<PAGE> 1
VANGUARD
U.S. GROWTH FUND
[PHOTO]
Semiannual
Report
February 28, 1999
[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. 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, 1998, 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, 1998.
- - The 70th anniversary, on December 28, 1998, of the incorporation of Vanguard
Wellington Fund. It is the nation's oldest balanced mutual fund, and 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.
[PHOTO]
CONTENTS
A Message to
Our Shareholders
1
The Markets in
Perspective
4
Report From
the Adviser
6
Fund Profile
8
Performance Summary
10
Financial Statements
11
All comparative mutual fund data are from Lipper or Morningstar, unless
otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
[PHOTO]
<TABLE>
<S> <C>
JOHN J. BRENNAN JOHN C. BOGLE
Chairman & CEO Senior Chairman
</TABLE>
Vanguard U.S. Growth Fund earned a truly remarkable return of +32.6% during the
first half of its 1999 fiscal year, as large growth companies led the stock
market's rebound from the summer decline. During the six months ended February
28, 1999, our fund's return outpaced by a comfortable margin the returns of its
average peer and of the unmanaged Standard & Poor's 500 Composite Stock Price
Index.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
FEBRUARY 28, 1999
- --------------------------------------------------------------------------------
<S> <C>
Vanguard U.S. Growth Fund +32.6%
- --------------------------------------------------------------------------------
Average Growth Fund +29.9%
- --------------------------------------------------------------------------------
S&P 500 Index +30.3%
- --------------------------------------------------------------------------------
S&P/BARRA Growth Index +35.4%
- --------------------------------------------------------------------------------
</TABLE>
The adjacent table presents the six-month total return earned by the fund,
as well as the returns of the average growth mutual fund, the S&P 500 Index, and
the index's growth component. The fund's total return (capital change plus
reinvested dividends) is based on an increase in net asset value from $30.36 per
share on August 31, 1998, to $37.57 per share on February 28, 1999, with the
latter figure adjusted for our annual dividend of $0.19 per share paid from net
investment income and a distribution of $2.31 per share paid from net realized
capital gains.
THE PERIOD IN REVIEW
During the six months ended February 28, the U.S stock market staged a roaring
recovery from the sharp--albeit brief--summer swoon that lopped off about 20%
from the S&P 500 Index. In fact, the stock market's low point came on August 31,
1998, the start of the period covered by this report. Large-capitalization
stocks, particularly technology and Internet issues, led the way, but many
segments of the stock market enjoyed terrific gains.
The U.S. economy provided a near-perfect setting for stocks, featuring
strong growth, low interest rates, and hardly a hint of inflation. The economy
expanded at an annualized rate of 6.1% during the final three months of 1998 and
proved remarkably resistant to the currency and economic troubles that have
roiled some international markets.
During the first half of our fund's fiscal year, the S&P 500 Index averaged
a gain of about +4.5% per month--a figure that takes into account the index's
decline of -3.1% in February. Though on an absolute basis the half-year was a
very rewarding one nearly across the board, the period was marked by significant
differences in the performance of stocks, depending on their characteristics.
Generally, large stocks outdistanced smaller stocks, and growth dominated value.
Given its large-cap orientation, the S&P 500 Index's six-month return of
+30.3% was more than 13 percentage points higher than the +16.8% return of the
Russell 2000 Index, a broad measure of the small-cap market. Within the S&P 500,
growth stocks returned +35.4%, while the index's value component earned +24.3%.
The difference between growth and value was even more striking among smaller-cap
stocks. The value component of the Russell 2000 Index returned +4.9% for the
half-year, while the index's growth stocks booked a +29.3% gain.
1
<PAGE> 4
Among S&P 500 stocks, technology issues were the clear leaders for the
half-year (+60%), but other sectors also recorded impressive gains, including
utilities (+37%); consumer discretionary (+34%); health care (+30%); and
financial services (+29%). Only the integrated-oils group (+8%), which has
suffered from lower earnings and declining oil prices, failed to post a
double-digit six-month return.
The Wilshire 5000 Equity Index, a measure of the entire U.S. stock market,
earned +29.4% for the period.
Rising stock prices came in the face of falling bond prices as interest
rates rose on balance during the six months. The yield of the 30-year U.S.
Treasury bond, which had fallen to a low of 4.72% in early October, ended the
period at 5.58%, up from 5.27% on August 31, 1998. The chief reason for the rise
was the strength of the nation's economy, which raised concern about future
inflation. As a result, returns for long-term bonds were negative for the six
months, as price declines engendered by rising interest rates more than offset
interest income earned during the period. The overall bond market, as measured
by the Lehman Brothers Aggregate Bond Index, provided a +1.6% return for the
half-year.
The U.S. Growth Fund's six-month total return of +32.6% was nothing short of
astounding. In fact, the fund packed the equivalent of about three years' worth
of normal returns into a mere half-year. The fund's return was 2.7 percentage
points better than that of the average growth mutual fund and 2.3 percentage
points higher than that of the S&P 500 Index. However, the fund fell short of
the +35.4% return of the S&P/BARRA Growth Index, a better measure of the large
growth-oriented stocks that we emphasize.
The dominance of growth stocks explains our margin over the S&P 500 Index,
which contains both growth and value stocks. In the technology sector, our
heavier weighting (23% of assets versus 16% for the index) and fine stock
selection clearly set us apart from the index. Our excellent choices in the
consumer-discretionary group, which mainly comprises retailing companies, also
provided a significant boost. Our avoidance of the integrated-oils sector--the
market laggard during the period--helped our relative performance, while our
avoidance of utilities, a group that does not fit our growth mandate, was a
slight negative, as the sector provided the second-highest return during the
half-year despite rising interest rates. Of course, topping the return of the
S&P 500 Index is not an easy task because the index is not burdened with
operating expenses and transaction costs that "real world" mutual funds must
incur.
The primary reason we outperformed the average growth mutual fund is that
the stocks we hold are, on average, much larger than those held by our average
peer. The median market capitalization of your fund's holdings is about $102
billion, more than twice that of its average peer.
This distinction, while helpful to our absolute and relative performance
over the past several years, won't always work in our favor. When small- and
mid-cap stocks rise up and take the market lead--as they inevitably will at some
point--any fund that emphasizes large growth stocks will lose some of its
luster.
However, we're confident that Vanguard U.S. Growth Fund will continue to
provide returns that are fully competitive with other large-cap growth funds. A
key reason for our confidence is our low expenses, which run at an annual rate
of about 0.40% of average net assets, more than a full percentage point less
than the 1.44% charged by our average peer. As we've said many times, this cost
advantage gives us a head start that is mighty difficult to overcome.
2
<PAGE> 5
We cannot overstate just how unusual it is for a fund to gain nearly +33% in
just six months, let alone to do it after registering an average annual total
return of +23.5% over its previous four full fiscal years. It's unreasonable to
expect such a run to continue, and it's dangerous to base your financial plans
on expectations that even approach these outsized numbers. Our caution is not
based on any prediction that the market for large-cap stocks is about to turn,
but rather on a sensible--and historically grounded--conclusion that the chances
of sustaining such an extraordinary pace are nil.
IN SUMMARY
Over the past several years, the rewards of equity investing have been readily
apparent, while the risks have been somewhat less obvious. However, last
summer's broad-based slide provided a valuable reminder that stocks are capable
of heading in a direction other than straight up. We have long believed that the
best way to deal with this inescapable truth is to construct and maintain a
balanced portfolio of stock funds, bond funds, and money market funds tailored
to your objectives, time horizon, and tolerance for risk.
For its part, Vanguard U.S. Growth Fund will continue to provide low-cost
exposure to large, growth-oriented stocks--an integral part of a well-balanced
investment program.
We look forward to reporting to you on the full 1999 fiscal year six months
hence.
<TABLE>
<S> <C>
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
</TABLE>
March 16, 1999
3
<PAGE> 6
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED FEBRUARY 28, 1999
[PHOTO]
Most of the world's stock markets provided solid gains during the six months
ended February 28, 1999, as they recovered from a sharp slide in midsummer 1998.
Central banks in the United States, Europe, and Japan aided the rebound by
easing monetary policy and lowering short-term interest rates.
The United States stood out during the period both for the strength of its
stock market recovery and for its remarkably robust economic performance--it was
the only major economy where policymakers had to ponder whether growth was too
rapid to prevent an inflationary surge. The world's second-largest economy,
Japan, remained mired in recession, and most of Europe's developed economies
were expanding weakly. Full-blown crises beset some key developing markets,
including those of Brazil and Russia.
U.S. STOCK MARKETS
Reflecting the strength of the domestic economy and the confidence of investors
in future corporate and economic prospects, the U.S. stock market advanced
powerfully during the six months ended February 28.
The overall stock market, as measured by the Wilshire 5000 Index, gained
29.4%. The S&P 500 Index, which is dominated by large-capitalization stocks,
advanced an impressive 30.3% from its level on August 31 (the date that marked
the end of the index's six-week summer descent, during which it fell by nearly
20%). The small-cap Russell 2000 Index gained 16.8%, but unlike the large-cap
indexes, it did not regain all of the ground it had lost during the spring and
summer of 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED FEBRUARY 28, 1999
---------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 30.3% 19.7% 24.1%
Russell 2000 Index 16.8 -14.1 9.7
Wilshire 5000 Index 29.4 14.4 21.6
MSCI EAFE Index 14.0 5.2 7.2
- -------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 1.6% 6.3% 7.1%
Lehman 10-Year Municipal Bond Index 2.8 6.3 6.9
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.3 4.9 5.1
- -------------------------------------------------------------------------------
OTHER
Consumer Price Index 0.7% 1.6% 2.3%
- -------------------------------------------------------------------------------
</TABLE>
*Annualized.
Even though corporate earnings declined slightly during the final half of
1998, investors were apparently focused more on the future potential of the
stock market than on current disappointments. A key factor in the market's
rebound was a lessening of fears that the U.S. economy would be bogged down by
economic and currency troubles that afflicted much of Asia, Russia, and Latin
America. Encouraged by low unemployment (4.4% in February 1999) and higher wages
(up 4% in 1998), U.S. consumers spent at a heroic pace during the period,
helping the economy to expand at a rapid 6% annual pace in the October-December
period. The Federal Reserve Board boosted the confidence of both consumers and
investors with three separate quarter-percentage-point cuts in interest rates
during autumn 1998.
4
<PAGE> 7
The stock market's rapid rise during the fiscal half-year was led by a surge
in technology stocks, which gained an incredible 60%. The tech sector benefited
from expectations that growth would continue to be strong among both consumers
and the world's businesses. Optimism--many would say speculation--was especially
evident in Internet stocks. With more computer users surfing the Internet,
demand for telecommunications services is growing smartly, and telecom stocks
led the utilities sector to a 37% rise during the half-year. The boom in
consumer spending propelled stock prices of retailers and other members of the
consumer-discretionary sector, which gained 34%.
The market's laggards during the fiscal half-year were energy stocks and
materials & processing companies such as chemical, paper, and metal
manufacturers. These sectors have been badly hurt in recent years by declining
commodity prices. Integrated-oil companies rose a relatively meager 8% during
the period, while oil-service and exploration companies and materials &
processing stocks were up about 11%.
U.S. BOND MARKETS
Interest rates traced a V pattern during the six months ended February 28. Early
in the period, interest rates fell, especially for U.S. Treasury bonds, as
investors flocked to the perceived safety of Treasuries. The yield of the
30-year Treasury bond began the period at 5.27% but quickly fell to a low of
4.72% on October 5. However, as prices of stocks and riskier bonds rebounded
from their summertime lows, prices of Treasury bonds began to fall and their
yields began to rise. By February 28, the yield on the 30-year Treasury was at
5.58%, up 31 basis points (0.31 percentage point) from its starting point. The
Lehman Aggregate Bond Index, which is a proxy for the U.S. taxable bond market
and has an intermediate-term average maturity, returned only 1.6% during the
half-year, as its income return of about 3.0% was partially offset by a -1.4%
price decline.
Short-term interest rates, which are most directly affected by Federal
Reserve policy changes, declined on balance during the period, although their
moves also traced a V. Yields on 3-month Treasury bills began the half-year at
4.83% but fell as low as 3.62% in mid-October. By February 28, the 3-month
T-bill was yielding 4.67%, 16 basis points below the rate prevailing when the
period began.
INTERNATIONAL STOCK MARKETS
International stock markets, heartened by Wall Street's strong rally and
nourished by looser monetary policy, rallied during the half-year. The dollar's
weakening against other currencies, especially the Japanese yen, boosted returns
for U.S. investors.
For a change, gains were smaller in Europe's developed markets than in Asia
and emerging markets. Overall, the EAFE Index gained 14.0% in U.S. dollars.
European stocks, which account for about 70% of the index, rose on average by
about 10%. In the Pacific region, which is dominated by Japan, stocks rose 24%
in dollar terms, recouping some of the steep losses suffered during the fiscal
year ended August 31, 1998. Emerging-market stocks, which suffered severe losses
in the previous two fiscal years, gained nearly 28% in U.S.-dollar terms, as
measured by the MSCI Select Emerging Markets Free Index.
Monetary authorities in Japan, where the economy was in recession, and in
Europe, where growth was lackluster on average, lowered interest rates in an
attempt to spur economic activity. Also, an increase in corporate restructuring
and merger activity helped to boost stock prices in Japan and Europe. In some
emerging markets where currency and stock values had plummeted in 1997 and 1998,
gains during the first half of our fiscal year were spectacular: about 95% in
Thailand, 92% in South Korea, 55% in Indonesia, and 43% in Mexico.
5
<PAGE> 8
REPORT FROM THE ADVISER
[PHOTO]
Anomalies abounded during the first half of Vanguard U.S. Growth Fund's fiscal
year.
On the positive side, the fund enjoyed an extraordinary 32.6% return for the
six months ended February 28, 1999. The period's starting point, August 31, was
the bottom of last year's brief but bitter 20% decline in the stock market,
providing a depressed base from which to measure the subsequent recovery. As
noted in the Message to Shareholders, beginning on page 1, your fund edged out
the returns of both the S&P 500 Index and the average growth mutual fund.
The less-good news about our performance was that the fund's return lagged
those of several indexes of large-cap growth stocks. The source of these
outstanding growth-index returns was a small group of equities--mostly
technology companies along with some retailers--with absolutely astounding
performances. Investors who didn't own big commitments in most of these special
stocks came up short in comparison with the growth-stock indexes. We plead
guilty to having diversified a bit more than was most desirable for the period.
Happily, we were less broadly diversified than the great majority of growth
mutual funds, which at least partly explains the enviable position of the U.S.
Growth Fund versus its peers in three-, five-, and ten-year rankings of growth
mutual funds.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
TEN LARGEST HOLDINGS
- ----------------------------------------------------------------
PERCENTAGE
COMPANY OF NET ASSETS
- ----------------------------------------------------------------
<S> <C>
1. Microsoft Corp. 5.1%
2. General Electric Co. 4.9
3. Merck & Co., Inc. 4.7
4. Intel Corp. 4.7
5. Cisco Systems, Inc. 4.6
6. Procter & Gamble Co. 3.8
7. Pfizer, Inc. 3.4
8. Lucent Technologies, Inc. 2.4
9. The Coca-Cola Co. 2.4
10. Wal-Mart Stores, Inc. 2.3
- ----------------------------------------------------------------
Total 38.3%
- ----------------------------------------------------------------
</TABLE>
During the first half of our fiscal year, there were only modest changes in
the fund's industry diversification. Our tech-stock position rose 3 percentage
points, and both consumer nondurables and cyclical growth were trimmed by 3
points. These modest shifts were partly due to transactions and partly to
changes in market valuations.
The table above lists the largest holdings of your fund. There were only two
changes among the top ten, with Wal-Mart and Lucent joining the group and
Bristol-Myers Squibb and Monsanto leaving it. These ten large commitments
represent about 38% of the fund's assets, the same proportion accounted for by
our top ten six months ago. The fund ended the period with 80 holdings, 3 more
than on August 31. Important new commitments included IBM, Pharmacia & Upjohn,
Associates First Capital, Nokia, and MBNA. Eliminations of positions included
Carnival, Disney, Motorola, DuPont, and Northern Telecom.
With respect to Lincoln Capital Management's strategy, we remain consistent
both in our emphasis on large-cap growth stocks and in our practice of generally
avoiding significant bets on industry sectors. Our portfolio is created at the
initiative
6
<PAGE> 9
of our experienced research analysts, whose work has uncovered a
wider-than-usual range of attractive companies. This explains the fund's
increased number of holdings. We intend to remain essentially fully invested in
stocks.
David Fowler, Portfolio Manager
Parker Hall, Portfolio Manager
Lincoln Capital Management Company
March 8, 1999
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.
7
<PAGE> 10
FUND PROFILE
U.S. GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of February
28, 1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ---------------------------------------------------
U.S. GROWTH S&P 500
- ---------------------------------------------------
<S> <C> <C>
Number of Stocks 80 500
Median Market Cap $101.9B $60.1B
Price/Earnings Ratio 39.0x 28.1x
Price/Book Ratio 9.3x 4.9x
Yield 0.6% 1.3%
Return on Equity 28.0% 22.4%
Earnings Growth Rate 23.4% 17.0%
Foreign Holdings 2.4% 1.4%
Turnover Rate 45%* --
Expense Ratio 0.40%* --
Cash Reserves 3.8% --
</TABLE>
*Annualized.
INVESTMENT FOCUS
- ---------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ---------------------------------------------------
U.S. GROWTH S&P 500
- ---------------------------------------------------
<S> <C> <C>
R-Squared 0.94 1.00
Beta 1.02 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ---------------------------------------------------
<S> <C>
Microsoft Corp. 5.1%
General Electric Co. 4.9
Merck & Co., Inc. 4.7
Intel Corp. 4.7
Cisco Systems, Inc. 4.6
Procter & Gamble Co. 3.8
Pfizer, Inc. 3.4
Lucent Technologies, Inc. 2.4
The Coca-Cola Co. 2.4
Wal-Mart Stores, Inc. 2.3
- ---------------------------------------------------
Top Ten 38.3%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ----------------------------------------------------------------------------------------------------
FEBRUARY 28, 1998 FEBRUARY 28, 1999
--------------------------------------------------------
U.S. GROWTH U.S. GROWTH S&P 500
--------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 0.0% 0.0% 2.6%
Consumer Discretionary 9.8 11.9 12.5
Consumer Staples 19.3 15.8 9.0
Financial Services 11.8 12.0 16.7
Health Care 23.1 22.9 12.6
Integrated Oils 0.0 0.0 4.7
Other Energy 0.5 0.0 0.9
Materials & Processing 10.3 1.3 3.6
Producer Durables 0.9 2.4 3.2
Technology 19.4 24.8 16.9
Utilities 0.0 0.0 11.9
Other 4.9 8.9 5.4
- ----------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
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 instruments. This
figure does not include cash invested in futures contracts to simulate stock
investments.
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 equity 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 period. 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.
9
<PAGE> 12
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-FEBRUARY 28, 1999
- --------------------------------------------------
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
1999* 31.9 0.7 32.6 30.3
- -------------------------------------------------
</TABLE>
*Six months ended February 28, 1999.
See Financial Highlights table on page 15 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 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 39.98% 26.16% 19.77% 1.43% 21.20%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
10
<PAGE> 13
FINANCIAL STATEMENTS
FEBRUARY 28, 1999 (UNAUDITED)
STATEMENT OF NET ASSETS
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
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)
- ---------------------------------------------------------------------------
COMMON STOCKS (96.1%)
- ---------------------------------------------------------------------------
<S> <C> <C>
CONSUMER DISCRETIONARY (11.4%)
- - Abercrombie & Fitch Co. 800,000 $ 60,800
Avon Products, Inc. 1,200,000 49,950
- - Bed Bath & Beyond, Inc. 1,400,000 41,212
- - Costco Cos., Inc. 1,500,000 120,469
Dayton Hudson Corp. 700,000 43,794
Gillette Co. 4,200,000 225,225
Home Depot, Inc. 1,900,000 113,406
Lowe's Cos., Inc. 1,600,000 94,900
Mattel, Inc. 2,100,000 55,387
May Department Stores Co. 500,000 29,625
McDonald's Corp. 1,500,000 127,500
- - Fred Meyer Inc. 1,500,000 96,375
- - Mirage Resorts, Inc. 1,850,000 36,075
TJX Cos., Inc. 2,100,000 59,981
Time Warner, Inc. 2,800,000 180,600
Wal-Mart Stores, Inc. 3,900,000 336,863
---------------
1,672,162
---------------
CONSUMER STAPLES (15.2%)
CVS Corp. 5,700,000 302,100
Campbell Soup Co. 400,000 16,075
The Coca-Cola Co. 5,400,000 345,263
Coca-Cola Enterprises, Inc. 1,300,000 40,300
Colgate-Palmolive Co. 2,200,000 186,725
General Mills, Inc. 1,400,000 112,962
- - The Kroger Co. 500,000 32,344
PepsiCo, Inc. 4,000,000 150,500
Philip Morris Cos., Inc. 6,000,000 234,750
Procter & Gamble Co. 6,200,000 554,900
The Quaker Oats Co. 700,000 38,237
Rite Aid Corp. 1,461,000 60,449
- - Safeway, Inc. 800,000 46,200
Unilever NV ADR 1,300,000 94,169
---------------
2,214,974
---------------
FINANCIAL SERVICES (11.6%)
American International
Group, Inc. 2,500,000 284,844
Associates First Capital Corp. 2,900,000 117,812
Automatic Data
Processing, Inc. 5,100,000 202,725
Capital One Financial Corp. 192,000 24,504
The Chase Manhattan Corp. 3,300,000 262,763
Fannie Mae 1,200,000 84,000
First Data Corp. 1,900,000 72,675
Household International, Inc. 3,608,300 146,587
MBNA Corp. 4,600,000 111,550
Paychex, Inc. 2,626,800 111,311
U.S. Bancorp 2,750,000 88,859
Wells Fargo Co. 5,000,000 183,750
---------------
1,691,380
---------------
HEALTH CARE (22.0%)
- - ALZA Corp. 2,900,000 152,069
American Home Products Corp. 4,087,200 243,188
- - Amgen, Inc. 1,600,000 199,800
Astra AB ADR 800,000 15,850
Bristol-Myers Squibb Co. 2,300,000 289,656
Cardinal Health, Inc. 1,400,000 101,063
Johnson & Johnson 2,400,000 204,900
Eli Lilly & Co. 1,400,000 132,563
Medtronic, Inc. 700,000 49,437
Merck & Co., Inc. 8,400,000 686,700
Pharmacia & Upjohn, Inc. 2,300,000 125,350
Pfizer, Inc. 3,800,000 501,363
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
MARKET
VALUE*
U.S. Growth Fund SHARES (000)
- ---------------------------------------------------------------------------
<S> <C> <C>
- - Quintiles Transnational Corp. 1,700,000 $ 73,312
Schering-Plough Corp. 4,300,000 240,531
Warner-Lambert Co. 2,200,000 151,937
Zeneca Group PLC ADR 1,100,000 45,169
---------------
3,212,888
---------------
MATERIALS & PROCESSING (1.2%)
- - W.R. Grace & Co. 2,600,000 34,937
- - Sealed Air Corp. 1,400,000 71,050
Sealed Air Corp. Pfd. 1,400,000 72,100
---------------
178,087
---------------
PRODUCER DURABLES (2.3%)
Nokia Corp. A ADR 1,300,000 176,313
Xerox Corp. 3,000,000 165,562
---------------
341,875
---------------
TECHNOLOGY (23.8%)
- - BMC Software, Inc. 1,500,000 61,312
- - Cisco Systems, Inc. 6,900,000 674,906
Compaq Computer Corp. 5,350,000 188,587
- - Dell Computer Corp. 3,700,000 296,463
- - EMC Corp. 800,000 81,900
Intel Corp. 5,700,000 683,644
International Business
Machines Corp. 1,300,000 221,000
- - Learning Co., Inc. 1,500,000 43,594
Linear Technology Corp. 600,000 26,287
Lucent Technologies, Inc. 3,400,000 345,313
- - Maxim Integrated
Products, Inc. 600,000 25,012
- - Microsoft Corp. 5,000,000 750,625
- - 3Com Corp. 2,500,000 78,594
---------------
3,477,237
---------------
OTHER (8.6%)
General Electric Co. 7,100,000 712,219
Illinois Tool Works, Inc. 1,900,000 130,625
Monsanto Co. 5,000,000 227,813
Tyco International Ltd. 2,500,000 186,094
---------------
1,256,751
---------------
- ---------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $8,635,806) 14,045,354
- ---------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- ---------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.8%)
- ---------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.78%, 3/1/1999
(COST $550,954) $550,954 $ 550,954
- ---------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(COST $9,186,760) 14,596,308
- ---------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.1%)
- ---------------------------------------------------------------------------
Other Assets--Note C 168,339
Liabilities (158,466)
---------------
9,873
- ---------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------
Applicable to 388,748,554 outstanding
$.001 par value shares of beneficial
interest (unlimited authorization) $14,606,181
===========================================================================
NET ASSET VALUE PER SHARE $37.57
===========================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
AT FEBRUARY 28, 1999, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $ 8,965,611 $23.06
Undistributed Net
Investment Income 8,986 .02
Accumulated Net
Realized Gains 222,036 .57
Unrealized Appreciation--
Note F 5,409,548 13.92
- ---------------------------------------------------------------------------
NET ASSETS $14,606,181 $37.57
===========================================================================
</TABLE>
12
<PAGE> 15
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
SIX MONTHS ENDED FEBRUARY 28, 1999
(000)
- --------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 49,677
Interest 11,443
Security Lending 29
-------------
Total Income 61,149
-------------
EXPENSES
Investment Advisory Fees--Note B 7,384
The Vanguard Group--Note C
Management and Administrative 15,722
Marketing and Distribution 1,221
Custodian Fees 12
Auditing Fees 7
Shareholders' Reports 274
Trustees' Fees and Expenses 10
-------------
Total Expenses 24,630
Expenses Paid Indirectly--Note D (880)
-------------
Net Expenses 23,750
- --------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 37,399
- --------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 221,817
- --------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 2,970,080
- --------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,229,296
========================================================================================================
</TABLE>
13
<PAGE> 16
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
-------------------------------
SIX MONTHS YEAR
ENDED ENDED
FEB. 28, 1999 AUG. 31, 1998
(000) (000)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 37,399 $ 62,038
Realized Net Gain 221,817 854,804
Change in Unrealized Appreciation (Depreciation) 2,970,080 (6,955)
Net Increase in Net Assets Resulting from Operations 3,229,296 909,887
DISTRIBUTIONS
Net Investment Income (63,672) (72,786)
Realized Capital Gain (774,122) (239,928)
Total Distributions (837,794) (312,714)
CAPITAL SHARE TRANSACTIONS(1)
Issued 2,994,937 2,986,205
Issued in Lieu of Cash Distributions 811,799 303,001
Redeemed (1,178,751) (1,744,938)
Net Increase from Capital Share Transactions 2,627,985 1,544,268
- -------------------------------------------------------------------------------------------------------
Total Increase 5,019,487 2,141,441
- -------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 9,586,694 7,445,253
End of Period $14,606,181 $9,586,694
=======================================================================================================
(1)Shares Issued (Redeemed)
Issued 82,986 92,058
Issued in Lieu of Cash Distributions 23,254 10,884
Redeemed (33,246) (55,595)
Net Increase in Shares Outstanding 72,994 47,347
=======================================================================================================
</TABLE>
14
<PAGE> 17
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 SIX MONTHS ENDED ----------------------------------------------------------------
THROUGHOUT EACH PERIOD FEB. 28, 1999 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 30.36 $ 27.74 $ 22.62 $ 18.83 $ 15.52 $ 14.71
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .10 .21 .27 .26 .25 .20
Net Realized and Unrealized Gain (Loss)
on Investments 9.61 3.57 6.73 4.39 3.24 .82
Total from Investment Operations 9.71 3.78 7.00 4.65 3.49 1.02
DISTRIBUTIONS
Dividends from Net Investment Income (.19) (.27) (.26) (.29) (.18) (.21)
Distributions from Realized Capital Gains (2.31) (.89) (1.62) (.57) -- --
Total Distributions (2.50) (1.16) (1.88) (.86) (.18) (.21)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 37.57 $ 30.36 $ 27.74 $ 22.62 $ 18.83 $ 15.52
==================================================================================================================================
TOTAL RETURN 32.61% 14.01% 32.50% 25.28% 22.75% 6.98%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $14,606 $9,587 $7,445 $4,544 $2,989 $1,963
Ratio of Total Expenses to
Average Net Assets 0.40%* 0.41% 0.42% 0.43% 0.47% 0.52%
Ratio of Net Investment Income to
Average Net Assets 0.60%* 0.69% 1.13% 1.32% 1.59% 1.30%
Portfolio Turnover Rate 45%* 48% 35% 44% 32% 47%
==================================================================================================================================
</TABLE>
*Annualized.
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.
15
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS (continued)
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 six months ended February 28, 1999, the advisory fee represented
an effective annual rate of 0.12% 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 February 28, 1999, the fund had contributed capital of $2,465,000
to Vanguard (included in Other Assets), representing 0.02% of the fund's net
assets and 3.5% of Vanguard's capitalization. The fund's Trustees and officers
are also Directors and officers of Vanguard.
D. Vanguard has asked the fund's investment adviser to direct certain portfolio
trades, subject to obtaining the best price and execution, to brokers who have
agreed to rebate to the fund part of the commissions generated. Such rebates are
used solely to reduce the fund's administrative expenses.The fund's custodian
bank has also agreed to reduce its fees when the fund maintains cash on deposit
in the non-interest-bearing custody account. For the six months ended February
28, 1999, directed brokerage and custodian fee offset arrangements reduced
expenses by $870,000 and $10,000, respectively. The total expense reduction
represented an effective annual rate of 0.01% of the fund's average net assets.
E. During the six months ended February 28, 1999, the fund purchased
$4,067,015,000 of investment securities and sold $2,711,307,000 of investment
securities other than temporary cash investments.
F. At February 28, 1999, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $5,409,548,000,
consisting of unrealized gains of $5,440,969,000 on securities that had risen in
value since their purchase and $31,421,000 in unrealized losses on securities
that had fallen in value since their purchase.
16
<PAGE> 19
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director/Trustee of The Vanguard
Group, Inc., and each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & JohnsonoMerck 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.
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> 20
VANGUARD
MILESTONES
[GRAPHIC]
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."
[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest 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.
[GRAPHIC]
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
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.
Q232-04/13/1999
(C) 1999 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
<PAGE> 21
VANGUARD INTERNATIONAL
GROWTH FUND
SEMIANNUAL
REPORT
FEBRUARY 28, 1999
[THE VANGUARD GROUP]
<PAGE> 22
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.
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, 1998, 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, 1998.
- - The 70th anniversary, on December 28, 1998, of the incorporation of Vanguard
Wellington Fund. It is the nation's oldest balanced mutual fund, and 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.
[PHOTO]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
3
REPORT FROM
THE ADVISER
5
PERFORMANCE SUMMARY
7
FUND PROFILE
8
FINANCIAL STATEMENTS
11
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE> 23
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman
Most of the world's stock markets were on the rise during the six months ended
February 28, 1999, the first half of the fiscal year for Vanguard International
Growth Fund. In this generally rewarding environment, the fund earned a robust
+12.6% return, bouncing back from a -3.0% decline registered during fiscal year
1998.
<TABLE>
<CAPTION>
Total Returns
Six Months Ended
February 28, 1999
<S> <C>
Vanguard International Growth Fund +12.6%
- -------------------------------------------------------
Average International Fund +10.2%
MSCI EAFE Index +14.0%
- -------------------------------------------------------
</TABLE>
The table at right presents the six-month total returns (capital change plus
reinvested dividends) for the fund and its comparative standards--the average
international stock fund and the unmanaged Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. Your fund's return exceeded that of
its average peer by 2.4 percentage points, but trailed the performance of its
benchmark index by 1.4 points.
The fund's return is based on an increase in net asset value from $16.57
per share on August 31, 1998, to $18.27 per share on February 28, 1999, with the
latter figure adjusted for a dividend of $0.22 per share paid from net
investment income and a distribution of $0.16 per share paid from net realized
capital gains.
THE PERIOD IN REVIEW
During the six months ended February 28, most major foreign stock markets
rebounded nicely from steep declines suffered in a global slump during the
summer of 1998. The performance of local markets varied considerably, as often
happens. Japan turned in a modest performance, but U.S. investors benefited from
a decline in the value of the U.S. dollar relative to the yen. Brazil, the
largest country in Latin America, was struck by the devaluation of its currency,
the real. Asia, excluding Japan, appeared to be recovering slowly from its own
currency troubles, which date to 1997. European bourses, which generally fared
well, were affected by several factors: a continuing movement toward corporate
restructuring, a wave of mergers and acquisitions, and a series of interest rate
cuts.
Advances in the United Kingdom, Italy, and France each exceeded +9% for
the six-month period in U.S. dollar terms. The gains were even higher in local
currency terms, but were diminished by a general rise in the relative value of
the U.S. dollar. A stronger dollar reduces returns from international
investments for U.S. investors; conversely, when the dollar declines, these
returns are enhanced. For U.S. investors in international stocks, the risk of
currency fluctuations is added to the normal risks of investing in common
stocks.
The New Year's Day advent of the euro--the common currency for eleven
European nations--seemed initially to boost the spirits of investors in European
stocks, though the relative value of the euro sagged after a strong start. The
euro eliminates exchange-rate fluctuations within these countries, but--as with
any other international currency--its value versus the U.S. dollar will affect
the returns received by U.S. investors.
The United States, meanwhile, provided a near-perfect setting for stocks,
as evidenced by the +29.4% gain in the Wilshire 5000 Equity Index. The U.S.
market enjoyed
1
<PAGE> 24
strong employment, low interest rates, and hardly a hint of inflation--a
combination that fostered a "torrid pace" of economic growth, in the words of
Federal Reserve Chairman Alan Greenspan.
As we noted, the +12.6% return of Vanguard International Growth Fund
topped that of our average peer but fell short of the +14.0% return of the EAFE
Index. Our margin over the average competitor can be explained, in part, by our
heavier weighting in Japan (13%, versus 10% for the average international mutual
fund). In local currency terms, the Japanese market gained only nominal ground
for the six months. But the yen appreciated smartly, turning the market's modest
return into a gain of nearly +22% in U.S. dollar terms. Our significantly lower
costs helped our relative performance, too. The International Growth Fund's
expense ratio is 0.61% of average net assets. The average international stock
fund charges 1.66%.
The slight gap in performance between the fund and its unmanaged
benchmark can be traced, in part, to the cautious approach of our investment
adviser, Schroder Capital Management International, toward Japan. At the end of
the fiscal half-year, 13% of the fund's net assets were invested in Japanese
stocks, as stated. In contrast, Japan accounted for about 21% of the EAFE Index.
The fund's shortfall versus the index can also be tied to its
underweighted position in the United Kingdom (less than 16% at the end of the
period, versus roughly 23% for the EAFE Index). Shares traded in London advanced
+13.3% in U.S. dollar terms between September and February. Finally, the fund's
cash reserves--which equaled more than 10% of net assets early in the fiscal
half-year--dampened performance relative to the EAFE Index, which as a
theoretical construct holds no cash. Cash reserves were reduced to roughly 4%
by the period's end.
IN SUMMARY
We have noted many times that the returns from international markets often
diverge from those of the U.S. market. But while the divergence has worked in
favor of U.S. stocks during most of the 1990s, we assure you it will not always
be so. Returns from foreign markets have topped those of the U.S. market in the
past--witness the dominance of Japan during the 1980s--and will at times in the
future.
Thus, our message remains unchanged. For investors who understand the
additional risks, international investing can play an important role in a
balanced portfolio of U.S. stock funds, bond funds, and money market funds.
Investors who maintain such a portfolio--tailored to their objectives, time
horizon, and temperament for risk--are better able to withstand the
unpredictable movements in securities prices and currency values and are better
prepared to stay the course with their investment programs.
We look forward to reporting to you on Vanguard International Growth
Fund's full 1999 fiscal year six months hence.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
March 17, 1999
2
<PAGE> 25
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED FEBRUARY 28, 1999
[PHOTO]
Most of the world's stock markets provided solid gains during the six months
ended February 28, 1999, as they recovered from a sharp slide in midsummer 1998.
Central banks in the United States, Europe, and Japan aided the rebound by
easing monetary policy and lowering short-term interest rates.
The United States stood out during the period both for the strength of
its stock market recovery and for its remarkably robust economic performance--it
was the only major economy where policymakers had to ponder whether growth was
too rapid to prevent an inflationary surge. The world's second-largest economy,
Japan, remained mired in recession, and most of Europe's developed economies
were expanding weakly. Full-blown crises beset some key developing markets,
including those of Brazil and Russia.
U.S. STOCK MARKETS
Reflecting the strength of the domestic economy and the confidence of investors
in future corporate and economic prospects, the U.S. stock market advanced
powerfully during the six months ended February 28.
The overall stock market, as measured by the Wilshire 5000 Index, gained
29.4%. The S&P 500 Index, which is dominated by large-capitalization stocks,
advanced an impressive 30.3% from its level on August 31 (the date that marked
the end of the index's six-week summer descent, during which it fell by nearly
20%). The small-cap Russell 2000 Index gained 16.8%, but unlike the large-cap
indexes, it did not regain all of the ground it had lost during the spring and
summer of 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED FEBRUARY 28, 1999
---------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 30.3% 19.7% 24.1%
Russell 2000 Index 16.8 -14.1 9.7
Wilshire 5000 Index 29.4 14.4 21.6
MSCI EAFE Index 14.0 5.2 7.2
- ---------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 1.6% 6.3% 7.1%
Lehman 10-Year Municipal Bond Index 2.8 6.3 6.9
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.3 4.9 5.1
- ---------------------------------------------------------------------------
OTHER
Consumer Price Index 0.7% 1.6% 2.3%
- ---------------------------------------------------------------------------
</TABLE>
*Annualized.
Even though corporate earnings declined slightly during the final half
of 1998, investors were apparently focused more on the future potential of the
stock market than on current disappointments. A key factor in the market's
rebound was a lessening of fears that the U.S. economy would be bogged down by
economic and currency troubles that afflicted much of Asia, Russia, and Latin
America. Encouraged by low unemployment (4.4% in February 1999) and higher
wages (up 4% in 1998), U.S. consumers spent at a heroic pace during the period,
helping the economy to expand at a rapid 6% annual pace in the October-December
period. The Federal Reserve Board boosted the confidence of both consumers and
investors with three separate quarter-percentage-point cuts in interest rates
during autumn 1998.
3
<PAGE> 26
The stock market's rapid rise during the fiscal half-year was led by a
surge in technology stocks, which gained an incredible 60%. The tech sector
benefited from expectations that growth would continue to be strong among both
consumers and the world's businesses. Optimism--many would say speculation--was
especially evident in Internet stocks. With more computer users surfing the
Internet, demand for telecommunications services is growing smartly, and telecom
stocks led the utilities sector to a 37% rise during the half-year. The boom in
consumer spending propelled stock prices of retailers and other members of the
consumer-discretionary sector, which gained 34%.
The market's laggards during the fiscal half-year were energy stocks and
materials & processing companies such as chemical, paper, and metal
manufacturers. These sectors have been badly hurt in recent years by declining
commodity prices. Integrated-oil companies rose a relatively meager 8% during
the period, while oil-service and exploration companies and materials &
processing stocks were up about 11%.
U.S. BOND MARKETS
Interest rates traced a V pattern during the six months ended February 28. Early
in the period, interest rates fell, especially for U.S. Treasury bonds, as
investors flocked to the perceived safety of Treasuries. The yield of the
30-year Treasury bond began the period at 5.27% but quickly fell to a low of
4.72% on October 5. However, as prices of stocks and riskier bonds rebounded
from their summertime lows, prices of Treasury bonds began to fall and their
yields began to rise. By February 28, the yield on the 30-year Treasury was at
5.58%, up 31 basis points (0.31 percentage point) from its starting point. The
Lehman Aggregate Bond Index, which is a proxy for the U.S. taxable bond market
and has an intermediate-term average maturity, returned only 1.6% during the
half-year, as its income return of about 3.0% was partially offset by a -1.4%
price decline.
Short-term interest rates, which are most directly affected by Federal
Reserve policy changes, declined on balance during the period, although their
moves also traced a V. Yields on 3-month Treasury bills began the half-year at
4.83% but fell as low as 3.62% in mid-October. By February 28, the 3-month
T-bill was yielding 4.67%, 16 basis points below the rate prevailing when the
period began.
INTERNATIONAL STOCK MARKETS
International stock markets, heartened by Wall Street's strong rally and
nourished by looser monetary policy, rallied during the half-year. The dollar's
weakening against other currencies, especially the Japanese yen, boosted returns
for U.S. investors.
For a change, gains were smaller in Europe's developed markets than in
Asia and emerging markets. Overall, the EAFE Index gained 14.0% in U.S.
dollars. European stocks, which account for about 70% of the index, rose on
average by about 10%. In the Pacific region, which is dominated by Japan,
stocks rose 24% in dollar terms, recouping some of the steep losses suffered
during the fiscal year ended August 31, 1998. Emerging-market stocks, which
suffered severe losses in the previous two fiscal years, gained nearly 28% in
U.S.-dollar terms, as measured by the MSCI Select Emerging Markets Free Index.
Monetary authorities in Japan, where the economy was in recession, and in
Europe, where growth was lackluster on average, lowered interest rates in an
attempt to spur economic activity. Also, an increase in corporate restructuring
and merger activity helped to boost stock prices in Japan and Europe. In some
emerging markets where currency and stock values had plummeted in 1997 and 1998,
gains during the first half of our fiscal year were spectacular: about 95% in
Thailand, 92% in South Korea, 55% in Indonesia, and 43% in Mexico.
4
<PAGE> 27
REPORT FROM THE ADVISER
[PHOTO]
Vanguard International Growth Fund rose 12.6% during the six months ended
February 28, 1999, the first half of our fiscal year. This was 2.4 percentage
points ahead of the return of the average international equity mutual fund, but
1.4 points behind the unmanaged EAFE Index.
Behind this rather comforting result lie a far from serene six months.
The period saw a liquidity crisis for a large U.S. hedge fund, the subsequent
dramatic easing of monetary policy by the developed world's central banks, the
apparent panic among speculators to repurchase tens of trillions of Japanese yen
borrowed to finance investment activities outside of Japan, the troubled launch
of the euro, and, finally--the latest chapter in the emerging-markets
crisis--the devaluation of Brazil's currency by more than 40%.
Little did I realize, when I reported to you in September that we would
pursue a cautious short-term policy, that so much would transpire. In fact, the
rout of the speculators started in Hong Kong during the last few days of August,
when the government there decided to drive up the market, inflicting stinging
losses on those who were speculating on further declines. In retrospect, this
brave but risky action was a major turning point, and the Hong Kong government
has made an immense (unrealized) profit.
Your fund is a diversified portfolio investing in non-U.S. stocks, and
was never overly exposed to any of these dramatic events during the half-year.
Indeed, the significant easing of monetary policy, by the U.S. Federal Reserve
Board in particular and the European and Japanese central banks to a lesser
degree, has reinvigorated equity markets; in January the fund's net asset value
reached a new all-time high, slightly exceeding the previous peak in July 1998.
Continental Europe remains the fund's largest commitment by far, with
61% of fund assets invested there. Cyclically, the major European countries are
well placed for economic expansion; we expect that growth in 1999 will be only
briefly slowed by the Asian and Russian economic crises, and that normal growth
will resume in 2000. The single-currency zone, the Eurozone, was launched as
planned at the beginning of 1999. As a consequence, 11 countries now operate
with identical monetary policy and a single currency, the euro. Teething
problems have occurred, but these will moderate; indeed, the first problem,
namely, interference with the new, independent European Central Bank by the
German finance minister, has been resolved by the latter's resignation.
As expected, the Eurozone has acted as a catalyst to corporate
consolidations. Of the 49 European companies in which the fund owns shares, 20
are or have recently been involved in significant mergers or acquisitions. Half
of these 20 consolidations are with other European companies, 7 are within a
single country, and 3 are intercontinental. We are confident that this trend
will continue, which is one reason European stocks remain attractive despite
being in the fifth year of a bull market.
Interest rates have been sharply reduced in the United Kingdom during the
past five months, greatly
5
<PAGE> 28
increasing the attractiveness of investing there. We raised the fund's U.K.
exposure to 15% by the end of February, and plan to further increase it in
coming months. In particular, we like companies that will benefit from
increased consumer spending; half of the fund's U.K. investments fit this
description.
Japan's situation is difficult to interpret. Our basic policy there has
not changed in the past six months, except for a temporary hedge put in place
to protect the fund in case the yen should weaken against the U.S. dollar.
Recently, Japan's economy appears to have stabilized, but it is by no means
certain that this marks the start of a sustainable recovery. Severe price
discounting and other incentive schemes have stimulated consumption, but
households' disposable income is falling (employment and wages are both weak),
and we expect precautionary savings to start rising again. Our investments in
Japan are limited to a small number of world-class companies based there. We
are watching closely to determine whether a more optimistic view is justified.
A complicating factor is the buoyant reaction of investors to recent
announcements by several companies of plans to restructure to cut costs. Such
plans tend to induce imitators who are not as determined to deliver on their
cost-cutting targets. Many have set five-year cost-reduction targets that
demand little action in the early years, so it is possible to be deceived.
Finally, 6% of the International Growth Fund is invested in smaller Asian
countries and in Latin America. Over half of this amount is focused on three
countries that we believe have good foundations: South Korea, Mexico, and
Singapore. But each remains vulnerable to global demand; in addition, South
Korea is vulnerable to any significant fall in the Japanese yen, which would
undermine the competitiveness of Korean companies relative to rivals in Japan.
The deterioration of China's economy has made us leery of rebuilding our
position in Hong Kong. Similarly, there are considerable risks in Brazil, and,
although some stocks are extremely cheap, we are waiting for a better outlook.
If this letter ends on a cautious note, that is appropriate. The fund
will remain focused where I believe sensible investments can be made. I hope
that, in so doing, I capture the most rewarding opportunities for you.
Richard Foulkes
Schroder Capital Management International
March 11, 1999
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.
6
<PAGE> 29
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.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: SEPTEMBER 30, 1981-FEBRUARY 28, 1999
- --------------------------------------------------------------
INTERNATIONAL GROWTH FUND MSCI EAFE
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------
<S> <C> <C> <C> <C>
1982 -5.7% 0.0% -5.7% -4.7%
1983 57.1 4.3 61.4 31.0
1984 5.7 1.6 7.3 14.7
1985 15.7 2.1 17.8 32.3
1986 96.4 2.5 98.9 103.7
1987 31.2 0.8 32.0 46.0
1988 -10.8 0.9 -9.9 -6.2
1989 22.7 1.8 24.5 22.4
1990 4.0 1.2 5.2 -11.8
1991 -6.8 1.7 -5.1 -0.3
1992 -0.4 1.9 1.5 0.4
1993 18.4 2.7 21.1 27.1
1994 19.5 0.9 20.4 11.1
1995 2.4 1.4 3.8 0.8
1996 11.3 1.4 12.7 8.2
1997 14.5 1.3 15.8 9.4
1998 -4.2 1.2 -3.0 0.1
1999* 11.2 1.4 12.6 14.0
- ------------------------------------------------------
</TABLE>
*Six months ended February 28, 1999.
See Financial Highlights table on page 16 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 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 16.93% 10.07% 8.20% 1.54% 9.74%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
7
<PAGE> 30
FUND PROFILE
INTERNATIONAL GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of February
28, 1999, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on page 9.
PORTFOLIO CHARACTERISTICS
<TABLE>
<CAPTION>
- ----------------------------------------------------------
INTERNATIONAL MSCI
GROWTH EAFE
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 128 1,025
Turnover Rate 26%* --
Expense Ratio 0.61%* --
Cash Reserves 3.6% --
</TABLE>
*Annualized.
VOLATILITY MEASURES
- ----------------------------------------------------------
INTERNATIONAL MSCI
GROWTH EAFE
- ----------------------------------------------------------
R-Squared 0.93 1.00
Beta 1.01 1.00
[PIE CHART]
FUND ALLOCATION
- ----------------------------------------------------------
EMERGING MARKETS %
PACIFIC %
EUROPE %
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -------------------------------------------------------
<S> <C>
Novartis AG (Registered) 5.2%
ING Groep NV 4.0
Endesa SA 4.0
Fuji Photo Film Co., Ltd. 3.2
Vivendi 2.9
Suez Lyonnaise des Eaux 2.8
Mannesmann AG 2.7
UBS AG 2.6
Telecom Italia SpA 2.5
Philips Electronics NV 2.4
- -------------------------------------------------------
Top Ten 32.3%
</TABLE>
Country Diversification (% of Common Stocks) can be found on page 10.
8
<PAGE> 31
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.
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.
FUND ALLOCATION. An indicator of diversification, this chart shows the
geographic distribution of a fund's holdings.
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.
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 period. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
9
<PAGE> 32
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF COMMON STOCKS)
- ------------------------------------------------------------------------------------------------------------------
FEBRUARY 28, 1998 FEBRUARY 28, 1999
- ------------------------------------------------------------------------------------------------------------------
INTERNATIONAL INTERNATIONAL MSCI
GROWTH GROWTH EAFE
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
Argentina 0.3% 0.2% 0.0%
Australia 1.9 1.7 2.7
Austria 0.5 0.0 0.3
Belgium 0.0 0.7 1.8
Brazil 1.3 0.6 0.0
Chile 0.3 0.1 0.0
Denmark 0.9 0.8 0.8
Finland 0.0 0.0 1.7
France 10.0 13.0 9.3
Germany 7.4 7.3 10.1
Hong Kong 5.0 0.6 2.0
Indonesia 0.1 0.0 0.0
Ireland 0.4 1.5 0.5
Italy 3.3 9.5 5.0
Japan 20.5 13.5 21.1
Malaysia 1.5 0.5 0.0
Mexico 1.3 0.9 0.0
Netherlands 12.5 11.4 6.1
New Zealand 0.0 0.0 0.2
Norway 0.0 0.0 0.4
Philippines 0.9 0.7 0.0
Portugal 0.0 0.0 0.7
Singapore 1.5 1.1 0.7
South Korea 0.7 1.5 0.0
Spain 1.2 4.1 3.3
Sweden 2.0 3.1 2.8
Switzerland 14.1 11.4 7.8
Thailand 0.1 0.0 0.0
United Kingdom 12.3 15.8 22.7
- ------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
</TABLE>
10
<PAGE> 33
FINANCIAL STATEMENTS
FEBRUARY 28, 1999 (UNAUDITED)
[PHOTO]
STATEMENT OF NET ASSETS
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
VALUE*
INTERNATIONAL GROWTH FUND SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.4%)
- ---------------------------------------------------------
ARGENTINA (0.2%)
YPF SA ADR 500,000 $ 14,500
----------
AUSTRALIA (1.6%)
Telstra Corp. Ltd. 8,488,800 43,306
Westpac Banking Corp., Ltd. 11,717,700 77,466
----------
120,772
----------
BELGIUM (0.7%)
Algemene Maatschappij voor
Nijverheidskredit NV 289,956 22,423
- - Fortis AG-CVG 81,662 385
Fortis (B) 734,958 26,745
Fortis (B) STRIP VVPR Shares 734,958 8
----------
49,561
----------
BRAZIL (0.6%)
- - Telecomunicacoes Brasileiras
SA ADR Pfd. 210,000 13,558
- - Telecomunicacoes
Brasileiras SA
Pfd. Receipts 192,500,000 12,468
Telecomunicacoes de
Sao Paulo SA Pfd. 156,120,000 14,582
----------
40,608
----------
CHILE (0.1%)
Chilectra SA ADR 250,000 4,875
----------
DENMARK (0.7%)
Den Danske Bank A/S 506,000 56,035
----------
FRANCE (12.6%)
Accor SA 160,000 37,234
Alcatel 758,000 81,542
Axa 490,000 63,900
Bouygues SA 236,500 58,801
Canal Plus SA 218,000 68,105
Compagnie des Gaz de Petrole
Primagaz SA 88,516 7,093
Elf Aquitaine SA 1,402,000 146,204
Suez Lyonnaise des Eaux 1,030,000 205,890
Total SA B Shares 552,000 57,564
Vivendi 814,600 212,372
- - Vivendi Warrants 2/5/2001 580,500 1,631
----------
940,336
----------
GERMANY (7.1%)
Allianz AG 243,000 73,648
Bayerische Hypo-und
Vereinsbank AG 650,500 36,846
Friederich Grohe AG Pfd. 18,747 4,713
Hoechst AG 1,800,000 84,864
Mannesmann AG 1,500,000 201,375
RWE AG 429,000 18,696
SAP AG Pfd. 105,600 39,876
Veba AG 907,000 48,387
Viag AG 37,000 19,751
----------
528,156
----------
HONG KONG (0.6%)
Mandarin Oriental
International Ltd. 3,311,369 1,606
SmarTone
Telecommunications Ltd. 2,000,000 5,408
</TABLE>
11
<PAGE> 34
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL GROWTH FUND SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
Sun Hung Kai Properties Ltd. 1,000,000 $ 6,808
Swire Pacific Ltd. A Shares 6,704,000 27,429
----------
41,251
----------
IRELAND (1.4%)
Bank of Ireland PLC 1,558,598 32,250
- - Elan Corp. PLC ADR 971,000 74,464
----------
106,714
----------
ITALY (9.1%)
Assicurazioni Generali SpA 3,947,600 152,533
- - Banca di Roma 60,797,000 88,094
Ente Nazionale
Idrocarburi SpA 5,026,645 28,969
- - Olivetti SpA 40,150,000 123,405
Telecom Italia Mobile SpA 15,000,000 100,770
Telecom Italia SpA 17,915,000 188,592
----------
682,363
----------
JAPAN (13.0%)
Chiyoda Fire & Marine
Insurance Co., Ltd. 2,220,000 7,671
Dowa Fire & Marine
Insurance Co. 2,221,000 7,207
East Japan Railway Co. 5,900 35,504
Fuji Photo Film Co., Ltd. 6,423,000 236,024
Hirose Electric Co., Ltd. 315,000 21,372
Keyence Corp. 143,000 16,849
Kuraray Co., Ltd. 1,900,000 18,688
Mabuchi Motor Co. 731,000 49,165
Matsushita Electric Industrial
Co., Ltd. 4,403,000 73,662
Mitsui Fudosan Co., Ltd. 2,632,000 21,096
Murata Manufacturing Co., Ltd. 3,112,000 140,060
Nippon Fire & Marine
Insurance Co., Ltd. 2,000,000 6,169
Nippon Television Network 65,820 18,612
Omron Corp. 1,513,000 16,450
SMC Corp. 646,500 52,309
Showa Shell Sekiyu K.K. 1,173,000 6,169
Sumitomo Corp. 6,300,000 31,646
Takeda Chemical Industries Ltd. 4,216,000 144,975
Tokyo Electron Ltd. 293,000 13,335
Toppan Printing Co., Ltd. 3,146,000 36,829
Yasuda Fire & Marine
Insurance Co. 4,370,000 19,815
----------
973,607
----------
MALAYSIA (0.5%)
Genting Bhd. 5,422,000 9,874
Telekom Malaysia Bhd. 6,529,500 11,203
Tenaga Nasional Bhd. 12,891,000 17,098
----------
38,175
----------
MEXICO (0.9%)
Cemex SA de CV (CPO) 3,208,161 9,244
- - Grupo Televisa SA GDR 440,000 12,375
Telefonos de Mexico SA
Class L ADR 790,000 45,178
----------
66,797
----------
NETHERLANDS (11.0%)
- - Baan Co. NV 2,019,610 19,287
- - Equant NV 154,700 11,157
- - Getronics NV 2,306,479 100,641
Heineken NV 2,066,999 108,003
ING Groep NV 5,353,000 299,679
Oce NV 2,016,245 56,106
Philips Electronics NV 2,562,000 178,583
Verenigde Nederlandse
Uitgeversbedrijven
Verenigd Bezit 1,270,000 52,209
----------
825,665
----------
PHILIPPINES (0.6%)
Ayala Land, Inc. 65,869,591 19,448
Manila Electric Co. 2,571,430 7,988
Philippine Long Distance
Telephone Co. 868,500 20,180
----------
47,616
----------
SINGAPORE (1.0%)
City Developments Ltd. 4,111,000 17,189
Development Bank of
Singapore Ltd. (Foreign) 340,000 2,468
Singapore Press Holdings Ltd. 2,885,486 32,842
United Overseas Bank Ltd.
(Foreign) 4,184,000 24,540
----------
77,039
----------
SOUTH KOREA (1.5%)
- - Korea Electric Power Corp. 1,880,050 44,408
SK Telecom Co. 15,562 11,868
- - Samsung Electronics Co., Ltd. 654,717 46,127
- - Samsung Electronics Co., Ltd.
GDR 1/2 Non-Voting Stock 275,931 3,914
Samsung Electronics Co., Ltd.
GDR 1/2 Voting Stock 69,784 2,894
----------
109,211
----------
SPAIN (4.0%)
Endesa SA 11,181,600 296,299
----------
SWEDEN (3.0%)
LM Ericsson Telephone AB
B Shares 3,201,000 84,586
Skandia Forsakrings AB 3,510,000 64,327
Svenska Handelsbanken AB
A Shares 2,200,000 77,691
----------
226,604
----------
SWITZERLAND (11.0%)
ABB AG (Bearer) 48,800 59,608
Adecco SA (Bearer) 33,255 17,442
Alusuisse-Lonza Group AG
(Registered) 17,000 18,900
Nestle SA (Registered) 18,000 33,974
Novartis AG (Registered) 220,500 386,809
Roche Holdings AG
(Dividend-Right Certificates) 9,300 117,769
- - UBS AG 614,000 191,099
----------
825,601
----------
UNITED KINGDOM (15.2%)
Airtours PLC 3,813,100 29,260
- - Allied Zurich PLC 7,000,000 103,337
Asda Group PLC 17,503,000 43,602
BP Amoco PLC 7,130,641 101,553
Bass PLC 700,000 9,711
Boots Co., PLC 585,000 9,395
</TABLE>
12
<PAGE> 35
<TABLE>
<CAPTION>
- -------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------
<S> <C> <C>
British Aerospace PLC 10,253,580 $ 65,130
British Airways PLC 3,660,000 27,015
British Land Co., PLC 3,620,000 29,837
British Sky Broadcasting
Group PLC 2,214,610 20,338
British Telecommunications
PLC 4,798,000 83,090
Cable and Wireless PLC 5,589,000 76,419
EMI Group PLC 4,670,915 34,477
- - Garban PLC 316,100 1,393
Glaxo Wellcome PLC 5,400,710 172,260
Granada Group PLC 366,448 7,388
Great Universal Stores PLC 737,000 9,386
LucasVarity PLC 10,300,000 46,779
Marks & Spencer PLC 783,000 5,265
Reckitt & Colman PLC 1,184,000 15,753
Rolls-Royce PLC 17,396,000 76,011
Scottish & Newcastle PLC 5,250,000 57,738
Tarmac PLC 2,936,000 5,056
Tesco PLC 27,675,000 78,474
United News & Media PLC 3,161,000 32,637
-----------
1,141,304
-----------
- --------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $5,460,403) 7,213,089
- -------------------------------------------------------------
<CAPTION>
FACE MARKET
AMOUNT VALUE*
(000) (000)
- --------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (18.5%)
- --------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.78%, 3/1/1999 $ 349,705 349,705
4.80%, 3/1/1999--Note G 1,037,259 1,037,259
- --------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $1,386,964) 1,386,964
- --------------------------------------------------------------
TOTAL INVESTMENTS (114.9%)
(Cost $6,847,367) 8,600,053
- --------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-14.9%)
Other Assets--Note C 142,752
Security Lending Collateral Payable
to Brokers--Note G (1,037,259)
Other Liabilities (220,438)
------------
(1,114,945)
- --------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------
Applicable to 409,654,934 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $7,485,108
==============================================================
NET ASSET VALUE PER SHARE $18.27
==============================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
GDR--Global Depositary Receipt.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
AT FEBRUARY 28, 1999, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------
<S> <C> <C>
Paid in Capital $5,730,733 $13.99
Overdistributed Net
Investment Income--Note E (676) --
Accumulated Net
Realized Losses--Note E (1,524) --
Unrealized Appreciation--
Note F
Investment Securities 1,752,686 4.27
Foreign Currencies and
Forward Currency Contracts 3,889 .01
- ---------------------------------------------------------
NET ASSETS $7,485,108 $18.27
=========================================================
</TABLE>
13
<PAGE> 36
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
SIX MONTHS ENDED FEBRUARY 28, 1999
(000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 20,620
Interest 14,805
Security Lending 1,221
-------------
Total Income 36,646
-------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 4,863
Performance Adjustment 856
The Vanguard Group--Note C
Management and Administrative 13,439
Marketing and Distribution 967
Custodian Fees 1,934
Auditing Fees 6
Shareholders' Reports 243
Trustees' Fees And Expenses 7
-------------
Total Expenses 22,315
Expenses Paid Indirectly--Note D (923)
-------------
Net Expenses 21,392
- -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 15,254
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 35,216
Foreign Currencies (102)
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 35,114
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 797,900
Foreign Currencies and Forward Currency Contracts 3,295
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 801,195
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $851,563
=========================================================================================================================
</TABLE>
*Dividends are net of foreign withholding taxes of $3,992,000.
14
<PAGE> 37
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
-----------------------------------
SIX MONTHS YEAR
ENDED ENDED
FEB. 28, 1999 AUG. 31, 1998
(000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 15,254 $ 101,730
Realized Net Gain 35,114 35,938
Change in Unrealized Appreciation (Depreciation) 801,195 (374,412)
----------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 851,563 (236,744)
----------------------------------
DISTRIBUTIONS
Net Investment Income (89,037) (83,884)
Realized Capital Gain (64,754) (207,713)
----------------------------------
Total Distributions (153,791) (291,597)
----------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 1,598,480 2,903,443
Issued in Lieu of Cash Distributions 138,650 263,660
Redeemed (1,770,243) (2,907,065)
----------------------------------
Net Increase (Decrease) from Capital Share Transactions (33,113) 260,038
- -------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 664,659 (268,303)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 6,820,449 7,088,752
End of Period $7,485,108 $6,820,449
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 89,501 161,215
Issued in Lieu of Cash Distributions 7,665 16,489
Redeemed (99,124) (163,081)
----------------------------------
Net Increase (Decrease) in Shares Outstanding (1,958) 14,623
=========================================================================================================================
</TABLE>
15
<PAGE> 38
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 SIX MONTHS ENDED ----------------------------------------------------------
THROUGHOUT EACH PERIOD FEB. 28, 1999 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $16.57 $17.86 $16.13 $14.70 $14.36 $12.02
- -----------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .04 .25 .19 .19 .20 .14
Net Realized and Unrealized Gain (Loss)
on Investments 2.04 (.81) 2.28 1.65 .32 2.31
- -----------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.08 (.56) 2.47 1.84 .52 2.45
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.22) (.21) (.19) (.20) (.18) (.11)
Distributions from Realized Capital Gains (.16) (.52) (.55) (.21) -- --
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions (.38) (.73) (.74) (.41) (.18) (.11)
=======================================================================================================================
NET ASSET VALUE, END OF PERIOD $18.27 $16.57 $17.86 $16.13 $14.70 $14.36
=======================================================================================================================
TOTAL RETURN 12.58% -2.99% 15.84% 12.72% 3.76% 20.44%
=======================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $7,485 $6,820 $7,089 $4,997 $3,354 $2,989
Ratio of Total Expenses to
Average Net Assets 0.61%* 0.59% 0.57% 0.56% 0.59% 0.46%
Ratio of Net Investment Income to
Average Net Assets 0.42%* 1.39% 1.26% 1.35% 1.53% 1.37%
Portfolio Turnover Rate 26%* 37% 22% 22% 31% 28%
========================================================================================================================
</TABLE>
*Annualized.
16
<PAGE> 39
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.
17
<PAGE> 40
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 for the preceding three years relative to the Morgan Stanley Capital
International Europe, Australasia, Far East Index. For the six months ended
February 28, 1999, the advisory fee represented an effective annual basic rate
of 0.13% of the fund's average net assets before an increase of $856,000 (0.02%)
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 February 28, 1999, the fund had contributed capital of $1,288,000
to Vanguard (included in Other Assets), representing 0.02% of the fund's net
assets and 1.8% of Vanguard's capitalization. The fund's Trustees and officers
are also Directors and officers of Vanguard.
D. 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. The fund's custodian
bank has also agreed to reduce its fees when the fund maintains cash on deposit
in the non-interest-bearing custody account. For the six months ended February
28, 1999, directed brokerage and custodian fee offset arrangements reduced the
fund's expenses by $920,000 and $3,000, respectively. The total expense
reduction represented an effective annual rate of 0.03% of the fund's average
net assets.
E. During the six months ended February 28, 1999, the fund purchased
$1,158,519,000 of investment securities and sold $860,651,000 of investment
securities other than temporary cash investments.
During the six months ended February 28, 1999, the fund realized net
foreign currency losses of $102,000, which decreased distributable net income
for tax purposes; accordingly, such losses have been reclassified from
accumulated net realized gains to overdistributed net investment income.
F. At February 28, 1999, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $1,752,686,000,
consisting of unrealized gains of $2,062,430,000 on securities that had risen in
value since their purchase and $309,744,000 in unrealized losses on securities
that had fallen in value since their purchase.
At February 28, 1999, the fund had open forward currency contracts to
deliver foreign currency in exchange for U.S. dollars as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
(000)
-----------------------------------------------------------------
Contract Amount
----------------------- Net
Foreign U.S. Market Value in Unrealized
Contract Settlement Date Currency Dollars U.S. Dollars Appreciation
- ----------------------------------------------------------------------------------------------------
<S> <S> <C> <C> <C> <C>
Deliver:
5/18/1999 JPY 71,351,555 $611,983 $607,536 $4,447
- ----------------------------------------------------------------------------------------------------
</TABLE>
JPY--Japanese Yen.
The fund had net unrealized foreign currency losses of $558,000 resulting
from the translation of other assets and liabilities at February 28, 1999.
18
<PAGE> 41
G. The market value of securities on loan to broker/dealers at February 28,
1999, was $959,646,000, for which the fund held cash collateral of
$1,037,259,000. Cash collateral received is invested in repurchase agreements.
19
<PAGE> 42
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director/Trustee of The Vanguard
Group, Inc., and each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
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.
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.
20
<PAGE> 43
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
oldest 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
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.
Q812-04/15/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
21
