening canceled each other out, so that the
EAFE Index provided the same return in local currency as in dollar terms. In any
event, there is a message in this decade-long reversal of fortune in the U.S.
and international markets: The past is rarely prologue to the future. Over the
long term, returns from disparate market sectors have strongly tended to return
to historic norms.
IN SUMMARY
In our semiannual report six months ago, with signs of economic turmoil already
abundant, we noted that international returns at times have exceeded those of
the U.S. market and at other times have fallen short. Indeed, this lack of
correlation is a major reason why U.S. investors should consider holding
international stock funds--we recommend perhaps 10% to 20% of overall assets--in
a balanced portfolio that includes U.S. stock funds, bond funds, and money
market funds. International stocks add diversification and the prospect of
competitive returns over time and, we believe, can help investors stay the
course toward their long-term objectives.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
September 18, 1998
NOTE: You'll observe that we have made a minor change in the name of the
International Growth Fund. We replaced the word "portfolio" with "fund" as part
of a broader effort to simplify the names in our fund lineup.
3
<PAGE> 30
NOTICE TO SHAREHOLDERS
At a special meeting on June 30, 1998, shareholders of Vanguard International
Growth Fund overwhelmingly approved five proposals. The proposals and voting
results were:
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. This change will reduce the
amount of state taxes the fund pays annually by approximately $458,000. Approved
by 97.14% of the shares voted, as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
FOR AGAINST ABSTAIN
- --------------------------------------------------------------
<S> <C> <C>
228,576,323 2,237,737 4,504,767
- --------------------------------------------------------------
</TABLE>
2a. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. This change
permits the fund to participate in Vanguard's interfund lending program, which
allows funds to loan money to each other if--and only if--it makes good
financial sense to do so on both sides of the transaction. The interfund lending
program won't be an integral part of your fund's investment program; it is a
contingency arrangement for managing unusual cash flows. Approved by 95.08% of
shares voted, as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------
FOR AGAINST ABSTAIN
- -------------------------------------------------------
<S> <C> <C>
223,735,374 5,275,929 6,307,524
- -------------------------------------------------------
</TABLE>
2b. INVESTMENT LIMITATION CHANGES--BORROWING MONEY AND PLEDGING ASSETS. This
change sets standard limits of 15% of net assets on the amount of money Vanguard
funds can borrow from all sources and on the amount of assets that can be
pledged to secure any loans. Approved by 94.16% of the shares voted, as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------
FOR AGAINST ABSTAIN
- -------------------------------------------------------
<S> <C> <C>
221,584,560 6,687,970 7,046,297
- -------------------------------------------------------
</TABLE>
2c. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN SECURITIES OWNED BY
AFFILIATES. This change eliminates the fund's policy of avoiding investments in
securities issued by companies whose securities are owned in certain amounts by
Trustees, officers, and key advisory personnel. This policy was well intentioned
but wrongly focused and unnecessary in light of the fund's Code of Ethics and
other regulatory protections against conflicts of interest on the part of fund
management. Approved by 93.80% of the shares voted, as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------
FOR AGAINST ABSTAIN
- -------------------------------------------------------
<S> <C> <C>
220,722,158 7,525,806 7,070,863
- -------------------------------------------------------
</TABLE>
2d. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN UNSEASONED COMPANIES. This
change eliminates the fund's policy of not investing more than 5% of net assets
in securities issued by companies with fewer than three years of operating
history, taking into account any predecessors. The policy was unduly
restrictive. Approved by 91.13% of the shares voted, as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------
FOR AGAINST ABSTAIN
- -------------------------------------------------------
<S> <C> <C>
214,451,791 13,203,939 7,663,097
- -------------------------------------------------------
</TABLE>
4
<PAGE> 31
THE MARKETS IN PERSPECTIVE
YEAR ENDED AUGUST 31, 1998
[PHOTO]
U.S. financial markets were anything but placid during the fiscal year ended
August 31, 1998. Falling interest rates made it a good year for bond investors,
while stock investors experienced both ecstasy and agony.
Disparities abounded in the economic sphere, too. While the U.S. economy
perked along quite nicely and European economies seemed to be coming out of the
doldrums, Asian economies slumped. By fiscal year-end, fears were growing that
the crisis in Asia would cause more worldwide disruption than originally
anticipated.
For most of the fiscal year, the U.S. economy's strong performance made
the stock market forget all about Asia. Growth was strong, led by a powerful
rise in consumer spending. Consumers felt flush because jobs were
plentiful--unemployment fell to levels last seen in 1970--and wages were rising
at the fastest rate in years. Happily, the robust economy did not trigger higher
inflation. Consumer prices rose just 1.6% during the fiscal year, as prices for
oil and many other commodities declined because of weak demand and ample
supplies. Also keeping a lid on prices was the U.S. dollar's rise against the
currencies of Canada, Mexico, and several Asian nations.
U.S. STOCK MARKETS
The great bull market in U.S. stocks that began in August 1982 was
interrupted--if not terminated--during the final six weeks of fiscal year 1998.
After rising to a record close of 1,186.75 on July 17, the S&P 500 Index fell by
19.2% from its top level and ended the year with a return of 8.1%.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED AUGUST 31, 1998
--------------------------------
1 YEAR 3 YEARS 5 YEARS
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 8.1% 21.8% 18.3%
Russell 2000 Index -19.4 4.8 8.1
MSCI EAFE Index 0.1 5.8 5.8
- ------------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 10.6% 8.2% 6.8%
Lehman 10-Year Municipal Bond Index 8.6 7.4 6.5
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.2 5.3 5.0
- ------------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.6% 2.2% 2.4%
- ------------------------------------------------------------------------------------
</TABLE>
Although widely regarded as a proxy for U.S. stocks, the S&P 500 Index
actually represents about 70% of the market's total value. The "other 30%" did
far worse than the S&P 500, whose performance was led by an exclusive group of
large growth stocks. Small-capitalization stocks, as represented by the Russell
2000 Index, peaked in April and couldn't keep pace with large-cap stocks. But
small stocks were spared none of the pain during the market's summer slide, with
the Russell 2000 falling 31% from its high and 19.4% for the fiscal year.
Within the S&P 500, results from value and growth stocks were like night
and day. Value stocks, whose prices reflect modest market expectations for
future earnings, are characterized by below-average prices in relation to
earnings, dividends, and book value. Usually, value stocks hold up better than
growth stocks during market downturns. Not in 1998. Value stocks within the S&P
fell 16.1% during August, versus a 13.0% drop for growth stocks. For the year,
value stocks were down 0.4%, while growth stocks rose 16.4%.
5
<PAGE> 32
The market flopped in response to a combination of concerns, chiefly that
Asia's problems would restrain U.S. economic growth and that a series of
corporate earnings disappointments--the results of tough competition and rising
wages--presaged widespread profit setbacks. Securities analysts kept cutting
forecasts for corporate earnings all year, though it took a while for the
earnings weakness to deflate investor confidence. But when the letdown came, it
was impressive: The S&P 500's decline in the final six weeks of the fiscal year
came within a whisker of the 20% threshold often used to define a bear market.
Small-cap stocks, as noted, passed well over the 20% threshold.
Among S&P 500 stocks, the best-performing sectors were those often regarded
as relatively safe from economic troubles at home or abroad. Telecommunications
stocks lifted the utilities sector to gains of nearly 40%, while pharmaceutical
companies led a rise of 29% in the health-care sector. The worst-performing
sectors reflected slumping prices for oil, basic metals, and other commodity
products. The "other energy" category, which includes oil services and
exploration companies, declined 41% as low energy prices caused huge cutbacks in
drilling activity. Losses were steep for many stocks in the producer-durables
sector (aircraft, farm equipment, etc.) and the materials & processing sector
(chemicals, paper, steel, etc.).
U.S. BOND MARKETS
The low inflation that took a toll on corporate profits was a tonic for bonds.
The Lehman Brothers Aggregate Bond Index, a proxy for the U.S. fixed-income
market, earned 10.6%. Interest rates fell across the board, especially for
long-term U.S. Treasury securities. Yields on 30-year, 10-year, and 3-year
Treasuries fell by about 1.35 percentage points to 5.27%, 4.98%, and 4.72%,
respectively. Three-month Treasury bills declined 0.39 point to 4.83%.
Treasuries benefited not only from low inflation and from expectations of a
slowing economy, but from investors' perception that such bonds offered a
relatively safe haven from the volatility of the world's stock and currency
markets.
Other bond sectors, which don't benefit directly from the "safe haven"
effect, didn't fare as well. Lower interest rates aren't a clear blessing for
mortgage-backed securities because investors expect low rates to boost mortgage
refinancing, leading to heavy prepayments of principal that would be reinvested
at lower rates. High-yield corporate bonds earned just 3.2%, on average, as
prices fell in response to fears that a slowdown in the economy would hurt
companies' ability to service their debt, resulting in higher defaults.
INTERNATIONAL STOCK MARKETS
For international investors, Europe was the only place to be during the past 12
months. As a group, European stocks gained 24.1% in U.S. dollar terms (21.5% in
local-currency terms), as economic growth picked up and the continent's high
unemployment rates edged lower. Stocks in Europe also benefited from seemingly
smooth progress toward the adoption by 11 nations of a single currency, the
euro, and from the belief that a common currency will force European companies
to become more efficient and profitable if they are to attract investors'
capital.
Nearly everywhere else, stock prices plummeted. In Japan, which was hit by
its worst recession since World War II, stocks fell to 12-year lows, declining
32.6% in U.S. dollar terms. Shrinking economies and devastated currency values
erased years of gains in many formerly high-flying Asian markets, including
Indonesia (stocks down 76%), Malaysia (-64%), South Korea (-63%), and Thailand
(-61%). Even in Hong Kong, whose currency remained stable against the U.S.
dollar, stock prices fell 52%. Declines in Latin American stocks ranged from 44%
in Mexico to 72% in Venezuela.
6
<PAGE> 33
REPORT FROM THE ADVISER
Vanguard International Growth Fund fell 3.0% during the fiscal year ended August
31, 1998. This was behind both the 0.1% increase of our unmanaged market
standard, the MSCI EAFE Index, and the 1.4% decline of the average international
equity mutual fund. It has been five years since we trailed both of our
benchmarks. During that period, we have earned a cumulative return of 58.3%, 26
percentage points ahead of the index and 18 points ahead of our average
competitor. As I said in my report six months ago, the Asian financial crisis
caught me by surprise; and its consequences, as it insidiously spread across
Asia, further damaged our performance for you.
Against the background of continuing bullishness outside Asia, I moved,
earlier in summer 1998, to more defensive investments, keeping the fund's cash
reserves at the upper end of our usual range. Stock markets in Europe have
enjoyed a strong uptrend since early 1995, and it seemed to me that prices were
becoming increasingly reliant upon the continuance of a favorable business
environment worldwide. Instead, uncertainties have increased both on the
political stage and, more important, in the global economy. Russia's default on
government debt raises the specter of further turmoil, and bankers and investors
have again become generally reluctant to lend money to riskier borrowers,
notably those in emerging markets. This has clear implications for Latin
America, and the vicious circle of withdrawal of short-term capital leading to
higher local interest rates, in turn leading to a severe disruption of local
economies, has again appeared. Stock markets in the countries at risk have
fallen rapidly. It will take an immense coordinated effort by the world's major
central banks to restore liquidity and confidence. We believe that this need is
understood; the problem is effecting it.
The International Growth Fund is, of course, a diversified non-U.S. fund.
And the major developed countries in which we predominantly invest are no more
exposed to developing countries than is the United States (indeed, Japan is less
exposed). Moreover, we have less than 5% of the fund's assets invested in other
countries at risk (in stocks that are extremely cheap if the crisis passes).
In our opinion, this is not a time for taking risks: There is a danger
that lower economic growth in developing countries will materially reduce growth
in Europe and Japan, just as it might affect the United States. The trade links
are smaller than often supposed, so the immediate impact of weakened developing
economies on the big, established ones is quite modest. However, if a secondary
impact is a decline in confidence, the situation could worsen. Continental
Europe is enjoying a strong economic upswing at the moment, and is well above
the point at which growth could cease to be self-sustaining. That is why we have
60% of the fund's net assets invested there. To reduce risk from a falloff in
trade outside Europe, we have recently focused on companies with predominantly
local business exposure. About 16% of the fund, or a little over a quarter of
the assets invested in continental
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by selecting the stocks of companies with the potential for above-average
earnings growth, with particular emphasis on companies in countries with
favorable business and market environments.
7
<PAGE> 34
Europe, is in utilities, mostly in the fast-growing telecommunications area; a
further 18% of assets is in pharmaceuticals, beverages, or service companies in
fast-growing areas of domestic economies; and 11% is in insurance companies
positioning themselves for an anticipated upsurge in long-term savings for
retirement. The remainder of your continental European exposure is vulnerable to
short-term demand fluctuations locally or globally, and is mostly in stocks
where we believe the short-term risk of underperformance is more than outweighed
by the long-term potential for gains when global economic conditions return to a
more-normal state.
We have a further 10% of the fund's net assets invested in the United
Kingdom. This is a smaller position than that of many other international funds.
A preference for continental Europe over the United Kingdom has worked extremely
well for us over the past year, and, even though the U.K. is a more defensive
market than most, we are sufficiently optimistic about continental European
growth to maintain our positions for now.
We have also been highly selective in our investments in Japan; indeed,
one stock, Fuji Photo Film, represents nearly one-quarter of the fund assets
allocated there. Japan retains the potential to produce the next great bull
market, but not yet. By some measures, such as the value of their underlying
assets, Japanese stocks are already cheap, after a bear market lasting more than
eight years. But with the country now in recession, these companies are
generating miserable profits. We must see two things before taking an obviously
optimistic stance: (1) evidence that Japanese companies are seriously attempting
to cut costs and to increase efficiency as has happened in the United States and
Europe; and (2) signs that the Japanese government has finally accepted the need
for dramatic measures to return the economy to a self-sustaining growth path. Of
these preconditions, the second is more important.
One-third of the countries in which the fund can invest are currently in
economic recession. However, this rather shocking number is not reflected in the
fund's holdings. The recessionary group is, of course, dominated by Japan, where
only 13% of the fund is invested. Just 1.5% is invested in the smaller countries
in recession. The current situation abounds with short-term risks, but there are
opportunities beyond. Recent events emphasize that the world's economies are not
synchronized, and that both recovery and recession can roll around the globe,
creating different investment conditions in their paths. A diversified
international stock fund seeks to take advantage of this variety, and I shall
try to do so in the year ahead, while retaining a degree of caution concerning
the more immediate outlook.
Richard Foulkes
Schroder Capital Management International
September 16, 1998
8
<PAGE> 35
PERFORMANCE SUMMARY
INTERNATIONAL GROWTH FUND
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely, so an investment in the fund
could lose money
TOTAL INVESTMENT RETURNS: SEPTEMBER 30, 1981-AUGUST 31, 1998
- ------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH FUND MSCI EAFE
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------------
<C> <C> <C> <C> <C>
1982 -5.7% 0.0% -5.7% -4.7%
1983 57.1 4.3 61.4 31.0
1984 5.7 1.6 7.3 14.7
1985 15.7 2.1 17.8 32.3
1986 96.4 2.5 98.9 103.7
1987 31.2 0.8 32.0 46.0
1988 -10.8 0.9 -9.9 -6.2
1989 22.7 1.8 24.5 22.4
1990 4.0 1.2 5.2 -11.8
1991 -6.8 1.7 -5.1 -0.3
1992 -0.4 1.9 1.5 0.4
1993 18.4 2.7 21.1 27.1
1994 19.5 0.9 20.4 11.1
1995 2.4 1.4 3.8 0.8
1996 11.3 1.4 12.7 8.2
1997 14.5 1.3 15.8 9.4
1998 -4.2 1.2 -3.0 0.1
- ------------------------------------------------------------
</TABLE>
See Financial Highlights table on page 18 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: AUGUST 31, 1988-AUGUST 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------
INTERNATIONAL ADVERAGE
GROWTH GROWTH MSCI EAFE
YEAR FUND FUND INDEX
- -------------------------------------------------------
<S> <C> <C> <C>
1988 08 10000 10000 10000
1988 11 11167 11,184 12012
1989 02 11076 11,573 12362
1989 05 10958 11,603 11573
1989 08 12448 12,597 12238
1989 11 13092 13,007 12906
1990 02 12991 13,094 11993
1990 05 13623 13,796 11884
1990 08 13102 13,044 10794
1990 11 12059 12,123 10113
1991 02 13445 13,333 11757
1991 05 12999 13,268 11286
1991 08 12432 13,020 10756
1991 11 12095 12,994 10994
1992 02 12630 13,728 10920
1992 05 13152 14,214 10942
1992 08 12618 13,459 10805
1992 11 11897 12,866 10140
1993 02 12187 13,420 10508
1993 05 13966 15,251 12782
1993 08 15275 16,384 13735
1993 11 15567 16,595 12638
1994 02 17783 18,862 14665
1994 05 17437 18,375 14554
1994 08 18398 19,219 15265
1994 11 17552 18,160 14552
1995 02 16556 17,096 14051
1995 05 18452 18,349 15316
1995 08 19089 18,982 15386
1995 11 19374 19,043 15702
1996 02 20650 20,153 16469
1996 05 21717 21,100 17002
1996 08 21517 20,680 16647
1996 11 22931 21,840 17600
1997 02 23278 22,166 17052
1997 05 25427 23,533 18337
1997 08 24924 23,470 18205
1997 11 23766 22,784 17578
1998 02 26194 25,031 19745
1998 05 27449 26,836 20428
1998 08 24180 22,936 18228
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED AUGUST 31, 1998
----------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Growth Fund -2.99% 9.62% 9.23% $24,180
Average International Fund -1.41 6.98 8.63 22,883
MSCI EAFE Index 0.13 5.82 6.19 18,228
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998*
- ----------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION -----------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International Growth Fund 9/30/1981 1.62% 14.50% 8.57% 1.57% 10.14%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
9
<PAGE> 36
FUND PROFILE
INTERNATIONAL GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of August 31,
1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 11.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- --------------------------------------------------
INTERNATIONAL MSCI
GROWTH EAFE
- --------------------------------------------------
<S> <C> <C>
Number of Stocks 123 1,099
Turnover Rate 37% --
Expense Ratio 0.59% --
Cash Reserves 10.8% --
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------------
INTERNATIONAL MSCI
GROWTH EAFE
- --------------------------------------------------
<S> <C> <C>
R-Squared 0.93 1.00
Beta 1.04 1.00
</TABLE>
<TABLE>
<CAPTION>
[PIE CHART]
PORTFOLIO ALLOCATION
- ------------------------------------------------
<S> <C>
Europe 79%
Pacific 18%
Emerging Markets 3%
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -----------------------------------------------
<S> <C>
Novartis AG (Registered) 5.0%
ING Groep NV 4.6
Fuji Photo Film Co., Ltd. 3.0
Endesa SA 2.9
Philips Electronics NV 2.5
Vivendi 2.1
Elf Aquitaine SA 2.0
Mannesmann AG 2.0
Assicurazioni Generali SpA 2.0
Allianz AG 1.8
- -----------------------------------------------
Top Ten 27.9%
</TABLE>
Country Diversification (% of Common Stocks) can be found on page 12.
10
<PAGE> 37
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH RESERVES. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures markets to simulate stock
investment.
COUNTRY DIVERSIFICATION. The percentages of a fund's common stock invested in
securities of various countries.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,
the more diversified it is and the more likely to perform in line with the
overall stock market.
PORTFOLIO ALLOCATION. This chart shows the geographic distribution of a fund's
holdings.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 30%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year. Funds
with high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
11
<PAGE> 38
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF COMMON STOCKS)
- -------------------------------------------------------------------------------------------------------------------------
AUGUST 31, 1997 AUGUST 31, 1998
---------------------------------------------------------------
INTERNATIONAL INTERNATIONAL MSCI
GROWTH GROWTH EAFE
---------------------------------------------------------------
<S> <C> <C> <C>
Argentina 0.4% 0.2% 0.0%
Australia 1.3 1.9 2.2
Austria 0.3 0.5 0.4
Belgium 0.0 0.7 1.9
Brazil 2.2 0.8 0.0
Canada 0.8 0.0 0.0
Chile 0.3 0.1 0.0
Denmark 0.7 1.0 1.0
Finland 0.0 0.0 1.1
France 8.5 11.6 9.9
Germany 6.5 9.3 11.1
Hong Kong 6.9 0.3 1.7
Indonesia 0.7 0.0 0.0
Ireland 0.0 0.4 0.5
Italy 0.4 9.4 4.9
Japan 28.4 14.8 20.4
Malaysia 1.7 0.4 0.4
Mexico 1.0 0.8 0.0
Netherlands 11.2 15.7 5.8
Norway 0.0 0.0 0.5
Philippines 1.1 0.5 0.0
Portugal 0.0 0.0 0.7
Singapore 1.9 0.8 0.5
South Korea 1.1 0.7 0.0
Spain 0.0 3.3 3.1
Sweden 1.7 3.3 3.1
Switzerland 12.7 11.8 8.1
Thailand 0.3 0.0 0.0
United Kingdom 9.9 11.7 22.7
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 39
FINANCIAL STATEMENTS
August 31, 1998
STATEMENT OF NET ASSETS [PHOTO]
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
country. Other assets are added to, and liabilities are subtracted from, the
value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the fund's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the fund had available to distribute to shareholders as income dividends or
capital gains as of the statement date, but may differ because certain
investments or transactions may be treated differently for financial statement
and tax purposes. Any Accumulated Net Realized Losses, and any cumulative excess
of distributions over net income or net realized gains, will appear as negative
balances. Unrealized Appreciation (Depreciation) is the difference between the
market value of the fund's investments and their cost, and reflects the gains
(losses) that would be realized if the fund were to sell all of its investments
at their statement-date values.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
MARKET
INTERNATIONAL VALUE*
GROWTH FUND SHARES (000)
- ---------------------------------------------------------------
COMMON STOCKS (89.1%)
- ---------------------------------------------------------------
<S> <C> <C>
ARGENTINA (0.2%)
YPF SA ADR 500,000 $ 11,062
----------
AUSTRALIA (1.7%)
- - AMP Ltd. 2,661,900 32,582
Telstra Corp. Ltd. 8,488,800 22,005
Westpac Banking Corp., Ltd. 11,717,700 62,360
----------
116,947
----------
AUSTRIA (0.4%)
Bank Austria AG 541,927 29,697
----------
BELGIUM (0.6%)
Algemene Maatschappij voor
Nijverheidskredit NV 289,956 21,644
Fortis AG STRIP VVPR Shares 81,662 4
Fortis AG 81,662 22,048
- - Fortis AG-CVG 81,662 557
----------
44,253
----------
BRAZIL (0.7%)
Telecomunicacoes
Brasileiras SA ADR 669,000 47,290
----------
CHILE (0.1%)
Chilectra SA ADR 250,000 4,063
Compania de
Telecomunicaciones de
Chile SA ADR 229,500 3,514
----------
7,577
----------
DENMARK (0.9%)
Den Danske Bank A/S 506,000 61,398
----------
FRANCE (10.4%)
AXA-UAP SA 332,000 38,200
Accor SA 160,000 36,873
Alcatel 379,000 61,243
Canal Plus SA 218,000 44,006
Compagnie Generale des
Eaux SA Warrants Exp. 5/2/2001 580,500 963
Compagnie Generale des
Etablissements Michelin
SCA B Shares 1,022,717 43,435
Compagnie des Gaz de Petrole
Primagaz SA 88,516 6,943
Elf Aquitaine SA 1,402,000 138,777
Suez Lyonnaise des Eaux 578,000 95,062
Synthelabo SA 276,000 42,030
Total SA B Shares 552,000 53,612
Vivendi 734,000 146,303
----------
707,447
----------
GERMANY (8.3%)
Allianz AG 436,618 125,278
Bayer AG 2,478,000 93,021
Deutsche Bank AG 1,330,600 82,771
Friederich Grohe AG Pfd. 18,747 5,422
Mannesmann AG 1,500,000 135,242
RWE AG 429,000 20,556
Veba AG 1,597,275 80,502
Viag AG 37,000 23,184
----------
565,976
----------
</TABLE>
13
<PAGE> 40
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
MARKET
INTERNATIONAL VALUE*
GROWTH FUND SHARES (000)
- ---------------------------------------------------------------
<S> <C> <C>
HONG KONG (0.3%)
Hong Kong Land Holdings Ltd. 3,093,823 $ 2,537
- - Mandarin Oriental
International Ltd. 3,311,369 1,556
Swire Pacific Ltd. A Shares 4,704,000 13,567
----------
17,660
----------
IRELAND (0.3%)
Bank of Ireland PLC 1,558,598 23,919
----------
ITALY (8.4%)
Assicurazioni Generali SpA 3,947,600 133,863
- - Banca di Roma 60,797,000 117,384
Ente Nazionale Idrocarburi SpA 5,026,645 26,534
- - Olivetti SpA 40,150,000 89,844
Telecom Italia Mobile SpA 15,000,000 98,459
Telecom Italia SpA 13,500,000 104,260
----------
570,344
----------
JAPAN (13.2%)
Chiyoda Fire & Marine
Insurance Co., Ltd. 2,220,000 7,374
Dowa Fire & Marine
Insurance Co. 2,221,000 6,151
East Japan Railway Co. 8,098 38,830
Fuji Photo Film Co., Ltd. 6,423,000 206,988
Hirose Electric Co., Ltd. 315,000 17,647
Keyence Corp. 143,000 14,423
Kuraray Co., Ltd. 2,250,000 19,697
Mabuchi Motor Co. 731,000 49,237
Matsushita Electric Industrial
Co., Ltd. 5,743,000 82,572
Mitsui Fudosan Co., Ltd. 3,142,000 20,251
Murata Manufacturing Co., Ltd. 3,112,000 102,712
Nippon Fire & Marine Insurance
Co., Ltd. 2,000,000 6,729
Nippon Television Network 74,620 21,616
Omron Corp. 2,488,000 27,137
SMC Corp. 916,000 63,061
Showa Shell Sekiyu K.K. 2,721,000 11,274
Sumitomo Corp. 6,300,000 25,925
Takeda Chemical Industries Ltd. 4,216,000 110,185
Tokyo Electron Ltd. 293,000 6,744
Toppan Printing Co., Ltd. 4,306,000 42,697
Yamazaki Baking Co., Ltd. 151,000 1,315
Yasuda Fire & Marine
Insurance Co. 5,190,000 19,004
----------
901,569
----------
MALAYSIA (0.4%)
Genting Bhd. 5,422,000 9,975
Telekom Malaysia Bhd. 6,529,500 8,425
Tenaga Nasional Bhd. 12,891,000 6,715
----------
25,115
----------
MEXICO (0.8%)
Cemex SA de CV (CPO) 3,208,161 6,619
- - Cifra SA de CV Series C 8,309,000 9,032
- - Grupo Televisa SA GDR 440,000 7,590
Telefonos de Mexico SA
Class L ADR 790,000 28,193
----------
51,434
----------
NETHERLANDS (13.9%)
- - Baan Co. NV 2,208,600 64,590
Ceteco Holdings NV 125,573 3,092
Getronics NV 2,306,479 117,637
Hagemeyer NV 377,101 13,719
Heineken NV 2,066,999 90,778
ING Groep NV 5,353,000 315,248
Oce-Van Der Grinten NV 2,016,245 70,515
Philips Electronics NV 2,562,000 167,102
Polygram NV 1,000,000 54,772
Verenigde Nederlandse
Uitgeversbedrijven NV 1,270,000 53,478
----------
950,931
----------
PHILIPPINES (0.5%)
Ayala Land, Inc. 49,394,692 7,781
Manila Electric Co. GDR 514,286 4,821
Philippine Long Distance
Telephone Co. 1,168,500 19,342
----------
31,944
----------
SINGAPORE (0.7%)
City Developments Ltd. 4,111,000 7,222
Development Bank of
Singapore Ltd. (Foreign) 2,810,600 9,732
Singapore Airlines Ltd. (Foreign) 977,000 4,181
Singapore Press Holdings Ltd. 3,206,096 22,565
United Overseas Bank Ltd.
(Foreign) 3,184,000 7,530
----------
51,230
----------
SOUTH KOREA (0.6%)
Korea Electric Power Corp. 1,880,050 24,223
SK Telecom Co. 15,109 7,607
Samsung Electronics Co., Ltd. 292,545 9,726
Samsung Electronics Co., Ltd.
GDR 1/2 Non-Voting Stock 275,931 1,980
Samsung Electronics Co., Ltd.
GDR 1/2 Voting Stock 23,040 397
- - Samsung Electronics Co., Ltd.
Rights Exp. 9/21/1998 27,140 314
----------
44,247
----------
SPAIN (2.9%)
Endesa SA 10,486,278 199,202
----------
SWEDEN (2.9%)
LM Ericsson Telephone AB
B Shares 2,716,000 63,297
Skandia Forsakrings AB 3,510,000 49,254
Svenska Handelsbanken AB
A Shares 2,200,000 85,407
----------
197,958
----------
SWITZERLAND (10.5%)
ABB AG (Bearer) 67,500 78,638
Adecco SA (Bearer) 53,590 24,973
Alusuisse-Lonza Group AG
(Registered) 25,000 25,323
Novartis AG (Registered) 220,500 342,868
Roche Holdings AG
(Dividend-Right Certificates) 9,300 96,225
</TABLE>
14
<PAGE> 41
<TABLE>
<CAPTION>
- ----------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------
<S> <C> <C>
- - UBS AG 205,000 $ 66,191
- - Zurich Allied AG 137,000 82,029
-----------
716,247
-----------
UNITED KINGDOM (10.4%)
Airtours PLC 3,813,100 22,858
Asda Group PLC 17,503,000 49,239
British Aerospace PLC 10,185,000 65,149
British Airways PLC 3,660,000 27,518
British Land Co., PLC 3,620,000 31,096
British Petroleum Co., PLC 8,282,197 104,499
British Sky Broadcasting
Group PLC 210,610 1,651
Cable and Wireless PLC 5,589,000 54,281
EMI Group PLC 4,670,915 32,694
Glaxo Wellcome PLC 3,542,000 106,759
LucasVarity PLC 10,300,000 36,564
Reckitt & Colman PLC 1,184,000 19,430
Rolls-Royce PLC 11,046,000 35,837
David S. Smith Holdings PLC 3,500,000 8,205
Tesco PLC 27,675,000 77,854
United News & Media PLC 3,161,000 35,040
-----------
708,674
-----------
- ----------------------------------------------------------
TOTAL COMMON STOCKS
(COST $5,127,335) 6,082,121
- ----------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (15.9%)
- ----------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.80%, 9/1/1998 $551,385 551,385
5.83%, 9/1/1998--Note F 530,600 530,600
- ----------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $1,081,985) 1,081,985
- ----------------------------------------------------------
TOTAL INVESTMENTS (105.0%)
(COST $6,209,320) 7,164,106
- ----------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------
MARKET
VALUE*
(000)
- ----------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (-5.0%)
- ----------------------------------------------------------
Other Assets--Note C $ 258,379
Security Lending Collateral
Payable to Brokers--Note F (530,600)
Other Liabilities (71,436)
------------
(343,657)
- ----------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------
Applicable to 411,612,788 outstanding
$0.001 par value shares of beneficial
interest (unlimited authorization) $6,820,449
==========================================================
NET ASSET VALUE PER SHARE $16.57
==========================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
GDR--Global Depositary Receipt.
<TABLE>
<CAPTION>
- --------------------------------------------------------
AT AUGUST 31, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------
<S> <C> <C>
Paid in Capital $5,763,846 $14.00
Undistributed Net
Investment Income--Note D 73,209 .18
Accumulated Net
Realized Gains--Note D 28,014 .07
Unrealized Appreciation--Note E
Investment Securities 954,786 2.32
Foreign Currencies 594 --
- --------------------------------------------------------
NET ASSETS $6,820,449 $16.57
========================================================
</TABLE>
15
<PAGE> 42
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period--these
amounts include the effect of foreign currency movements on the value of the
fund's securities. Currency gains (losses) on the translation of other assets
and liabilities, combined with the results of any investments in forward
currency contracts during the period, are shown separately.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
YEAR ENDED AUGUST 31, 1998
(000)
- ------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $116,369
Interest 27,766
-----------
Total Income 144,135
-----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 9,793
Performance Adjustment 2,526
The Vanguard Group--Note C
Management and Administrative 23,440
Marketing and Distribution 2,211
Taxes (other than income taxes) 457
Custodian Fees 4,469
Auditing Fees 8
Shareholders' Reports 287
Annual Meeting and Proxy Costs 144
Trustees' Fees and Expenses 17
-----------
Total Expenses 43,352
Expenses Paid Indirectly--Note C (947)
-----------
Net Expenses 42,405
- ------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 101,730
- ------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 2,409
Foreign Currencies and Forward Currency Contracts 33,529
- ------------------------------------------------------------------------------------------
REALIZED NET GAIN 35,938
- ------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (386,295)
Foreign Currencies and Forward Currency Contracts 11,883
- ------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (374,412)
- ------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(236,744)
==========================================================================================
</TABLE>
*Dividends are net of foreign withholding taxes of $13,530,000.
16
<PAGE> 43
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
YEAR ENDED AUGUST 31,
--------------------------------
1998 1997
(000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 101,730 $ 76,032
Realized Net Gain 35,938 205,252
Change in Unrealized Appreciation (Depreciation) (374,412) 515,143
--------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations (236,744) 796,427
--------------------------------
DISTRIBUTIONS
Net Investment Income (83,884) (61,180)
Realized Capital Gain (207,713) (177,098)
--------------------------------
Total Distributions (291,597) (238,278)
--------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 2,903,443 2,762,825
Issued in Lieu of Cash Distributions 263,660 218,868
Redeemed (2,907,065) (1,448,315)
--------------------------------
Net Increase from Capital Share Transactions 260,038 1,533,378
- -------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) (268,303) 2,091,527
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 7,088,752 4,997,225
--------------------------------
End of Year $6,820,449 $7,088,752
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 161,215 156,951
Issued in Lieu of Cash Distributions 16,489 13,654
Redeemed (163,081) (83,511)
--------------------------------
Net Increase in Shares Outstanding 14,623 87,094
=========================================================================================================================
</TABLE>
17
<PAGE> 44
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
YEAR ENDED AUGUST 31,
------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $17.86 $16.13 $14.70 $14.36 $12.02
- -----------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .25 .19 .19 .20 .14
Net Realized and Unrealized Gain (Loss) on Investments (.81) 2.28 1.65 .32 2.31
----------------------------------------------------------
Total from Investment Operations (.56) 2.47 1.84 .52 2.45
----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.21) (.19) (.20) (.18) (.11)
Distributions from Realized Capital Gains (.52) (.55) (.21) -- --
----------------------------------------------------------
Total Distributions (.73) (.74) (.41) (.18) (.11)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $16.57 $17.86 $16.13 $14.70 $14.36
=======================================================================================================================
TOTAL RETURN -2.99% 15.84% 12.72% 3.76% 20.44%
=======================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $6,820 $7,089 $4,997 $3,354 $2,989
Ratio of Total Expenses to Average Net Assets 0.59% 0.57% 0.56% 0.59% 0.46%
Ratio of Net Investment Income to Average Net Assets 1.39% 1.26% 1.35% 1.53% 1.37%
Portfolio Turnover Rate 37% 22% 22% 31% 28%
=======================================================================================================================
</TABLE>
18
<PAGE> 45
NOTES TO FINANCIAL STATEMENTS
Vanguard International Growth Fund is registered under the Investment Company
Act of 1940 as a diversified open-end investment company, or mutual fund. The
fund invests in securities of foreign issuers, which may subject it to
investment risks not normally associated with investing in securities of United
States corporations.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments are valued at cost, which approximates market
value. Securities for which market quotations are not readily available are
valued by methods deemed by the Board of Trustees to represent fair value.
2. FOREIGN CURRENCY: Securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the
exchange rates on the valuation date as employed by Morgan Stanley Capital
International in the calculation of its indexes.
Realized gains (losses) and unrealized appreciation (depreciation) on
investment securities include the effects of changes in exchange rates since the
securities were purchased, combined with the effects of changes in security
prices. Fluctuations in the value of other assets and liabilities resulting from
changes in exchange rates are recorded as unrealized foreign currency gains
(losses) until the asset or liability is settled in cash, when they are recorded
as realized foreign currency gains (losses).
3. FORWARD CURRENCY CONTRACTS: The fund enters into forward currency
contracts to protect the value of securities and related receivables and
payables against changes in future foreign exchange rates. The fund's risks in
using these contracts include movement in the values of the foreign currencies
relative to the U.S. dollar and the ability of the counterparties to fulfill
their obligations under the contracts.
Forward currency contracts are valued at their quoted daily settlement
prices. The aggregate principal amounts of the contracts are not recorded in the
financial statements. Fluctuations in the value of the contracts are recorded in
the Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized forward currency contract gains
(losses).
4. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
5. REPURCHASE AGREEMENTS: The fund, along with other members of The Vanguard
Group, transfers uninvested cash balances to a Pooled Cash Account, which is
invested in repurchase agreements secured by U.S. government securities.
Securities pledged as collateral for repurchase agreements are held by a
custodian bank until the agreements mature. Each agreement requires that the
market value of the collateral be sufficient to cover payments of interest and
principal; however, in the event of default or bankruptcy by the other party to
the agreement, retention of the collateral may be subject to legal proceedings.
6. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
7. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
19
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. Schroder Capital Management International provides investment advisory
services to the fund for a fee calculated at an annual percentage rate of
average net assets. The basic fee is subject to quarterly adjustments based on
performance relative to the Morgan Stanley Capital International Europe,
Australasia, Far East Index. For the year ended August 31, 1998, the advisory
fee represented an effective annual basic rate of 0.13% of the fund's average
net assets before an increase of $2,526,000 (0.03%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the Board of Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At August 31, 1998, the fund had contributed capital of $1,519,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 2.2% of Vanguard's capitalization. The fund's Trustees and officers are also
Directors and officers of Vanguard.
Vanguard has asked the fund's investment adviser to direct certain fund
trades, subject to obtaining the best price and execution, to brokers who have
agreed to rebate to the fund part of the commissions generated. Such rebates
are used solely to reduce the fund's administrative expenses. For the year
ended August 31, 1998, these arrangements reduced the fund's expenses by
$947,000 (an annual rate of 0.01% of average net assets).
D. During the year ended August 31, 1998, the fund purchased $2,559,573,000 of
investment securities and sold $2,758,039,000 of investment securities other
than temporary cash investments.
During the year ended August 31, 1998, the fund realized net foreign
currency losses of $6,286,000, which decreased distributable net income for tax
purposes; accordingly, such losses have been reclassified from accumulated net
realized gains to undistributed net investment income.
Certain of the fund's investments are in securities considered to be
"passive foreign investment companies," for which any unrealized appreciation
and/or realized gains are required to be included in distributable net
investment income for tax purposes. Distributions from passive foreign
investment company income during the year ended August 31, 1998, were
$1,475,000. During the year ended August 31, 1998, the fund realized gains on
the sale of passive foreign investment companies of $2,916,000, which were
included in 1998 and prior years' distributable net income; accordingly such
gains have been reclassified from accumulated net realized gains to
undistributed net investment income.
E. At August 31, 1998, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $954,786,000, consisting
of unrealized gains of $1,488,604,000 on securities that had risen in value
since their purchase and $533,818,000 in unrealized losses on securities that
had fallen in value since their purchase.
The fund had net unrealized foreign currency losses of $594,000 resulting
from the translation of other assets and liabilities at August 31, 1998.
F. The market value of securities on loan to broker/dealers at August 31,
1998, was $487,758,000, for which the fund held cash collateral of
$530,600,000. Cash collateral received is invested in repurchase agreements.
20
<PAGE> 47
REPORT OF INDEPENDENT
ACCOUNTANTS
To the Shareholders and [PHOTO]
Board of Trustees of
Vanguard International Growth Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard International Growth Fund (the "Fund") at August 31, 1998, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at August 31, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
September 30, 1998
21
<PAGE> 48
SPECIAL 1998 TAX INFORMATION (UNAUDITED)
FOR VANGUARD INTERNATIONAL GROWTH FUND
This information for the fiscal year ended August 31, 1998, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $161,776,000 as capital gain dividends (from net
long-term capital gains) to shareholders in December 1997. Of the $161,776,000
capital gain dividends, the fund designates $85,222,000 as a 20% rate gain
distribution.
The fund has elected to pass through the credit for taxes paid in foreign
countries. The foreign income and foreign tax per share outstanding on August
31, 1998 are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
GROSS FOREIGN FOREIGN
COUNTRY DIVIDENDS TAX
---------------------------------------------------------------------
<S> <C> <C>
Argentina $.0012 $.0000
Australia .0121 .0004
Austria .0006 .0000
Belgium .0071 .0000
Brazil .0060 .0005
Canada .0012 .0002
Chile .0014 .0000
Denmark .0031 .0005
France .0306 .0000
Germany .0192 .0019
Hong Kong .0305 .0000
Ireland .0010 .0000
Italy .0073 .0011
Japan .0225 .0036
Malaysia .0033 .0009
Mexico .0038 .0000
Netherlands .0446 .0046
Philippines .0009 .0002
Singapore .0055 .0015
South Korea .0010 .0002
Spain .0076 .0011
Sweden .0057 .0008
Switzerland .0286 .0043
United Kingdom .0718 .0111
---------------------------------------------------------------------
</TABLE>
The pass-through of foreign tax credit will affect only shareholders on the
dividend record date in December 1998. Shareholders will receive more detailed
information along with their Form 1099-DIV in January 1999.
22
<PAGE> 49
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director of The Vanguard Group, Inc.,
and Trustee of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; Trustee Emerita of Wellesley College.
JoANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & Johnson-Merck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
BRUCE K. MacLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co., The Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co.,
NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DiSTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MacKINNON
Managing Director, Fixed Income Group.
F. WILLIAM McNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company is
the owner of trademarks and copyrights relating to the Russell Indexes.
"Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire Associates.
<PAGE> 50
VANGUARD
MILESTONES
[THE VANGUARD GROUP LOGO]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[THE VANGUARD GROUP LOGO]
Walter L. Morgan, founder of
Wellington Fund, the nation's
first balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[THE VANGUARD GROUP LOGO]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
[email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
Q810-10/15/1998
(C) 1998 Vanguard Marketing
Corporation, Distributor.
All rights reserved.
