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VANGUARD(R)
U.S. GROWTH
FUND
February 29, 2000
SEMIANNUAL
[SHIP PHOTO]
[A MEMBER OF THE VANGUARD GROUP LOGO]
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HAVE THE PRINCIPLES OF INVESTING CHANGED?
In a world of frenetic change in business, technology, and the financial
markets, it is natural to wonder whether the basic principles of investing
have changed.
We don't think so.
The most successful investors over the coming decade will be those who
began the new century with a fundamental understanding of risk and who had
the discipline to stick with long-term investment programs.
Certainly, investors today confront a challenging, even unprecedented,
environment. Valuations of market indexes are at or near historic highs. The
strength and duration of the bull market in U.S. stocks have inflated people's
expectations and diminished their recognition of the market's considerable
risks. And the incredible divergence in stock returns--many technology-related
stocks gained 100% or more in 1999, yet prices fell for more than half of all
stocks--has made some investors question the idea of diversification.
And then there is the Internet. Undeniably, it is a powerful medium for
communications and transacting business. For investors, the Internet is a vast
source of information about investments, and online trading has made it
inexpensive and convenient to trade stocks and invest in mutual funds.
However, new tools do not guarantee good workmanship. Information is not the
same as wisdom. Indeed, much of the information, opinion, and rumor that swirl
about financial markets each day amounts to "noise" of no lasting significance.
And the fact that rapid-fire trading is easy does not make it beneficial.
Frequent trading is almost always counterproductive because costs--even at low
commission rates--and taxes detract from the returns that the markets provide.
Sadly, many investors jump into a "hot" mutual fund just in time to see it cool
off. Meanwhile, long-term fund investors are hurt by speculative trading
activity because they bear part of the costs involved in accommodating purchases
and redemptions.
Vanguard believes that intelligent investors should resist short-term
thinking and focus instead on a few time-tested principles:
o Invest for the long term. Pursuing your long-term investment goals is
more like a marathon than a sprint.
o Diversify your investments with holdings in stocks, bonds, and cash
investments. Remember that, at any moment, some part of a diversified portfolio
will lag other parts, and be wary of taking on more risk by "piling onto" the
best-performing part of your holdings. Today's leader could well be tomorrow's
laggard.
o Step back from the daily frenzy of the markets; focus on your overall
asset allocation.
o Capture as much of the market's return as possible by minimizing costs
and taxes. Costs and taxes diminish long-term returns while doing nothing to
reduce the risks you incur as an investor.
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CONTENTS
REPORT FROM THE CHAIRMAN .............1
THE MARKETS IN PERSPECTIVE ...........4
REPORT FROM THE ADVISER ..............6
FUND PROFILE .........................8
PERFORMANCE SUMMARY .................10
FINANCIAL STATEMENTS.................11
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All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
"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>
REPORT FROM THE CHAIRMAN
[PHOTO OF JOHN J. BRENNAN]
JOHN J. BRENNAN
Vanguard U.S. Growth Fund posted an excellent absolute return of 13.6% during
the first half of its 2000 fiscal year, but its relative performance was not so
good--falling well short of the sizzling 29.3% average return of its mutual fund
peers. During the six months ended February 29, 2000, our average peer better
capitalized on the extraordinary returns available from some white-hot
technology stocks.
The adjacent table presents our fund's six-month total return, the average
return of large-capitalization growth mutual funds, and the returns of two
unmanaged indexes: the Standard & Poor's 500 Index and the Russell 1000 Growth
Index. Though our return topped that of the S&P 500 Index, it was nearly 9
percentage points behind the return of the Russell 1000 Growth Index, which is
more representative of the large, growth-oriented companies that the U.S. Growth
Fund emphasizes.
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TOTAL RETURNS
SIX MONTHS ENDED
FEBRUARY 29, 2000
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Vanguard U.S. Growth Fund 13.6%
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Average Large-Cap Growth Fund* 29.3%
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S&P 500 Index 4.1%
Russell 1000 Growth Index 22.5
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*Derived from data provided by Lipper Inc.
The fund's total return (capital change plus reinvested dividends) is based
on an increase in net asset value from $38.92 per share on August 31, 1999, to
$41.99 per share on February 29, 2000, and is adjusted for a dividend of $0.21
per share paid from net investment income and a distribution of $2.02 per share
paid from net realized capital gains.
THE PERIOD IN REVIEW
The powerhouse U.S. stock market rose again during the six months ended February
29. The Wilshire 5000 Total Market Index, the broadest measure of U.S. stocks,
returned 13.4% for the period, while the S&P 500 Index gained 4.1%, as noted.
But the market's rise was very uneven. Certain growth-stock
sectors--technology, biotechnology, and wireless telecommunications--recorded
huge gains. Other sectors, including such growth-stock groups as consumer
staples and pharmaceuticals, suffered significant declines. In general, the
technology-led growth stocks, which are characterized by above-average prices in
relation to such fundamentals as earnings and book value, far outpaced value
stocks. However, there was a change in leadership among growth stocks, as
large-cap issues, the front-runners for the past several years, were outpaced by
mid- and small-cap growth companies.
The disparity in returns between growth and value stocks was wide among
large-cap stocks and enormous among smaller stocks. Within the large-cap S&P 500
Index, growth stocks returned 12.2% during the six months versus -5.0% for value
stocks. The growth/value gap was nearly 80 percentage points within the Russell
Midcap Index--growth stocks in the index returned 67.3% during the half-year,
while value stocks declined -11.2%. Growth stocks within the small-cap Russell
2000 Index gained 66.0%, while value stocks were up just 2.8%.
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The U.S. economy continued to expand impressively during the six months,
completing a record 108 months of uninterrupted growth. Consumer spending helped
boost the nation's gross domestic product to an annual growth rate of 6.9% in
the final three months of 1999, and the unemployment rate hovered around 4%.
Though inflation measures--both at the consumer and wholesale levels--were
relatively benign, a sharp spike in oil prices and hints of price pressure in
the production pipeline for some goods raised concerns about increased
inflation. The exceedingly tight labor market, which shows no sign of
slackening, continues to suggest that higher wages--and, thus, higher prices of
goods and services--could be on the way.
The U.S. bond market, meanwhile, was characterized by a significant rise in
most interest rates but by a decreasing supply of long-term U.S. Treasury
securities. The 10-year U.S. Treasury bond--which is increasingly viewed as the
main benchmark for the bond market--ended the six-month period with a yield of
6.41%, up from 5.97% on August 31, 1999. The yield of the 30-year Treasury bond
rose only slightly during the six months, ending at 6.14%, slightly above its
starting point of 6.06%. The rise in the long-term bond's yield was restrained
by the Treasury's plan to reduce supply of long-term bonds due to federal budget
surpluses.
PERFORMANCE OVERVIEW
Vanguard U.S. Growth Fund's absolute return of 13.6% is a fine result for a
half-year. However, our performance should also be judged in relation to funds
with similar investment objectives. On that score, we came up short, trailing
the average return of large-cap growth funds by nearly 16 percentage points. The
main reason for our shortfall was that large-cap stocks--our bread and
butter--trailed smaller growth stocks. In addition, we held smaller stakes in
the hottest segments of the market than most growth-oriented funds.
We fell short of the 22.5% return of the Russell 1000 Growth Index largely
because our technology holdings, which gained about 18%, badly trailed the 53%
gain for the index's tech stocks. Also, we had a smaller commitment to this
sector than did the index--an average of about 33% during the period versus a
weighting of about 38% for the index. The bright spots in our
portfolio--excellent stock selection among the consumer-staples,
financial-services, and producer-durables groups--were not enough to overcome
the deficit in technology. Keeping pace with an unmanaged index is a difficult
task because indexes do not incur the operating expenses and administrative
costs that mutual funds must bear.
Over the past six months, our holdings--and the stock market in
general--have become far more heavily weighted in technology companies. As of
February 29, 2000, the fund's commitment to technology stocks stood at about 40%
of assets, up from about 25% in February 1999. The tech weighting in the Russell
1000 Growth Index on February 29 was about 46%, up from about 24% a year
earlier. Nine of our ten largest holdings are technology-related stocks. The
concentration of our assets in our ten largest holdings has also increased,
rising from about 38% one year ago to more than 43% at the end of February.
These changes, of course, increase the riskiness of the fund by tying its
fortunes more closely to a select group of stocks.
Over the long run, we expect to provide performance that is superior to
that of funds with similar investment objectives and policies--a goal we haven't
met over the past 18 months. We base this expectation of superior performance in
part on our low
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operating costs, which total 0.39% of average net assets, well below the 1.41%
annual expense ratio charged by the average large-cap growth fund.
It should go without saying that the returns of growth stocks will not
always be as strong as they've been in recent years. Downturns are certain to
occur periodically, although the timing of market downturns--and upsurges--is
unpredictable.
IN SUMMARY
During periods when a particular market segment or asset class dominates all
others, the importance of diversification can be difficult to appreciate. But
these are precisely the periods when diversification is most valuable. We
caution against the urge to forsake a diversified approach to investing.
A balanced investment program of stock funds, bond funds, and cash reserves
provides exposure to both leading and lagging market segments and ensures that
you participate in the market's gains while avoiding some of the risk. Sticking
with a thoughtfully constructed plan, while trying at times, is a logical way to
address the cyclical nature of the financial markets and is a solid approach for
long-term investment success.
[SIGNATURE OF JOHN J. BRENNAN]
John J. Brennan
Chairman and Chief Executive Officer
March 14, 2000
3
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THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED FEBRUARY 29, 2000
A strong expansion in economic growth, both at home and abroad, led to robust
returns for stocks but anemic returns for bonds during the six months ended
February 29, 2000.
Big gains for growth stocks--especially those of computer, biotechnology,
and wireless communications companies--pushed global markets higher. Returns
from bonds were hurt by a rise in interest rates amid worries that surging
economic growth would push up inflation.
U.S. STOCK MARKETS
Stock prices rose, on average, during the half-year. A burgeoning economy and
solid increases in current and projected corporate earnings generally outweighed
investors' concern about rising interest rates. The U.S. market as a whole, as
measured by the Wilshire 5000 Total Market Index, rose 13.4% during the six
months ended February 29. For a change, small- and mid-capitalization stocks
outperformed large-cap issues. The S&P 500 Index, a large-cap benchmark, gained
4.1%, while the rest of the market, as measured by the Wilshire 4500 Completion
Index, was up a remarkable 46.6%.
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TOTAL RETURNS
PERIODS ENDED FEBRUARY 29, 2000
----------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
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STOCKS
S&P 500 Index 4.1% 11.7% 25.1%
Russell 2000 Index 35.8 49.3 19.2
Wilshire 5000 Index 13.4 21.7 25.1
MSCI EAFE Index 13.8 25.8 13.2
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BONDS
Lehman Aggregate Bond Index 1.9% 1.1% 7.0%
Lehman 10 Year Municipal Bond Index 0.6 -1.5 6.1
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.5 4.9 5.2
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OTHER
Consumer Price Index 1.6% 3.2% 2.4%
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*Annualized.
Surging prices of growth-oriented, technology-related stocks caused a wide
gap, across all size groups, in the returns of growth and value stocks. Within
the S&P 500 Index, growth stocks outpaced value stocks by 17.2 percentage points
(+12.2% for growth stocks versus -5.0% for value stocks). Within the small-cap
Russell 2000 Index, growth beat value by a huge 63.2 percentage points (+66.0%
versus +2.8%).
An amazing 21 of 54 technology stocks in the S&P 500 Index gained more than
100% during the half-year. Some observers viewed such gains, along with a rise
in margin borrowing by investors, as signs of speculative excess. Nevertheless,
several factors contributed to the sector's dominance, including fast-growing
revenues; rapid development of computer and communications gear and services;
high demand for digital products by corporations seeking to improve
productivity; and the opening of international markets.
Interestingly, the stock market's surge was itself cited as a potential
worry by Federal Reserve Board Chairman Alan Greenspan. Higher stock prices, he
said, made individuals feel wealthier and contributed to a rise in demand for
goods and services that is outstripping the growth rate of supply.
4
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The Fed, seeking to slow the economy to prevent inflation, raised its
target for short-term interest rates twice during the half-year and was widely
expected to engineer further increases. Inflation did, in fact, accelerate
somewhat. The Consumer Price Index registered a 1.6% gain during the six-month
period and was up 3.2% for the 12 months through February.
Higher rates can hurt stock prices because many investors, in valuing
stocks, use current interest rates to discount the value of future earnings and
dividends that they expect to receive. The higher the discount, the lower the
present value of future earnings and dividends. But for tech stocks, at least,
investor enthusiasm overcame any qualms about higher rates.
U.S. BOND MARKETS
Rapid economic growth may cheer stock investors, but it tends to make bond
investors anxious. With economic growth running at better than a 4% annual rate,
and with unemployment hovering around a 30-year low of 4.0%, bond
investors--like Fed policymakers--were concerned that inflation would inevitably
heat up. And inflation is the bane of bondholders because it reduces the
purchasing power of future payments of interest and principal.
Inflation did worsen a bit during the half-year, but for those looking
ahead, the economic tea leaves could support either of two forecasts. The
pessimistic view was that increased inflation was bound to result from higher
prices for oil and other commodities and higher wages (wage and salary income in
January 2000 was 6.6% higher than a year before). Optimists countered that oil's
higher price was temporary and that rapidly rising productivity would help
businesses to offset higher wage costs.
In any event, interest rates increased and bond prices, which move in the
opposite direction, fell during the half-year. For long-term U.S. Treasury
securities, the rise in yields was muted by a shrinking supply of securities.
Because of the federal budget surplus, the Treasury issued fewer new securities
and even began repurchasing some outstanding bonds. The yield of the 30-year
Treasury bond rose a mere 8 basis points (0.08%), to 6.14% on February 29 from
6.06% on August 31. The yield of the 10-year Treasury rose 44 basis points, to
6.41% from 5.97%. Money market rates, which are most influenced by the Federal
Reserve, rose more steeply: Yields on 3-month T-bills increased on balance by 81
basis points, to 5.78% on February 29.
The Lehman Aggregate Bond Index, the benchmark for the overall taxable bond
market, returned 1.9% for the six months, as interest income of 7.0% was
partially offset by a 5.1% average decline in bond prices.
INTERNATIONAL STOCK MARKETS
Stock prices in Europe, Asia, and many emerging markets rose sharply during the
half-year as investors responded to improving economic conditions and to an
increase in corporate merger and acquisition activity. The return from developed
foreign markets was 13.8%, as measured by the Morgan Stanley Capital
International Europe, Australasia, Far East (EAFE) Index.
In Europe, an average return of 22.2% in local-currency terms was
reduced to 13.8% for U.S. investors because of the U.S. dollar's gains against
European currencies. (Returns from abroad are diminished when the dollar's value
rises against other currencies, and augmented when the dollar falls.) Stocks in
the Pacific region, which is dominated by Japan, returned 13.1% in U.S. dollars
and 13.7% in local-currency terms. The Select Emerging Markets Free Index soared
26.3% in U.S. dollars, led by huge gains in Turkey (+159%) and Brazil (+62%).
5
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REPORT FROM THE ADVISER
Vanguard U.S. Growth Fund generated a healthy 13.6% return during the first six
months of the fiscal year. However, we acknowledge that this result was short of
the returns from some growth stock indexes and the average return from other
growth mutual funds.
Returns diverged widely among segments of the growth-stock universe,
notably in terms of market capitalization. The trend shows up in returns from
the growth stocks within the S&P 500 Index, which is dominated by large-cap
stocks, compared with the growth issues in the Russell 1000 Index, which
includes many mid-cap companies. That perennial winner of recent years, the S&P
500/BARRA Growth Index, recorded a 12.2% return for the six months, during which
the Russell 1000 Growth Index increased 22.5%. This gap in returns for the two
indexes was unusually wide--a result of the veritable explosion in prices of
mid-cap growth stocks, which rose 67% during the half-year. The average return
for large-cap growth mutual funds, many of which hold more mid-cap stocks than
your fund, benefited from this trend, reaching 29.3%. In prior periods when
larger growth companies excelled, your U.S. Growth Fund has comfortably
outdistanced the average return from its fund counterparts.
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TEN LARGEST HOLDINGS
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PERCENTAGE
COMPANY OF NET ASSETS
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1.Cisco Systems, Inc. 8.9%
2.Microsoft Corp. 6.1
3.General Electric Co. 5.5
4.EMC Corp. 3.6
5.Intel Corp. 3.6
6.Texas Instruments, Inc. 3.4
7.America Online, Inc. 3.3
8.Sun Microsystems, Inc. 3.1
9.Applied Materials, Inc. 3.0
10.Nokia Corp. ADR 2.8
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Total 43.3%
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Your portfolio managers would like to share some perspectives on how we
construct the fund. We tend not to vary significantly from our benchmark index's
weightings in subsectors of the growth-stock market. Instead, we rely on stock
selection to add value. While the fund has a striking 52% of assets in
technology and telecommunications companies (up from 38% six months ago), this
exposure is close to the market weight for these groups, as measured by the
Russell 1000 Growth Index. In the past 12 months, the tech/telecom weighting in
the growth indexes has doubled. The rise in these stocks' proportion of the
market is truly extraordinary--indeed, it may well be unique in the history of
the securities markets. The tech sector is generating a wave of growth with
valuable new technologies that sometimes appear to have nearly open-ended
potential. Not only consumers, like you and us, but also almost all businesses
are joining in this technological revolution, and it is changing the way we
conduct our lives.
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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.
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In keeping with this outlook, and based on their strong business
fundamentals, four of the fund's five largest purchases in the last six months
were technology-related stocks: America Online, Sun
6
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Microsystems, Oracle, and Texas Instruments. Nine of the ten largest gainers in
the fund were tech stocks; the other was General Electric. And, as of February
29, nine of the fund's ten largest positions were technology companies, broadly
defined.
As your adviser, Lincoln Capital has responded to the gigantic shifts in
the market in other ways as well. We are about to retain a third experienced
analyst in the tech/telecom field, and we expect to add a fourth later this
year. These additions will permit us to further intensify our coverage of the
field, especially in telecom and mid-cap tech stocks.
It is an exciting time.
For the first time since Lincoln Capital began advising the U.S. Growth
Fund 12 years ago, a new member has joined the portfolio management team. This
is John Cole. John is a seasoned professional, who has spent nearly three years
at Lincoln and a decade in the investment field. His presence assures continued
stability and continuity in your management team.
John Cole, Portfolio Manager
David Fowler, Portfolio Manager
Parker Hall, Portfolio Manager
Lincoln Capital Management Company
March 10, 2000
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FUND PROFILE
U.S. GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of February
29, 2000, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
PORTFOLIO CHARACTERISTICS
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U.S. GROWTH S&P 500
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Number of Stocks 68 500
Median Market Cap $121.1B $84.1B
Price/Earnings Ratio 46.9x 26.2x
Price/Book Ratio 12.0x 5.2x
Yield 0.2% 1.2%
Return on Equity 28.6% 23.7%
Earnings Growth Rate 21.3% 16.6%
Foreign Holdings 3.6% 1.2%
Turnover Rate 55%* --
Expense Ratio 0.39%* --
Cash Reserves 2.3% --
*Annualized.
INVESTMENT FOCUS
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[GRID]
STYLE GROWTH
MARKET CAP LARGE
VOLATILITY MEASURES
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U.S. GROWTH S&P 500
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R-Squared 0.91 1.00
Beta 1.02 1.00
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
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Cisco Systems, Inc. 8.9%
Microsoft Corp. 6.1
General Electric Co. 5.5
EMC Corp. 3.6
Intel Corp. 3.6
Texas Instruments, Inc. 3.4
America Online, Inc. 3.3
Sun Microsystems, Inc. 3.1
Applied Materials, Inc. 3.0
Nokia Corp. ADR 2.8
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Top Ten 43.3%
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
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FEBRUARY 28, 1999 FEBRUARY 29, 2000
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U.S. GROWTH U.S. GROWTH S&P 500
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<S> <C> <C> <C>
Auto & Transportation ................. 0.0% 0.0% 1.9%
Consumer Discretionary ................ 12.0 11.4 12.4
Consumer Staples ...................... 15.9 8.7 5.7
Financial Services .................... 12.1 7.5 12.7
Health Care ........................... 23.0 11.7 9.5
Integrated Oils ....................... 0.0 0.0 4.6
Other Energy .......................... 0.0 0.0 1.7
Materials & Processing ................ 2.4 0.6 2.6
Producer Durables ..................... 2.4 5.9 3.9
Technology ............................ 24.9 41.0 29.4
Utilities ............................. 0.0 3.5 9.8
Other ................................. 7.3 9.7 5.8
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</TABLE>
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BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH RESERVES. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a fund's 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 35%.) 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.
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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. An investor's shares, when
redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: AUGUST 31, 1979-FEBRUARY 29, 2000
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U.S. GROWTH FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------------
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 36.7 0.7 37.4 39.8
2000* 13.1 0.5 13.6 4.1
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*Six months ended February 29, 2000
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, 1999*
- ---------------------------------------------------------------------------------------------------------
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 22.28% 30.34% 18.45% 1.32% 19.77%
- ---------------------------------------------------------------------------------------------------------
*SEC rules require that we provide this average annual total return information through the latest
calendar quarter.
</TABLE>
10
<PAGE>
FINANCIAL STATEMENTS
FEBRUARY 29, 2000 (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, 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.
- --------------------------------------------------------------------------------
MARKET
VALUE*
U.S. GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (97.3%)
- --------------------------------------------------------------------------------
CONSUMER DISCRETIONARY (11.1%)
o America Online, Inc. 10,500,000 619,500
Home Depot, Inc. 5,700,000 329,531
Wal-Mart Stores, Inc. 6,700,000 326,206
Time Warner, Inc. 2,800,000 239,400
Gillette Co. 5,500,000 193,875
The Walt Disney Co. 2,800,000 93,800
o Amazon.com, Inc. 1,300,000 89,537
o Bed Bath & Beyond, Inc. 2,200,000 62,425
o Clear Channel Communications, Inc. 800,000 53,300
TJX Cos., Inc. 2,600,000 41,438
McDonald's Corp. 457,300 14,434
-------------
2,063,446
-------------
CONSUMER STAPLES (8.5%)
Procter & Gamble Co. 5,600,000 492,800
The Coca-Cola Co. 7,100,000 343,906
CVS Corp. 6,096,200 213,367
PepsiCo, Inc. 6,600,000 212,850
Colgate-Palmolive Co. 3,200,000 167,000
Walgreen Co. 4,721,000 121,861
o The Kroger Co. 2,114,800 31,458
-------------
1,583,242
-------------
FINANCIAL SERVICES (7.3%)
MBNA Corp. 9,600,000 218,400
Paychex, Inc. 4,200,000 210,263
American International Group, Inc. 2,200,000 194,562
American Express Co. 1,345,300 180,522
Automatic Data Processing, Inc. 3,900,000 169,894
State Street Corp. 2,200,000 160,325
Capital One Financial Corp. 4,200,000 154,612
o Concord EFS, Inc. 3,600,000 70,425
-------------
1,359,003
-------------
HEALTH CARE (11.4%)
Warner-Lambert Co. 5,900,000 504,819
Eli Lilly & Co. 5,500,000 326,906
Schering-Plough Corp. 7,600,000 265,050
American Home Products Corp. 4,700,000 204,450
o Amgen, Inc. 2,900,000 197,744
Bristol-Myers Squibb Co. 3,300,000 187,481
Johnson & Johnson 2,100,000 150,675
AstraZeneca Group PLC ADR 4,207,800 139,383
o ALZA Corp. 1,786,900 65,557
Pharmacia & Upjohn, Inc. 1,153,100 54,916
Merck & Co., Inc. 408,800 25,167
-------------
2,122,148
-------------
MATERIALS & PROCESSING (0.6%)
o Sealed Air Corp. 1,800,000 89,438
o W.R. Grace & Co. 2,600,000 26,162
-------------
115,600
-------------
PRODUCER DURABLES (5.7%)
o Applied Materials, Inc. 3,028,300 553,990
o Nokia Corp. ADR 2,596,300 514,879
-------------
1,068,869
-------------
TECHNOLOGY (39.9%)
COMMUNICATIONS TECHNOLOGY (15.1%)
o Cisco Systems, Inc. 12,516,300 1,654,498
Lucent Technologies, Inc. 5,700,000 339,150
Corning, Inc. 1,174,000 220,712
o JDS Uniphase Corp. 700,000 184,625
o QUALCOMM, Inc. 775,500 110,460
o Juniper Networks, Inc. 300,000 82,294
11
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
U.S. GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
o Inktomi Corp. 600,000 $ 82,275
o Tellabs, Inc. 1,706,200 81,898
o CIENA Corp. 308,000 49,222
COMPUTER SERVICES SOFTWARE & SYSTEMS (8.2%)
o Microsoft Corp. 12,700,000 1,135,062
o Oracle Corp. 5,300,000 393,525
COMPUTER TECHNOLOGY (8.1%)
o EMC Corp. 5,700,000 678,300
o Sun Microsystems, Inc. 6,100,000 581,025
o Dell Computer Corp. 6,000,000 244,875
ELECTRONICS--SEMICONDUCTORS/COMPONENTS (7.8%)
Intel Corp. 5,900,000 666,700
Texas Instruments, Inc. 3,800,000 632,700
o Broadcom Corp. 800,000 157,900
ELECTRONICS--TECHNOLOGY (0.7%)
o Solectron Corp. 2,100,000 137,550
-------------
7,432,771
-------------
UTILITIES (3.4%)
o MCI WorldCom, Inc. 6,150,000 274,444
SBC Communications Inc. 4,267,600 162,169
o Level 3 Communications, Inc. 1,000,000 113,875
Comcast Corp.-Special Class A 1,900,000 80,750
-------------
631,238
-------------
OTHER (9.4%)
General Electric Co. 7,800,000 1,031,062
Monsanto Co. 9,400,000 364,838
Tyco International Ltd. 6,000,000 227,625
Illinois Tool Works, Inc. 2,600,000 134,387
-------------
1,757,912
-------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $11,547,278) 18,134,229
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (0.4%)
- --------------------------------------------------------------------------------
Sealed Air Corp. $ 2.00 Cvt. Pfd.
(COST $53,909) 1,400,000 68,163
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (2.9%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.77%, 3/1/2000 $456,492 456,492
5.77%, 3/1/2000--Note F 76,936 76,936
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $533,428) 533,428
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.6%)
(COST $12,134,615) 18,735,820
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARKET
VALUE
(000)
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.6%)
- --------------------------------------------------------------------------------
Other Assets--Note C $ 274,655
Liabilities--Note F (380,666)
-------------
(106,011)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 443,672,427 outstanding
$.001 per value shares of beneficial
interest (unlimited authorization) $18,629,809
================================================================================
NET ASSET VALUE PER SHARE $41.99
================================================================================
*See Note A in Notes to Financial Statements.
oNon-Income-Producing Security.
ADR--American Depositary Receipt.
- --------------------------------------------------------------------------------
AT FEBRUARY 29, 2000, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
Paid in Capital $11,204,137 $25.25
Overdistributed Net
Investment Income (6,949) (.01)
Accumulated Net Realized Gains 831,416 1.87
Unrealized Appreciation--
Note E 6,601,205 14.88
- --------------------------------------------------------------------------------
NET ASSETS $18,629,809 $41.99
================================================================================
12
<PAGE>
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.
- --------------------------------------------------------------------------------
U.S. GROWTH FUND
SIX MONTHS ENDED FEBRUARY 29, 2000
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 49,307
Interest 9,128
Security Lending 4
-------------
Total Income 58,439
-------------
EXPENSES
Investment Advisory Fees--Note B 9,629
The Vanguard Group--Note C
Management and Administrative 23,202
Marketing and Distribution 1,256
Custodian Fees 16
Auditing Fees 7
Shareholders' Reports 212
Trustees' Fees and Expenses 11
-------------
Total Expenses 34,333
Expenses Paid Indirectly--Note C (2,126)
-------------
Net Expenses 32,207
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 26,232
- --------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 870,538
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES 1,294,524
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,191,294
================================================================================
13
<PAGE>
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. 29, 2000 AUG. 31, 1999
(000) (000)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income 26,232 82,729
Realized Net Gain 870,538 802,298
Change in Unrealized Appreciation (Depreciation) 1,294,524 2,867,213
---------------------------------
Net Increase in Net Assets Resulting from Operations 2,191,294 3,752,240
---------------------------------
DISTRIBUTIONS
Net Investment Income (87,494) (63,675)
Realized Capital Gain (841,607) (774,154)
---------------------------------
Total Distributions (929,101) (837,829)
---------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 2,650,544 5,653,573
Issued in Lieu of Cash Distributions 899,201 811,835
Redeemed (2,189,296) (2,959,346)
---------------------------------
Net Increase from Capital Share Transactions 1,360,449 3,506,062
- ----------------------------------------------------------------------------------------------
Total Increase 2,622,642 6,420,473
- ----------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 16,007,167 9,586,694
---------------------------------
End of Period $18,629,809 $16,007,167
==============================================================================================
1Shares Issued (Redeemed)
Issued 63,517 151,298
Issued in Lieu of Cash Distributions 21,409 23,255
Redeemed (52,505) (79,056)
--------------------------------
Net Increase in Shares Outstanding 32,421 95,497
==============================================================================================
</TABLE>
14
<PAGE>
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. 29, 2000 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $38.92 $30.36 $27.74 $22.62 $18.83 $15.52
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .07 .21 .21 .27 .26 .25
Net Realized and Unrealized Gain (Loss)
on Investments 5.23 10.85 3.57 6.73 4.39 3.24
------------------------------------------------------------
Total from Investment Operations 5.30 11.06 3.78 7.00 4.65 3.49
------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.21) (.19) (.27) (.26) (.29) (.18)
Distributions from Realized Capital Gains (2.02) (2.31) (.89) (1.62) (.57) --
------------------------------------------------------------
Total Distributions (2.23) (2.50) (1.16) (1.88) (.86) (.18)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $41.99 $38.92 $30.36 $27.74 $22.62 $18.83
===============================================================================================================
TOTAL RETURN 13.62% 37.38% 14.01% 32.50% 25.28% 22.75%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $18,630 $16,007 $9,587 $7,445 $4,544 $2,989
Ratio of Total Expenses to
Average Net Assets 0.39%* 0.39% 0.41% 0.42% 0.43% 0.47%
Ratio of Net Investment Income to
Average Net Assets 0.30%* 0.59% 0.69% 1.13% 1.32% 1.59%
Portfolio Turnover Rate 55%* 49% 48% 35% 44% 32%
===============================================================================================================
*Annualized.
</TABLE>
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Vanguard U.S. Growth Fund is registered under the Investment Company Act of 1940
as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments are valued at cost, which approximates market
value. Securities for which market quotations are not readily available are
valued by methods deemed by the Board of Trustees to represent fair value.
2. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Lincoln Capital Management Company provides investment advisory services to
the fund for a fee calculated at an annual percentage rate of average net
assets. For the six months ended February 29, 2000, the advisory fee represented
an effective annual rate of 0.11% 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 29, 2000, the fund had contributed capital of $3,701,000
to Vanguard (included in Other Assets), representing 0.02% of the fund's net
assets and 3.7% of Vanguard's capitalization. The fund's Trustees and officers
are also Directors and officers of Vanguard.
The fund has asked its investment adviser to direct certain security
trades, subject to obtaining the best price and execution, to brokers who have
agreed to rebate to the fund part of the commissions generated. Such rebates are
used solely to reduce the fund's management and administrative expenses. For the
six months ended February 29, 2000, these arrangements reduced the fund's
expenses by $2,126,000 (an annual rate of 0.02% of average net assets).
16
<PAGE>
D. During the six months ended February 29, 2000, the fund purchased
$4,940,010,000 of investment securities and sold $4,729,956,000 of investment
securities other than temporary cash investments.
E. At February 29, 2000, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $6,601,205,000,
consisting of unrealized gains of $7,200,727,000 on securities that had risen in
value since their purchase and $599,522,000 in unrealized losses on securities
that had fallen in value since their purchase.
F. The market value of securities on loan to broker/dealers at February 29,
2000, was $74,498,000, for which the fund held cash collateral of $76,936,000.
Cash collateral received is invested in repurchase agreements.
17
<PAGE>
THE VANGUARD FAMILY OF FUNDS
STOCK FUNDS
- ----------------------------------------------
500 Index Fund
Aggressive Growth Fund
Capital Opportunity Fund
Convertible Securities Fund
Emerging Markets Stock Index Fund
Energy Fund Equity Income Fund
European Stock Index Fund
Explorer Fund
Extended Market Index Fund*
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Index Fund*
Health Care Fund
Institutional Index Fund*
International Growth Fund
International Value Fund
Mid-Cap Index Fund*
Morgan Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund*
Small-Cap Index Fund*
Small-Cap Value Index Fund*
Tax-Managed Capital Appreciation Fund*
Tax-Managed Growth and Income Fund*
Tax-Managed International Fund*
Tax-Managed Small-Cap Fund*
Total International Stock Index Fund
Total Stock Market Index Fund*
U.S. Growth Fund
Utilities Income Fund
Value Index Fund*
Windsor Fund
Windsor II Fund
BALANCED FUNDS
- ----------------------------------------------
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy Conservative Growth Fund
LifeStrategy Growth Fund
LifeStrategy Income Fund
LifeStrategy Moderate Growth Fund
STAR Fund
Tax-Managed Balanced Fund
Wellesley Income Fund
Wellington Fund
BOND FUNDS
- ----------------------------------------------
Admiral Intermediate-Term Treasury Fund
Admiral Long-Term Treasury Fund
Admiral Short-Term Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Insured Long-Term Tax-Exempt Fund
Intermediate-Term Bond Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund*
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds(California,
Florida, Massachusetts, New Jersey, New
York, Ohio, Pennsylvania)
Total Bond Market Index Fund*
MONEY MARKET FUNDS
- ----------------------------------------------
Admiral Treasury Money Market Fund
Federal Money Market Fund
Prime Money Market Fund*
State Tax-Exempt Money Market Funds
(California, New Jersey, New York,
Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
- ----------------------------------------------
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
*Offers Institutional Shares.
For information about Vanguard funds and our variable annuity plan, including
charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box
2600, Valley Forge, PA 19482-2600.
Read it carefully before you invest or send money.
18
<PAGE>
- --------------------------------------------------------------------------------
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's eight board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's professional
affiliations. Noted in parentheses is the year in which the Trustee joined the
Vanguard Board.
TRUSTEES
JOHN J. BRENNAN (1987) 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 (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL (1977) 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 Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL (1991) 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. (1971) 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 (1985) Retired Chairman of Rohm & Haas Co.; Director of
AmeriSource Health Corporation, 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.
VANGUARD MANAGING DIRECTORS
R. Gregory Barton Legal Department.
Robert A. DiStefano Information Technology.
James H. Gately Individual Investor Group.
Kathleen C. Gubanich Human Resources.
Ian A. MacKinnon Fixed Income Group.
F. William McNabb, III Institutional Investor Group.
Michael S. Miller Planning and Development.
Ralph K. Packard Chief Financial Officer.
George U. Sauter Core Management Group.
<PAGE>
[SHIP LOGO]
[THE VANGURD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the
Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of
Forest Hill, Maryland.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's
shareholders. It may not be distributed
to prospective investors unless it
is preceded or accompanied by the
current fund prospectus.
Q232-04/11/2000
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
<PAGE>
VANGUARD(R)
INTERNATIONAL
GROWTH FUND
February 29, 2000
SEMIANNUAL
[SHIP PHOTO]
[A MEMBER OF THE VANGUARD GROUP LOGO]
<PAGE>
HAVE THE PRINCIPLES OF INVESTING CHANGED?
In a world of frenetic change in business, technology, and the
financial markets, it is natural to wonder whether the basic principles of
investing have changed.
We don't think so.
The most successful investors over the coming decade will be those who
began the new century with a fundamental understanding of risk and who had the
discipline to stick with long-term investment programs.
Certainly, investors today confront a challenging, even unprecedented,
environment. Valuations of market indexes are at or near historic highs. The
strength and duration of the bull market in U.S. stocks have inflated people's
expectations and diminished their recognition of the market's considerable
risks. And the incredible divergence in stock returns--many technology-related
stocks gained 100% or more in 1999, yet prices fell for more than half of all
stocks--has made some investors question the idea of diversification.
And then there is the Internet. Undeniably, it is a powerful medium for
communications and transacting business. For investors, the Internet is a vast
source of information about investments, and online trading has made it
inexpensive and convenient to trade stocks and invest in mutual funds.
However, new tools do not guarantee good workmanship. Information is
not the same as wisdom. Indeed, much of the information, opinion, and rumor that
swirl about financial markets each day amounts to "noise" of no lasting
significance. And the fact that rapid-fire trading is easy does not make it
beneficial. Frequent trading is almost always counterproductive because
costs--even at low commission rates--and taxes detract from the returns that the
markets provide. Sadly, many investors jump into a "hot" mutual fund just in
time to see it cool off. Meanwhile, long-term fund investors are hurt by
speculative trading activity because they bear part of the costs involved in
accommodating purchases and redemptions.
Vanguard believes that intelligent investors should resist short-term
thinking and focus instead on a few time-tested principles:
o Invest for the long term. Pursuing your long-term investment goals is
more like a marathon than a sprint.
o Diversify your investments with holdings in stocks, bonds, and cash
investments. Remember that, at any moment, some part of a diversified portfolio
will lag other parts, and be wary of taking on more risk by "piling onto" the
best-performing part of your holdings. Today's leader could well be tomorrow's
laggard.
o Step back from the daily frenzy of the markets; focus on your overall
asset allocation.
o Capture as much of the market's return as possible by minimizing
costs and taxes. Costs and taxes diminish long-term returns while doing nothing
to reduce the risks you incur as an investor.
- -----------------------------------------
CONTENTS
REPORT FROM THE CHAIRMAN............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 Inc. or Morningstar, Inc.,
unless otherwise noted.
"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>
REPORT FROM THE CHAIRMAN
[PHOTO OF JOHN J. BRENNAN]
JOHN J. BRENNAN
Vanguard International Growth Fund provided a robust total return of 24.0%
during the six months ended February 29, 2000, as many of the world's major
stock markets registered impressive gains.
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, the unmanaged Morgan Stanley Capital
International Europe, Australasia, Far East (EAFE) Index, and a subset of that
benchmark--the MSCI EAFE Growth Index. Your fund's performance lagged that of
its average peer by 3.2 percentage points. However, it handily outpaced the
broader EAFE Index, its primary benchmark.
- ---------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
FEBRUARY 29, 2000
- ---------------------------------------------------------
Vanguard International Growth Fund 24.0%
- ---------------------------------------------------------
Average International Fund* 27.2%
- ---------------------------------------------------------
MSCI EAFE Index 13.8%
- ---------------------------------------------------------
MSCI EAFE Growth Index 27.3%
- ---------------------------------------------------------
*Derived from data provided by Lipper Inc.
The fund's return is based on an increase in net asset value from
$19.75 per share on August 31, 1999, to $23.22 per share on February 29, 2000,
with the latter figure adjusted for a dividend of $0.26 per share paid from net
investment income and a distribution of $0.90 per share paid from net realized
capital gains.
THE PERIOD IN REVIEW
Economic conditions in the world's industrialized nations were generally quite
good during the six months ended February 29, the first half of fiscal 2000 for
Vanguard International Growth Fund. Business activity expanded at a modest pace
in Europe, while output rose quickly in Asia, except for Japan. The economic
expansion in the United States completed a record ninth year without
interruption.
Indeed, global economic news was so bright that some investors fretted
that inflation--particularly in the United States--could ignite, prompting
higher interest rates and lower demand for equities. Indeed, there were hints of
inflation: a spike in oil prices, rising wage costs, and some tightness in
supplies of some goods. The U.S. Federal Reserve Board, the Bank of England, and
the European Central Bank each made preemptive strikes against inflation by
raising interest rates during the period. Strong growth in productivity and
higher corporate earnings proved soothing to investors, however, and stock
prices in most countries moved higher.
Five of the seven countries that dominate the EAFE Index, which tracks
developed markets in Europe and the Pacific Rim, saw rising stock prices during
the six-month period. Markets in Germany, France, and Italy soared, providing
total returns of 35%-46% in local-currency terms. However, for U.S. investors,
the gains from these three countries were cut by about one-third as the euro
lost value versus the U.S. dollar. (Currency fluctuations, which are an
additional element of risk faced by investors in international stocks, are
driven by changes in demand from importers, exporters, investors, and central
banks.) Stocks in Japan--which accounted for more than 26% of the
capitalization-weighted EAFE Index as of February 29--rose about 14% in both yen
and dollar terms.
1
<PAGE>
The U.S. stock market during the half-year returned 13.4%, as measured
by the Wilshire 5000 Total Market Index, the broadest measure of U.S. stocks.
Small- and mid-capitalization stocks led the advance, while the large-cap S&P
500 Index lagged with a gain of 4.1%.
Volatility was evident in emerging markets, as usual. Brazil provided
an amazing six-month total return of more than 62% in U.S.-dollar terms, while
Malaysia and Mexico each gained more than 33%. South Korea went the other way,
declining more than -11%.
PERFORMANCE OVERVIEW
Vanguard International Growth Fund's gain of 24.0% was a very high absolute
return for a mere six-month period. However, our performance should also be
judged in comparison with funds with similar objectives. On that score, we came
up short, trailing the average return of international stock funds by about 3
percentage points. This was primarily because we held smaller stakes in the
technology, media, and telecommunications sectors during the period. These
sectors provided exceptionally high returns but--mindful of their risks--our
adviser held smaller positions in them than the average international fund. We
lagged the 27.3% return of the tech-heavy EAFE Growth Index for the same reason.
The fund did benefit from its holdings in these sectors, however,
enabling us to outperform the overall EAFE Index. Compared with the index, the
fund was also helped by our lighter weighting in the United Kingdom, where the
average stock posted a modest loss. On average during the period, the fund held
13% of its assets in the United Kingdom--well below the region's 19% position in
the EAFE Index. (The acquisition of Germany's Mannesmann by the British
mobile-telephone company Vodafone bumped this stake up to about 17% at the end
of the fiscal half-year.) Of course, the weakness of U.K. stocks restrained the
absolute return of the fund.
Over the long run, we expect to provide performance superior to that of
funds with similar investment objectives and policies. We base this expectation
in part on the low operating costs that are a key part of the Vanguard value
proposition. Over the past six months, for example, the International Growth
Fund had annualized costs totaling 0.52% of average net assets, or $5.20 per
$1,000 in assets--well below the 1.72%, or $17.20 per $1,000, expense ratio
charged by the average international fund.
IN SUMMARY
During periods when one market segment or asset class dominates all others, the
importance of diversification can be difficult to appreciate. But these are
precisely the periods when diversification is most valuable in mitigating risk.
We strongly advise investors to maintain a diversified approach to investing.
A balanced investment program that includes both domestic and
international stock funds, as well as bond funds and cash reserves, provides
exposure to all market segments and ensures that you participate in the market's
gains while avoiding some of the risk. Sticking with a thoughtfully constructed
plan, while trying at times, is a solid approach for long-term investment
success.
[SIGNATURE OF JOHN J. BRENNAN]
John J. Brennan
Chairman and Chief Executive Officer
March 17, 2000
2
<PAGE>
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED FEBRUARY 29, 2000
A strong expansion in economic growth, both at home and abroad, led to
robust returns for stocks but anemic returns for bonds during the six months
ended February 29, 2000.
Big gains for growth stocks--especially those of computer, biotechnology,
and wireless communications companies--pushed global markets higher. Returns
from bonds were hurt by a rise in interest rates amid worries that surging
economic growth would push up inflation.
U.S. STOCK MARKETS
Stock prices rose, on average, during the half-year. A burgeoning economy and
solid increases in current and projected corporate earnings generally outweighed
investors' concern about rising interest rates. The U.S. market as a whole, as
measured by the Wilshire 5000 Total Market Index, rose 13.4% during the six
months ended February 29. For a change, small- and mid-capitalization stocks
outperformed large-cap issues. The S&P 500 Index, a large-cap benchmark, gained
4.1%, while the rest of the market, as measured by the Wilshire 4500 Completion
Index, was up a remarkable 46.6%.
Surging prices of growth-oriented, technology-related stocks caused a
wide gap, across all size groups, in the returns of growth and value stocks.
Within the S&P 500 Index, growth stocks outpaced value stocks by 17.2 percentage
points (+12.2% for growth stocks versus -5.0% for value stocks). Within the
small-cap Russell 2000 Index, growth beat value by a huge 63.2 percentage points
(+66.0% versus +2.8%).
- -----------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED FEBRUARY 29, 2000
----------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- -----------------------------------------------------------------------
STOCKS
S&P 500 Index 4.1% 11.7% 25.1%
Russell 2000 Index 35.8 49.3 19.2
Wilshire 5000 Index 13.4 21.7 25.1
MSCI EAFE Index 13.8 25.8 13.2
- -----------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 1.9% 1.1% 7.0%
Lehman 10 Year Municipal Bond Index 0.6 -1.5 6.1
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.5 4.9 5.2
- -----------------------------------------------------------------------
OTHER
Consumer Price Index 1.6% 3.2% 2.4%
- -----------------------------------------------------------------------
*Annualized.
An amazing 21 of 54 technology stocks in the S&P 500 Index gained more
than 100% during the half-year. Some observers viewed such gains, along with a
rise in margin borrowing by investors, as signs of speculative excess.
Nevertheless, several factors contributed to the sector's dominance, including
fast-growing revenues; rapid development of computer and communications gear and
services; high demand for digital products by corporations seeking to improve
productivity; and the opening of international markets.
Interestingly, the stock market's surge was itself cited as a potential
worry by Federal Reserve Board Chairman Alan Greenspan. Higher stock prices, he
said, made individuals feel wealthier and contributed to a rise in demand for
goods and services that is outstripping the growth rate of supply.
3
<PAGE>
The Fed, seeking to slow the economy to prevent inflation, raised its
target for short-term interest rates twice during the half-year and was widely
expected to engineer further increases. Inflation did, in fact, accelerate
somewhat. The Consumer Price Index registered a 1.6% gain during the six-month
period and was up 3.2% for the 12 months through February.
Higher rates can hurt stock prices because many investors, in valuing
stocks, use current interest rates to discount the value of future earnings and
dividends that they expect to receive. The higher the discount, the lower the
present value of future earnings and dividends. But for tech stocks, at least,
investor enthusiasm overcame any qualms about higher rates.
U.S. BOND MARKETS
Rapid economic growth may cheer stock investors, but it tends to make bond
investors anxious. With economic growth running at better than a 4% annual rate,
and with unemployment hovering around a 30-year low of 4.0%, bond
investors--like Fed policymakers--were concerned that inflation would inevitably
heat up. And inflation is the bane of bondholders because it reduces the
purchasing power of future payments of interest and principal.
Inflation did worsen a bit during the half-year, but for those looking
ahead, the economic tea leaves could support either of two forecasts. The
pessimistic view was that increased inflation was bound to result from higher
prices for oil and other commodities and higher wages (wage and salary income in
January 2000 was 6.6% higher than a year before). Optimists countered that oil's
higher price was temporary and that rapidly rising productivity would help
businesses to offset higher wage costs.
In any event, interest rates increased and bond prices, which move in
the opposite direction, fell during the half-year. For long-term U.S. Treasury
securities, the rise in yields was muted by a shrinking supply of securities.
Because of the federal budget surplus, the Treasury issued fewer new securities
and even began repurchasing some outstanding bonds. The yield of the 30-year
Treasury bond rose a mere 8 basis points (0.08%), to 6.14% on February 29 from
6.06% on August 31. The yield of the 10-year Treasury rose 44 basis points, to
6.41% from 5.97%. Money market rates, which are most influenced by the Federal
Reserve, rose more steeply: Yields on 3-month T-bills increased on balance by 81
basis points, to 5.78% on February 29.
The Lehman Aggregate Bond Index, the benchmark for the overall taxable
bond market, returned 1.9% for the six months, as interest income of 7.0% was
partially offset by a 5.1% average decline in bond prices.
INTERNATIONAL STOCK MARKETS
Stock prices in Europe, Asia, and many emerging markets rose sharply during the
half-year as investors responded to improving economic conditions and to an
increase in corporate merger and acquisition activity. The return from developed
foreign markets was 13.8%, as measured by the Morgan Stanley Capital
International Europe, Australasia, Far East (EAFE) Index.
In Europe, an average return of 22.2% in local-currency terms was
reduced to 13.8% for U.S. investors because of the U.S. dollar's gains against
European currencies. (Returns from abroad are diminished when the dollar's value
rises against other currencies, and augmented when the dollar falls.) Stocks in
the Pacific region, which is dominated by Japan, returned 13.1% in U.S. dollars
and 13.7% in local-currency terms. The Select Emerging Markets Free Index soared
26.3% in U.S. dollars, led by huge gains in Turkey (+159%) and Brazil (+62%).
4
<PAGE>
REPORT FROM THE ADVISER
Vanguard International Growth Fund achieved a total return of 24.0% during the
six months ended February 29, 2000. This was ahead of the 13.8% return of our
unmanaged benchmark, the MSCI EAFE Index, but behind the 27.2% average return of
international stock mutual funds.
Clearly, the past half-year was an uncommon period. International
markets have been electrified by the potential of digital technology and the
convergence of the communications, information, and entertainment industries.
Just as the United States leads the world in personal computer usage, Europe
leads the world in mobile telephones, and over the past six months we have seen
more skirmishes in the struggle for control of this very fast-moving industry.
Your fund benefited from this battle because of its significant holdings in
strategically well-positioned companies that are more likely to be acquired than
to try acquiring others. Vodafone's bid for Mannesmann was the catalyst for a
reevaluation by the market of industry prospects. The fund had a large holding
in Mannesmann. We also had a big stake in Vivendi, which used its pivotal
position in the takeover to strike a very advantageous deal with Vodafone
involving Canal Plus, which also was one of our holdings. The fund owns seven
other European telecommunications companies. It would not be surprising if
several of these were also taken over in the industry's current consolidation
phase.
The fund's exposure to technology, media, and telecommunications
companies has been the most important factor in its performance over the past
six months; this contrasts markedly with the usual pattern, whereby country
exposures have been the most important. Overall, about 44% of our assets are in
these three sectors: 20% in technology, 6% in media, and 18% in
telecommunications. The EAFE Index typically holds about 35% in the same
industries. In geographic terms, the fund has a strong bias toward Europe for
telecommunications and media stocks, and toward Asia for companies producing
computer hardware.
The performance of these sectors is being driven by dramatic
technological advances rather than by macroeconomic factors. It is encouraging
that the latter are also very supportive of non-U.S. stock prices at this point.
Continental Europe is in the sweet spot of the economic cycle. Growth
has broadened in recent months to encompass all the major countries. Business
and consumer confidence is high. Unemployment is falling from exceedingly high
levels, which should allow economic expansion for a protracted period.
Government finances are improving as revenues recover (as they have done in the
United States), and inflationary pressures are unlikely to be a constraint for
the foreseeable future. Corporations are restructuring more aggressively than
most observers had expected, and hostile takeover bids are appearing in a region
that historically has shunned them. Finally, in Germany, signs of tax reform are
very encouraging.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
About 46% of the fund is invested in continental Europe. Our
investments outside of technology-related areas feature many well-run companies,
which is an important characteristic of the fund's investment strategy. Within
the past year, ten of the companies
5
<PAGE>
we hold have announced major deals expanding or refocusing their businesses, and
five of them are positioned specifically to benefit from the region's economic
expansion.
Japan, where the fund has invested about 18% of assets, is an enigma.
During the past six months, we widened our holdings there, which in the past
were focused on a small number of world-class companies. It appears that another
massive wave of government spending due to start later in 2000 may help the
economy to stop contracting and grow by 1.5% this year. Typically, when growth
is accelerating and monetary policy is accommodative, stocks prosper. For this
reason, we have modestly increased exposure to Japanese companies that derive
most of their revenue domestically. Not all signs are encouraging, however. An
expanding economy would provide the best climate in which to push through the
reforms that are desperately needed in Japan, but neither the government nor
most companies show much real enthusiasm for change. With elections coming later
this year, reform at the government level has halted. Change is coming to
companies, but at a disappointingly slow pace. This is why, even though I am
more positive for the near term, I remain cautious about Japan as I look ahead
to 2001. A weaker currency would significantly improve the outlook for the
economy. We expect such a weakening, which is why most of our Japanese yen
exposure is hedged back to U.S. dollars.
About 17% of the fund's assets are invested in the United Kingdom.
One-quarter of this is represented by Vodafone, resulting from its successful
bid for Mannesmann. Most of our other U.K. holdings are midsized companies that
represent outstanding value. Both large- and small-capitalization stocks have
performed strongly in recent years, but a wide swath of companies in the middle
lagged. Like the United States, the United Kingdom faces inflationary risks
because its economy is near a peak after a long expansion. For this reason, many
U.K. stocks look cheaper than they truly are. We trust our selections.
Finally, 17% of the portfolio is invested in the smaller Asian
countries and in Latin America. The Asian countries are tremendous beneficiaries
of the recovery in global economic growth and, in particular, in demand for
high-tech products. Also, China's economy is recovering, which has a ripple
effect across the region. Most of our investments are in exporting companies,
which should prosper if world trade remains buoyant this year, as we anticipate.
Latin America is riskier because the region is dependent on capital inflows from
abroad. We have only 4% of assets there, as we try to balance the risk with our
positive near-term outlook.
As I write, markets are exceptionally volatile. Despite the fund's bias
toward "new economy" companies, our holdings are well diversified, which should
dampen price fluctuations. However, the fund has only modest protection against
a major market swing back to value stocks.
Richard Foulkes
Schroder Investment Management North America Inc.
March 16, 2000
6
<PAGE>
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. An investor's shares, when
redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: SEPTEMBER 30, 1981-FEBRUARY 29, 2000
- -----------------------------------------------------------------
INTERNATIONAL GROWTH FUND MSCI EAFE
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------------------------------
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 20.2 1.5 21.7 26.0
2000* 22.5 1.5 24.0 13.8
- -----------------------------------------------------------------
*Six months ended February 29, 2000.
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, 1999*
- -----------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION --------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
<S> <C> <C> <C> <C> <C> <C>
International Growth Fund 9/30/1981 26.34% 15.17% 8.33% 1.54% 9.87%
- -----------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
7
<PAGE>
FUND PROFILE
INTERNATIONAL GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of February
29, 2000, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
PORTFOLIO CHARACTERISTICS
- ---------------------------------------------------
INTERNATIONAL MSCI
GROWTH EAFE
- ---------------------------------------------------
Number of Stocks 145 963
Turnover Rate 44%* --
Expense Ratio 0.52%* --
Cash Reserves 3.9% --
*Annualized.
ALLOCATION BY REGION
- -----------------------------------
[PIE CHART]
EUROPE 64%
PACIFIC 23%
EMERGING MARKETS 13%
VOLATILITY MEASURES
- ----------------------------------------------------
INTERNATIONAL MSCI
GROWTH EAFE
- ----------------------------------------------------
R-Squared 0.90 1.00
Beta 1.01 1.00
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
- ----------------------------------------------------
Vodafone AirTouch PLC 4.6%
Philips Electronics NV 4.2
Vivendi 3.1
Murata Manufacturing Co., Ltd. 2.9
Fuji Photo Film Co., Ltd. 2.7
Total Fina SA B Shares 2.7
Samsung Electronics Co., Ltd. 2.6
Canal Plus SA 2.6
ING Groep NV 2.6
Olivetti SpA 2.2
- ----------------------------------------------------
Top Ten 30.2%
Country Diversification (% of Common Stocks) can be found on page 10.
8
<PAGE>
ALLOCATION BY REGION. An indicator of diversification, this chart shows the
geographic distribution of a fund's holdings.
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.
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 35%.) 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>
COUNTRY DIVERSIFICATION (% OF COMMON STOCKS)
- -----------------------------------------------------------------
FEBRUARY 28, 1999 FEBRUARY 29, 2000
---------------------------------------------------
INTERNATIONAL INTERNATIONAL MSCI
GROWTH GROWTH EAFE
---------------------------------------------------
Argentina 0.2% 0.0% 0.0%
Australia 1.7 0.2 2.4
Austria 0.0 0.0 0.2
Belgium 0.7 0.0 0.7
Brazil 0.6 2.2 0.0
Chile 0.1 0.0 0.0
Denmark 0.8 0.5 0.8
Finland 0.0 1.8 3.4
France 13.0 15.8 10.9
Germany 7.3 3.0 10.0
Hong Kong 0.6 2.6 2.4
Ireland 1.5 1.5 0.4
Italy 9.5 6.1 4.7
Japan 13.5 18.1 26.6
Malaysia 0.5 1.4 0.0
Mexico 0.9 1.9 0.0
Netherlands 11.4 11.9 5.1
New Zealand 0.0 0.0 0.1
Norway 0.0 0.0 0.4
Philippines 0.7 0.0 0.0
Portugal 0.0 0.0 0.5
Singapore 1.1 1.9 0.9
South Korea 1.5 3.9 0.0
Spain 4.1 1.8 2.8
Sweden 3.1 2.8 3.5
Switzerland 11.4 2.4 5.1
Taiwan 0.0 3.2 0.0
United Kingdom 15.8 17.0 19.1
- -----------------------------------------------------------------
Total 100.0% 100.0% 100.0%
10
<PAGE>
FINANCIAL STATEMENTS
FEBRUARY 29, 2000 (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
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.
- --------------------------------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (96.1%)
- --------------------------------------------------------------------------------
AUSTRALIA (0.2%)
Broken Hill Proprietary Co. Ltd. 2,000,000 $ 19,766
-----------
BRAZIL (2.1%)
o Telecomunicacoes de
Sao Paulo 1,706,500 58,341
Telesp Participacoes
SA Pfd. 1,182,325,725 40,111
Petroleo Brasileiro SA Pfd. 132,434,000 34,457
Telecomunicacoes
Brasileiras SA ADR Pfd. 210,000 30,923
Tele Centro Sul
Participacoes ADR 363,900 26,246
Cia Vale Do Rio Pfd. A 611,100 16,245
o Telecomunicacoes
Brasileiras Pfd. Receipts SA 91,500,000 13,430
-----------
219,753
-----------
DENMARK (0.5%)
Den Danske Bank A/S 506,000 48,348
-----------
FINLAND (1.8%)
Nokia Oyj 921,320 183,618
-----------
FRANCE (15.2%)
Vivendi 2,733,000 321,022
Total Fina SA B Shares 2,120,130 280,673
Canal Plus SA 947,000 267,149
Alcatel 928,000 217,294
Suez Lyonnaise des Eaux 1,181,670 194,548
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
Thomson-CSF SA 2,345,859 $ 92,602
Bouygues SA 101,500 84,531
Aventis 1,157,000 59,820
AXA 300,196 37,718
Accor SA 800,000 29,115
o Vivendi Warrants Exp. 2/5/2001 580,500 3,219
-----------
1,587,691
-----------
GERMANY (2.8%)
SAP AG Pfd. 147,000 122,142
Deutsche Telekom AG 1,465,000 121,444
Viag AG 2,964,000 52,794
-----------
296,380
-----------
HONG KONG (2.5%)
o China Telecom
(Hong Kong) Ltd. 11,770,000 108,134
Hutchison Whampoa Ltd. 4,527,000 70,966
Cheung Kong Holdings Ltd. 2,713,000 36,080
Swire Pacific Ltd. A Shares 6,978,000 33,444
Sun Hung Kai Properties Ltd. 1,815,000 16,383
Mandarin Oriental
International Ltd. 1,101,369 567
Mandarin Oriental
International Ltd. Rights
Exp. 3/6/2000 220,274 1
-----------
265,575
-----------
IRELAND (1.5%)
o Elan Corp. PLC ADR 2,747,000 112,970
Bank of Ireland PLC 6,828,000 39,857
-----------
152,827
-----------
11
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
ITALY (5.9%)
o Olivetti SpA 57,816,000 $ 227,670
Telecom Italia Mobile SpA 15,903,000 216,656
Banca di Roma SpA 60,797,000 69,130
Fiat SpA 1,786,100 54,341
o Tecnost SpA 10,749,000 44,708
-----------
612,505
-----------
JAPAN (17.2%)
Murata Manufacturing
Co., Ltd. 1,613,000 307,178
Fuji Photo Film Co., Ltd. 6,418,000 282,189
Takeda Chemical
Industries Ltd. 3,639,000 205,385
Matsushita Electric Industrial Co., Ltd. 4,386,000 127,765
Nippon Telegraph and
Telephone Corp. 8,266 114,376
Mabuchi Motor Co. 731,000 90,234
Nippon Television
Network Corp. 58,000 80,254
SMC Corp. 373,000 69,268
Sumitomo Electric
Industries Ltd. 4,720,000 62,216
East Japan Railway Co. 10,860 49,035
Keyence Corp. 143,000 47,905
Mitsubishi Corp. 6,291,000 46,445
Tokyo Electron Ltd. 254,000 38,730
Sony Corp. 125,000 36,982
Mitsui & Co., Ltd. 5,600,000 34,665
Hirose Electric Co., Ltd. 246,000 32,941
Yamanouchi Pharmaceuticals
Co., Ltd. 667,000 31,877
TDK Corp. 300,000 28,702
Fujitsu Ltd. 808,000 26,847
Tokio Marine & Fire
Insurance Co. 2,560,000 23,374
Yasuda Fire & Marine
Insurance Co. 4,370,000 18,697
Toppan Printing Co., Ltd. 1,767,000 17,420
Kuraray Co., Ltd. 1,093,000 9,114
Chiyoda Fire & Marine
Insurance Co., Ltd. 2,220,000 5,558
Dowa Fire & Marine
Insurance Co. 2,221,000 5,338
Nippon Fire & Marine
Insurance Co., Ltd. 2,000,000 4,442
-----------
1,796,937
-----------
MALAYSIA (1.4%)
Tenaga Nasional Bhd. 16,195,000 53,699
Malayan Banking Bhd. 6,780,400 30,512
Telekom Malaysia Bhd. 7,076,500 29,982
Genting Bhd. 5,422,000 23,971
Resorts World Bhd. 1,620,000 5,883
-----------
144,047
-----------
MEXICO (1.8%)
Telefonos de Mexico SA
Class L ADR 1,208,600 79,465
o Grupo Televisa SA GDR 695,000 53,385
Fomento Economico
Mexica UBD 5,520,000 24,600
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
o Cemex SA CPO 5,331,405 $ 23,076
o Grupo Bimbo SA 6,552,000 10,825
o Cemex SA CPO Warrants
Exp. 12/13/2002 333,000 201
-----------
191,552
-----------
NETHERLANDS (11.5%)
Philips Electronics NV 2,354,292 435,775
ING Groep NV 5,271,786 266,574
Getronics NV 2,321,456 194,453
Verenigde Nederlandse
Uitgeversbedrijven
Verenigd Bezit 1,270,000 87,610
TNT Post Group NV 2,570,000 63,691
Heineken NV 1,091,000 55,094
STMicroelectronics NV 260,000 51,567
o Equant NV 290,000 32,779
Oce NV 860,000 10,474
-----------
1,198,017
-----------
SINGAPORE (1.8%)
Singapore Press Holdings Ltd. 2,882,486 55,185
United Overseas Bank Ltd. 7,816,512 49,429
o DBS Group Holdings Ltd. 3,365,722 41,591
City Developments Ltd. 6,180,000 25,097
Singapore Airlines Ltd. 1,564,000 14,518
-----------
185,820
-----------
SOUTH KOREA (3.7%)
Samsung Electronics Co., Ltd. 1,210,102 273,888
o Korea Electric Power Corp. 2,185,550 54,684
o Korea Telephone Warrants
Exp. 5/22/2000 292,000 24,660
o Kookmin Bank 2,018,500 22,486
o Shinhan Bank Co. 1,424,000 13,597
-----------
389,315
-----------
SPAIN (1.7%)
Endesa SA 5,374,000 113,675
Altadis SA 1,171,654 12,849
Bankinter SA 897,000 56,611
-----------
183,135
-----------
SWEDEN (2.7%)
LM Ericsson Telephone AB
B Shares 1,516,000 145,085
Skandia Forsakrings AB 2,209,000 90,459
Svenska Handelsbanken
A Shares 3,815,000 44,605
-----------
280,149
-----------
SWITZERLAND (2.3%)
o ABB Ltd. 1,019,000 108,415
Novartis AG (Registered) 69,800 88,864
Adecco SA (Bearer) 33,042 26,143
Clariant AG 50,300 18,874
-----------
242,296
-----------
TAIWAN (3.1%)
o United Microelectronics
Warrants 2/12/2001 25,614,000 93,491
o Asustek Computer Inc.
Warrants Exp. 2/12/2001 3,864,000 48,107
o Taiwan Semiconductor
Manufacturing Co. Warrants
Exp. 4/25/2000 5,318,748 42,656
12
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
o Taiwan Semiconductor
Manufacturing Co. Warrants
Exp. 1/29/2001 5,745,000 $ 37,559
o Far East Textiles Warrants
Exp. 8/11/2000 12,026,000 26,169
o Honhai Precision Warrants
3/5/2001 2,456,000 22,847
o Honhai Precision Warrants
2/15/2001 2,230,000 20,717
o Taiwan Semiconductor
Manufacturing Co.
Warrants Exp. 2/15/2001 1,435,000 9,372
o Honhai Precision Warrants
Exp. 8/11/2000 1,269,000 11,790
o Asustek Computer Inc.
Warrants Exp. 6/21/2000 702,000 8,722
-----------
321,430
-----------
UNITED KINGDOM (16.4%)
Vodafone AirTouch PLC 85,717,001 480,730
Standard Chartered PLC 9,628,700 135,896
Kingfisher PLC 12,218,000 92,103
Bass PLC 8,489,206 89,994
o British Sky Broadcasting
Group PLC 3,228,300 82,920
Centrica PLC 23,812,000 80,353
British Telecommunications
PLC 4,423,000 77,228
Tesco PLC 27,589,616 74,698
Rolls-Royce PLC 21,153,549 68,877
Electrocomponents PLC 4,938,000 56,090
Scottish & Newcastle PLC 8,025,418 52,009
Allied Zurich PLC 5,578,108 47,145
United News & Media PLC 3,161,000 41,993
Reckitt Benckiser PLC 4,654,000 40,447
Boots Co. PLC 5,532,000 40,217
BP Amoco PLC 4,482,000 34,494
Provident Financial PLC 3,400,000 27,643
Airtours PLC 5,813,100 25,994
Marconi PLC 1,894,000 23,607
IMI PLC 6,619,000 22,701
Tomkins PLC 8,080,000 22,355
Bodycote International PLC 5,079,000 20,928
o Telewest Communications PLC 3,022,130 20,754
British Land Co., PLC 3,129,000 17,166
o Arm Holdings PLC 158,000 11,911
British Airways PLC 2,189,000 10,333
Johnson Matthey PLC 757,000 8,628
-----------
1,707,214
-----------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $6,363,715) 10,026,375
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (8.9%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.77%, 3/1/2000 $ 122,497 $ 122,497
5.76%, 3/1/2000--Note G 801,732 801,732
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $924,229) 924,229
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (105.0%)
(COST $7,287,944) 10,950,604
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-5.0%)
- --------------------------------------------------------------------------------
Other Assets--Note C 332,359
Security Lending Collateral
Payable to Brokers--Note G (801,732)
Other Liabilities (49,846)
-----------
(519,219)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 449,224,440 outstanding
$.001 par value shares of beneficial
interest (unlimited authorization) $10,431,385
================================================================================
NET ASSET VALUE PER SHARE $23.22
================================================================================
*See Note A in Notes to Financial Statements.
oNon-Income-Producing Security.
ADR--American Depositary Receipt.
GDR--Global Depositary Receipt.
- --------------------------------------------------------------------------------
AT FEBRUARY 29, 2000, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
Paid in Capital 6,587,581 $14.66
Overdistributed Net
Investment Income--Note E (875) --
Accumulated Net
Realized Gains--Note E 164,779 .37
Unrealized Appreciation
(Depreciation)--Note F
Investment Securities 3,662,660 8.15
Foreign Currencies and
Forward Currency Contracts 17,240 .04
- --------------------------------------------------------------------------------
NET ASSETS $10,431,385 $23.22
================================================================================
13
<PAGE>
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.
- --------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
SIX MONTHS ENDED FEBRUARY 29, 2000
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* $ 38,011
Interest 6,392
Security Lending 1,463
-----------
Total Income 45,866
-----------
EXPENSES
Investment Advisory Fees--Note B 5,930
The Vanguard Group--Note C
Management and Administrative 13,962
Marketing and Distribution 734
Custodian Fees 2,268
Auditing Fees 6
Shareholders' Reports 154
Trustees' Fees and Expenses 6
-----------
Total Expenses 23,060
Expenses Paid Indirectly--Note D (922)
-----------
Net Expenses 22,138
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 23,728
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 277,696
Foreign Currencies and Forward Currency Contracts (15,615)
- --------------------------------------------------------------------------------
REALIZED NET GAIN 262,081
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 1,645,102
Foreign Currencies and Forward Currency Contracts 17,361
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 1,662,463
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,948,272
================================================================================
*Dividends are net of foreign withholding taxes of $5,259,000.
14
<PAGE>
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.29,2000 AUG.31,1999
(000) (000)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 23,728 $ 107,313
Realized Net Gain 262,081 296,801
Change in Unrealized Appreciation (Depreciation) 1,662,463 1,062,057
--------------------------------
Net Increase in Net Assets Resulting from Operations 1,948,272 1,466,171
--------------------------------
DISTRIBUTIONS
Net Investment Income (106,118) (89,038)
Realized Capital Gain (367,331) (64,755)
--------------------------------
Total Distributions (473,449) (153,793)
--------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 3,322,309 3,671,257
Issued in Lieu of Cash Distributions 438,423 138,652
Redeemed (2,804,469) (3,942,437)
--------------------------------
Net Increase (Decrease) from Capital Share Transactions 956,263 (132,528)
- ------------------------------------------------------------------------------------------------
Total Increase 2,431,086 1,179,850
- ------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 8,000,299 6,820,449
--------------------------------
End of Period $10,431,385 $8,000,299
================================================================================================
1Shares Issued (Redeemed)
Issued 155,002 197,691
Issued in Lieu of Cash Distributions 20,564 7,665
Redeemed (131,405) (211,906)
--------------------------------
Net Increase (Decrease) in Shares Outstanding 44,161 (6,550)
================================================================================================
</TABLE>
15
<PAGE>
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. 29, 2000 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $19.75 $16.57 $17.86 $16.13 $14.70 $14.36
- -------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .05 .27 .25 .19 .19 .20
Net Realized and Unrealized Gain (Loss)
on Investments 4.58 3.29 (.81) 2.28 1.65 .32
----------------------------------------------------------------
Total from Investment Operations 4.63 3.56 (.56) 2.47 1.84 .52
----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.26) (.22) (.21) (.19) (.20) (.18)
Distributions from Realized Capital Gains (.90) (.16) (.52) (.55) (.21) --
----------------------------------------------------------------
Total Distributions (1.16) (.38) (.73) (.74) (.41) (.18)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $23.22 $19.75 $16.57 $17.86 $16.13 $14.70
=============================================================================================================
TOTAL RETURN 23.97% 21.70% -2.99% 15.84% 12.72% 3.76%
=============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $10,431 $8,000 $6,820 $7,089 $4,997 $3,354
Ratio of Total Expenses to
Average Net Assets 0.52%* 0.58% 0.59% 0.57% 0.56% 0.59%
Ratio of Net Investment Income to
Average Net Assets 0.53%* 1.42% 1.39% 1.26% 1.35% 1.53%
Portfolio Turnover Rate 44%* 37% 37% 22% 22% 31%
=============================================================================================================
*Annualized.
</TABLE>
16
<PAGE>
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>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. Schroder Investment Management North America Inc. 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 29, 2000, the advisory fee represented an effective annual basic
rate of 0.13% of the fund's average net assets.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the Board of Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At February 29, 2000, the fund had contributed capital of $1,924,000
to Vanguard (included in Other Assets), representing 0.02% of the fund's net
assets and 1.9% of Vanguard's capitalization. The fund's Trustees and officers
are also Directors and officers of Vanguard.
D. The fund has asked its investment adviser to direct certain security trades,
subject to obtaining the best price and execution, to brokers who have agreed to
rebate to the fund part of the commissions generated. Such rebates are used
solely to reduce the fund's management and 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 29, 2000, directed brokerage and custodian fee offset arrangements
reduced expenses by $899,000 and $23,000, respectively. The total expense
reduction represented an effective annual rate of 0.02% of the fund's average
net assets.
E. During the six months ended February 29, 2000, the fund purchased
$2,041,146,000 of investment securities and sold $2,120,675,000 of investment
securities other than temporary cash investments.
During the six months ended February 29, 2000, the fund realized net
foreign currency losses of $1,727,000, 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 29, 2000, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $3,662,660,000,
consisting of unrealized gains of $4,136,175,000 on securities that had risen in
value since their purchase and $473,515,000 in unrealized losses on securities
that had fallen in value since their purchase.
At February 29, 2000, 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> <C> <C> <C> <C>
Deliver:
4/3/2000 JPY 156,885,356 $1,454,865 $1,435,450 $19,415
- -----------------------------------------------------------------------------------------------
JPY--Japanese Yen.
</TABLE>
Malaysian securities purchased after February 14, 1999, are subject to
a 10% levy on realized gains upon sale and conversion of proceeds from Malaysian
ringgits to another currency. At February 29, 2000, the International Growth
Fund had recorded a liability (included in unrealized
18
<PAGE>
foreign currency losses) of $1,163,000 representing the levy that would be
assessed if all subject Malaysian holdings were sold at their current values and
the proceeds repatriated.
The fund had net unrealized foreign currency losses of $1,012,000
resulting from the translation of other assets and liabilities at February 29,
2000.
G. The market value of securities on loan to broker/dealers at February 29,
2000, was $769,951,000, for which the fund held cash collateral of $801,732,000.
Cash collateral received is invested in repurchase agreements.
19
<PAGE>
THE VANGUARD(R) FAMILY OF FUNDS
STOCK FUNDS
- -------------------------------------------------
500 Index Fund
Aggressive Growth Fund
Capital Opportunity Fund
Convertible Securities Fund
Emerging Markets Stock Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer(TM) Fund
Extended Market Index Fund*
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Index Fund*
Health Care Fund
Institutional Index Fund*
International Growth Fund
International Value Fund
Mid-Cap Index Fund*
Morgan(TM) Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund*
Small-Cap Index Fund*
Small-Cap Value Index Fund*
Tax-Managed Capital Appreciation Fund*
Tax-Managed Growth and Income Fund*
Tax-Managed International Fund*
Tax-Managed Small-Cap Fund*
Total International Stock Index Fund
Total Stock Market Index Fund*
U.S. Growth Fund
Utilities Income Fund
Value Index Fund*
Windsor(TM) Fund
Windsor(TM) II Fund
BALANCED FUNDS
- -------------------------------------------------
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
Lifestrategy(TM) Conservative Growth Fund
Lifestrategy(TM) Growth Fund
Lifestrategy(TM) Income Fund
Lifestrategy(TM) Moderate Growth Fund
STAR(TM) Fund
Tax-Managed Balanced Fund
Wellesley(R)Income Fund
Wellington(TM) Fund
BOND FUNDS
- -------------------------------------------------
Admiral(TM) Intermediate-Term Treasury Fund
Admiral(TM) Long-Term Treasury Fund
Admiral(TM) Short-Term Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Insured Long-Term Tax-Exempt Fund
Intermediate-Term Bond Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund*
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds(California,
Florida, Massachusetts, New Jersey, New York,
Ohio, Pennsylvania)
Total Bond Market Index Fund*
MONEY MARKET FUNDS
- -------------------------------------------------
Admiral(TM) Treasury Money Market Fund
Federal Money Market Fund
Prime Money Market Fund*
State Tax-Exempt Money Market Funds (California,
New Jersey, New York, Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
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Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
*Offers Institutional Shares.
For information about Vanguard funds and our variable annuity plan, including
charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box
2600, Valley Forge, PA 19482-2600. Read it carefully before you invest or send
money.
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THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's eight board members are independent, meaning that
they have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers
for the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's
professional affiliations. Noted in parentheses is the year in which the Trustee
joined the Vanguard Board.
TRUSTEES
JOHN J. BRENNAN (1987) 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 (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL (1977) 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 Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL (1991) 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.(1971) 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 (1985) Retired Chairman of Rohm & Haas Co.; Director of
AmeriSource Health Corporation, Cummins Engine Co., and The Mead Corp.; Trustee
of Vanderbilt University.
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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.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON Legal Department.
ROBERT A. DISTEFANO Information Technology.
JAMES H. GATELY Individual Investor Group.
Kathleen C. Gubanich Human Resources.
IAN A. MACKINNON Fixed Income Group.
F. WILLIAM MCNABB, III Institutional Investor Group.
MICHAEL S. MILLER Planning and Development.
RALPH K. PACKARD Chief Financial Officer.
GEORGE U. SAUTER Core Management Group.
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[SHIP GRAPHIC]
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the
Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of
Forest Hill, Maryland.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q812-04/13/2000
(C) 2000 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing
Corporation, Distributor.
