<PAGE> 1
CHAIRMAN'S LETTER
Fellow Shareholder:
Common stock prices experienced two significant downdrafts--one in late March,
the other in late June--during the six months ended June 30, the first half of
Vanguard/Morgan Growth Fund's 1994 fiscal year. Nonetheless, reasonable
strength during the remainder of the period held the net decline in the total
value of all U.S. stocks to -4.5% for the full period.
Relative to the unmanaged Standard & Poor's 500 Composite Stock Price
Index, dominated by the performance of both growth and value stocks with large
market capitalizations, the Fund's total return (capital change plus income) of
- - -7.1% left something to be desired. However, most growth funds fell short of
the Index, as the average growth mutual fund, which has investment objectives
and policies similar to ours, provided a return of -6.0%. This table presents
the comparisons:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------
Total Return
------------
Six Months Ended
June 30, 1994
- - ------------------------------------------------------------
<S> <C>
VANGUARD/MORGAN GROWTH FUND -7.1%
- - ------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX -3.4%
AVERAGE GROWTH MUTUAL FUND -6.0
- - ------------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $12.01 per share on
December 31, 1993, and $11.07 on June 30, 1994, with the latter figure adjusted
to take into account the reinvestment of a carry-over distribution of $.10 per
share from net capital gains realized during 1993 and paid in March.
* THE STOCK MARKET IN REVIEW
Following two years of relative tranquility, substantial volatility returned to
the stock market during the past six months, and stocks in the aggregate showed
a net decline. While the dimension of the decline in stock prices from the
February high to the June low (-8%) was fairly significant, it was a far cry
from the market's sharp dips in 1990 (-20%), 1987 (-34%), 1981 (-18%), and
1973-1974 (-48%). (Price change from high to low, excluding income.)
Although the recent price decline could be described as "moderate" in an
historical sense, it seemed to reflect investor concerns beyond the actual
dimensions of the problems confronting the market, most notably possible future
inflation. Surely the concerns were increased by the sharp six-month decline
(-15%) in the prices of long-term U.S. Treasury bonds, as interest rates leaped
upward--from 6.4% at the start of our fiscal period to 7.6% at its close. By
way of perspective, this yield was 7.4% when 1993 began.
While these inflationary concerns have yet to be reflected in the
Consumer Price Index, the Federal Reserve has acted to "tighten" the money
supply and slow economic growth and potential future inflation, raising the
Federal funds rate (at which banks borrow from one another) four times--in
February, March, April, and again in May--from 3.00% to 4.25%. Theory suggests
that increases in short-term rates should be regarded by market participants as
a restraint on potential inflation, and thus cause long-term rates to fall.
However, this theory seldom holds true in practice, and 1994 has proved to be
no exception.
* MORGAN GROWTH FUND DURING THE PERIOD
In the stock market, the six-month period was the reverse of 1993 in at least
two respects: (1) stocks with large market capitalizations outpaced those with
medium and small market capitalizations; and (2) traditional actively managed
mutual funds generally fell short of the unmanaged market indexes.
One equity market factor that persisted during the first half of 1994
was the continued ascendancy of value stocks--those with above-average dividend
yields and below-average price-book value ratios--over growth stocks--those
that provide lower yields but presumably richer prospects for earnings growth.
The disparity in
1
<PAGE> 2
returns thus far in 1994, however, has been far short of last year's, when the
Standard and Poor's/BARRA Growth and Value Indexes provided returns of +1.7%
and +18.6%, respectively. During the past six months, the comparable figures
were -4.4% for the Growth Index and -2.4% for the Value Index. As we have often
noted, the relationship of the two groups is quite cyclical; there is every
reason to expect that growth stocks will, sooner, I think, rather than later,
give a relatively better account of themselves.
Curiously enough, the Morgan Growth Fund return was not hindered by our
holdings in the various industry sectors. Basically, our well-below-average
weighting (relative to the Standard & Poor's 500 Index) in utility stocks
minimized our participation in the market's worst-performing sector, and our
well-above-average weighting in the technology sector maximized our
participation in one of the sectors that best resisted the decline. However,
our individual stock selections were a negative factor within most industry
sectors (e.g., the consumer and capital goods stocks that we held in our
portfolio fell short of the performance of the Index stocks in these sectors).
On balance, as shown in the table at the start of this letter, we
underperformed the Standard & Poor's 500 Index by 3.7 percentage points.
Compared to the average growth fund, our underperformance was 1.1 percentage
points, relatively better, but still unsatisfactory.
On March 31, 1994, in our continuing effort to enhance Morgan's relative
returns, we again reallocated assets among the Fund's four investment advisers.
This table shows the present allocations compared with those prevailing at
year-end 1993:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------
Share of Total Net Assets
-------------------------------------
Dec. 31, 1993 June 30, 1994
-------------------------------------
Investment Advisers % %
- - -----------------------------------------------------------------------
<S> <C> <C>
WELLINGTON MANAGEMENT CO. 51% 40%
FRANKLIN PORTFOLIO ASSOCIATES 22 34
HUSIC CAPITAL MANAGEMENT 13 12
VANGUARD CORE MANAGEMENT 9 9
CASH RESERVES 5 5
- - -----------------------------------------------------------------------
TOTAL 100% 100%
- - -----------------------------------------------------------------------
</TABLE>
The Vanguard Core Management portion of our portfolio (oriented towards a
growth stock index) provided the most favorable performance during the period,
while the Husic portion (emphasizing more volatile stocks) provided the least
favorable. Our two largest sub-portfolio advisers--Wellington Management
Company and Franklin Portfolio Associates--each provided just slight
enhancements to the Fund's aggregate return. Since the Franklin and Wellington
sub-portfolios comprise nearly three-quarters of the Fund's total assets, we
have included reports from each of these portfolio managers on pages 4 and 5.
* IN SUMMARY
When I wrote to you six months ago in our Annual Report for 1993, I noted that,
as we look ahead, "it would be imprudent not to offer a word of caution about
the stock market, which is obviously due for its share of difficult bumps along
the way during the next few years." Such bumps obviously transpired during the
first half of 1994, and there may well be more to come. That said, Morgan
Growth Fund is designed for the long-term investor, and we would urge you, once
again, to "stay the course."
Sincerely,
/s/ JOHN C. BOGLE
- - ---------------------
John C. Bogle
Chairman of the Board
July 18, 1994
Note: Mutual fund data from Lipper Analytical Services, Inc.
2
<PAGE> 3
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND (PERIODS ENDED JUNE 30, 1994) ARE
AS FOLLOWS:
1 YEAR: -2.67% 5 YEARS: +8.87% 10 YEARS: +12.61%
THE AVERAGE ANNUAL TOTAL RETURN FOR THE TEN-YEAR PERIOD INCLUDES A CAPITAL
RETURN OF +10.40% AND AN INCOME RETURN OF +2.21%. ALL OF THE DATA REPRESENT
PAST PERFORMANCE. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST.
3
<PAGE> 4
REPORT FROM WELLINGTON MANAGEMENT COMPANY
* ENVIRONMENT AND OUTLOOK
The domestic investment environment changed markedly in late winter, when the
Federal Reserve shifted its policy towards "tightening" the nation's supply of
money. This move to push up short-term interest rates, the first such move in
five years, caused the stock market to adopt a more cautionary tone. The rise
in rates hit the more aggressive sectors of the market and interest-rate
sensitive cyclicals relatively hard. On balance, growth company stock prices
underperformed more value-oriented issues.
Our working assumption, despite this rate rise, is that the U.S. economy
in 1995 will continue to show moderate expansion, perhaps 3% annualized growth,
with moderate inflation on the order of 3.5%. At the same time, short rates
should continue to move higher into next year, and the "yield curve" should
flatten as has been common in past cycles. We would expect rising interest
rates to cause a drain on liquidity from financial assets into the real economy
and into non-monetary assets. This changed environment will not be conducive to
the same kind of strong equity market returns that investors have become used
to over the past decade. Moreover, market volatility could rise.
* STRATEGY
During the first half of the year, the stocks of smaller and faster-growing
companies fell fairly sharply. As a result, we reduced holdings in the
slower-growing consumer staple area, where market valuations remained stable,
and redeployed the proceeds into more rapidly growing companies where relative
price/earnings ratios had become significantly more attractive. Our strategy
has been to identify firms with special attractions that we believe will be
more impervious to economic uncertainty than the average company. In that vein,
we have added such companies as Hillhaven, a well- positioned nursing home
company with buy-out potential; International Game Technology, the predominant
supplier of gaming machinery; and American Re, a major player in the
reinsurance market, where we foresee a turn in the underwriting cycle. The
overall effect of this strategy, plus the recent merger of the VSP Service
Economy Portfolio into the Fund, has been to increase the portfolio's expected
growth characteristics, increase diversification across the range of market
capitalizations, and increase exposure to the service sector.
Looking at the current portfolio mix, more than 40% of net assets are in
pure domestic companies, based in this country, with most or all of their
operations within our borders. Over one-half of the portfolio is invested in
multinational companies (defined as companies with a minimum of 25% of their
operations overseas) headquartered either here in the U.S. (i.e., Gillette or
McDonald's) or abroad (i.e., Ericsson or News Corp.). Roughly 4% of portfolio
net assets is invested in international companies doing business entirely
abroad. Examples would include Vodafone, the U.K. cellular company, and Baesa,
PepsiCo's most successful international bottler, with operations in Latin
America.
The ongoing trend toward globalization of business activity has spawned
a trend in the globalization of financial markets. The pending change in
global accounting standards set for 1995 seems to have accelerated the entry of
foreign companies into the U.S. market in order to tap the broad, liquid U.S.
capital markets and create greater investor awareness. We believe that this
opening up of the markets provides excellent opportunities for our style of
growth investing. We also believe that for both U.S. and foreign companies the
current tenor of foreign economies and markets provides intriguing
opportunities at this time.
I am pleased to be on the Vanguard/Morgan Growth investment team and
look forward to the future with optimism.
Robert D. Rands, Senior Vice President
Portfolio Manager
Wellington Management Company
July 8, 1994
4
<PAGE> 5
REPORT FROM FRANKLIN PORTFOLIO ASSOCIATES
We begin this letter with five observations about the current investment
environment:
1. The economic outlook is mixed.
2. Evidence of an economic recovery continues to present itself.
3. A continuing deficit in the balance of trade has caused unrest in the
international monetary markets.
4. International pressures and the vigilance of the Federal Reserve have
led to upward pressure on interest rates.
5. The Clinton health care initiative has the potential to have a major
economic impact.
As you see, it is still easy to cite economic and financial benchmarks that
indicate that equity prices are high. The weakness in the first half of the
Fund's 1994 fiscal year has made any indications of overvaluation less extreme,
as has a general clarifying and strengthening of the economic picture. In spite
of these factors, we view the long-term prospect for equities as quite
attractive, especially when compared to fixed-income alternatives.
In the domestic equity markets, there were significant differences in
performance among various sectors of the market. Growth stocks continued to be
less favored in the marketplace than value stocks. Smaller securities were
significantly weaker than larger ones. The volatility of individual stocks
continues to appear higher than normal.
We have been managers of a portion of the Vanguard/Morgan Growth Fund
for just over four years. Recent relative performance versus the Growth Fund
Stock Index has been weak, while results since inception remain ahead of the
Index. The recent weakness in our relative performance has been partially
attributable to a failure of our earnings momentum measures to discriminate
between future winners and losers. Having encountered periods such as these in
the past, we are looking forward to an improving period of relative
performance.
Our strategy is to build a margin of superiority by trying to achieve
many small positive differences in performance rather than a few big ones. Our
strategy leads to our being fully invested to the extent practicable at all
times, which means that the market value of our portfolio is almost certain to
decline in a sustained bear market for equities. This strategy is more
compatible with long-term equity investors than with speculators.
We look forward to the remainder of this year and the years to follow
with considerable optimism, and we will do our utmost to warrant your
confidence in us.
John Nagorniak
Franklin Portfolio Associates
July 19, 1994
5
<PAGE> 6
TOTAL INVESTMENT RETURN
The table below illustrates the returns for VANGUARD/MORGAN GROWTH FUND from
December 31, 1968, to June 30, 1994, the lifetime of the Fund. During this
period, stock prices fluctuated and were generally higher at the end than at
the beginning. These results should not be considered a representation of the
dividend income or capital gain or loss which may be realized from an
investment made in the Fund today.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA* YEAR-END VALUE TOTAL INVESTMENT RETURN
- - ------------------------------------------------------------------------------------------------------------------------------------
Annual Percentage Change**
--------------------------
Value with Income
Year Ended Net Asset Income Capital Gains Dividends & Capital Vanguard/Morgan S&P 500 Vanguard/Morgan S&P 500
December 31 Value Dividends Distributions Gains Reinvested Growth Fund Index Growth Fund Index
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL (12/68) $ 6.67 -- -- $ 6.67 $ 10,000 $ 10,000 -- --
- - ----------------------------------------------------------------------------------------------------------------------------------
1969 6.89 -- -- 6.89 10,330 9,160 + 3.3% - 8.4%
- - -----------------------------------------------------------------------------------------------------------------------------------
1970 6.38 $ .06 $ .09 6.54 9,802 9,516 - 5.1 + 3.9
- - ----------------------------------------------------------------------------------------------------------------------------------
1971 8.06 .10 -- 8.38 12,565 10,870 +28.2 +14.2
- - ----------------------------------------------------------------------------------------------------------------------------------
1972 9.18 .07 .48 10.21 15,301 12,931 +21.8 +19.0
- - ----------------------------------------------------------------------------------------------------------------------------------
1973 7.12 .09 .27 8.25 12,370 11,034 -19.2 -14.7
- - ----------------------------------------------------------------------------------------------------------------------------------
1974 4.74 .11 -- 5.59 8,381 8,131 -32.2 -26.3
- - ----------------------------------------------------------------------------------------------------------------------------------
1975 6.62 .13 -- 8.00 11,993 11,151 +43.1 +37.1
- - ----------------------------------------------------------------------------------------------------------------------------------
1976 7.77 .11 -- 9.53 14,287 13,806 +19.1 +23.8
- - ----------------------------------------------------------------------------------------------------------------------------------
1977 8.18 .15 -- 10.24 15,350 12,814 + 7.4 - 7.2
- - ----------------------------------------------------------------------------------------------------------------------------------
1978 9.35 .21 .11 12.21 18,311 13,650 +19.3 + 6.5
- - ----------------------------------------------------------------------------------------------------------------------------------
1979 9.47 .29 1.13 14.51 21,761 16,168 +18.8 +18.4
- - ----------------------------------------------------------------------------------------------------------------------------------
1980 12.36 .31 -- 19.55 29,317 21,413 +34.7 +32.4
- - ----------------------------------------------------------------------------------------------------------------------------------
1981 11.05 .29 .45 18.61 27,911 20,368 - 4.8 - 4.9
- - ----------------------------------------------------------------------------------------------------------------------------------
1982 12.01 .30 1.31 23.76 35,634 24,748 +27.7 +21.5
- - ----------------------------------------------------------------------------------------------------------------------------------
1983 13.84 .25 1.04 30.51 45,743 30,306 +28.4 +22.5
- - ----------------------------------------------------------------------------------------------------------------------------------
1984 11.45 .31 1.39 28.66 42,970 32,191 - 6.1 + 6.2
- - ----------------------------------------------------------------------------------------------------------------------------------
1985 13.82 .25 .60 37.34 55,984 42,377 +30.3 +31.6
- - ----------------------------------------------------------------------------------------------------------------------------------
1986 11.50 .43 2.88 40.27 60,365 50,266 + 7.8 +18.6
- - ----------------------------------------------------------------------------------------------------------------------------------
1987 9.39 .20 2.45 42.29 63,395 52,870 + 5.0 + 5.2
- - ----------------------------------------------------------------------------------------------------------------------------------
1988 10.27 .24 .98 51.71 77,518 61,594 +22.3 +16.5
- - ----------------------------------------------------------------------------------------------------------------------------------
1989 11.72 .28 .59 63.43 95,080 81,052 +22.7 +31.6
- - ----------------------------------------------------------------------------------------------------------------------------------
1990 10.40 .34 .80 62.47 93,644 78,523 - 1.5 - 3.1
- - ----------------------------------------------------------------------------------------------------------------------------------
1991 12.20 .29 .86 80.79 121,112 102,394 +29.3 +30.4
- - -----------------------------------------------------------------------------------------------------------------------------------
1992 12.65 .18 .52 88.50 132,672 110,186 + 9.5 + 7.6
- - -----------------------------------------------------------------------------------------------------------------------------------
1993 12.01 .18 1.35 94.98 142,384 121,271 + 7.3 +10.1
- - -----------------------------------------------------------------------------------------------------------------------------------
1994 (6/30) 11.07 -- .10 88.26 132,391 117,162 - 7.1 - 3.4
- - -----------------------------------------------------------------------------------------------------------------------------------
LIFETIME $5.17 $17.40 +1,223.9% +1,071.6% +10.7% +10.1%
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* All per share data have been adjusted for the 3-for-2 stock split in
February 1979.
** Adjusted to include reinvestment of income dividends and any capital gains
distributions both for the Fund and the Index.
Note: No adjustment has been made for income taxes payable by shareholders
on reinvested income dividends and capital gains distributions.
6
<PAGE> 7
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS (unaudited)
June 30, 1994
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- - -------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (92.7%)
- - -------------------------------------------------------
CONSUMER (27.4%)
- - -------------------------------------------------------
DRUGS (3.7%)
* Biogen, Inc. 185,000 $ 5,273
Bristol-Myers Squibb Co. 21,700 1,164
* Cambridge Neuroscience, Inc. 22,000 110
* Genentech Inc. 6,000 295
Johnson & Johnson 269,500 11,555
* National Intergroup, Inc. 114,800 2,009
Pfizer, Inc. 184,800 11,666
* Roberts Pharmaceuticals 21,500 435
Schering-Plough Corp. 58,600 3,589
Upjohn Co. 63,800 1,858
Warner-Lambert Co. 18,300 1,208
---------
GROUP TOTAL 39,162
---------
- - -------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (4.5%)
Archer-Daniels-Midland Co. 9,644 224
Bob Evans Farms, Inc. 20,000 430
* Buenos Aires Embotellado, SA
ADR 106,900 3,301
CPC International, Inc. 5,000 241
Campbell Soup Co. 26,400 907
Consolidated Products Inc. 6,200 62
IBP, Inc. 141,400 3,765
* Lone Star Steakhouse & Saloon 55,700 975
McCormick & Co., Inc. 14,300 286
McDonald's Corp. 416,000 12,012
Michael Foods, Inc. 30,400 331
(1) PepsiCo, Inc. 561,469 17,195
Philip Morris Cos., Inc. 29,400 1,514
* RJR Nabisco, Inc. 269,200 1,649
* Ryan's Family Steak Houses,
Inc. 61,300 429
Sara Lee Corp. 138,500 2,943
* Sysco Corp. 15,000 339
Wendys International, Inc. 90,600 1,416
Wm. Wrigley, Jr. Co. 7,400 351
---------
GROUP TOTAL 48,370
---------
- - -------------------------------------------------------
HOUSEHOLD PRODUCTS (2.1%)
CML Group, Inc. 89,600 1,053
Colgate-Palmolive Co. 49,800 2,590
* Danskin, Inc. 5,000 12
Gillette Co. 84,000 5,470
Kimberly-Clark Corp. 147,200 7,783
Newell Co. 23,200 1,073
Premark International, Inc. 24,100 1,813
Procter & Gamble Co. 1,100 59
Speizman Industries, Inc. 13,800 114
Unilever NV 3,200 322
Wolverine World Wide, Inc. 119,100 2,531
---------
GROUP TOTAL 22,820
---------
- - -------------------------------------------------------
MEDICAL PRODUCTS AND SERVICES (4.6%)
* Beverly Enterprises Inc. 45,000 546
* Coastal Healthcare Group,
Inc. 11,200 372
* Coventry Corp. 4,500 163
* FHP International Corp. 435,400 10,232
* Forest Laboratories, Inc. 38,900 1,692
* Genesis Health 15,000 381
* HEALTHSOUTH Rehabilitation
Corp. 10,200 266
Hillhaven Corp. 315,000 5,670
* Integrated Health Services,
Inc. 25,800 774
Lincare Holdings Inc. 113,500 2,185
Medical Diagnostics, Inc. 11,500 44
Medtronic, Inc. 163,100 13,068
* Pacificare Health Systems Inc.
Class A 7,000 343
* Perrigo 350,000 4,725
* Somatix Therapy Corp. 74,100 352
United Healthcare Corp. 18,600 853
U.S. Healthcare, Inc. 28,800 1,066
* Vencor, Inc. 106,800 3,685
Zeneca Group ADR 69,781 2,329
---------
GROUP TOTAL 48,746
---------
- - -------------------------------------------------------
RETAIL (6.7%)
Albertson's, Inc. 31,800 874
American Stores Co. 31,600 774
Best Buy, Inc. 3,500 101
* Big Entertainment, Inc. 28,600 164
Blockbuster Entertainment
Corp. 237,200 6,138
Claire's Stores, Inc. 42,500 436
* Consolidated Stores, Inc. 79,800 978
Dillard Department Stores
Class A 250,000 7,719
Fleming Cos., Inc. 33,047 917
* Fossil, Inc. 21,000 420
The Gap, Inc. 13,400 573
* Good Guys, Inc. 208,700 2,609
* Home Shopping Network, Inc. 402,000 4,724
* The Kroger Co. 156,400 3,636
Lowes Cos., Inc. 22,000 753
(1) May Department Stores Co. 384,400 15,088
* Musicland Stores Corp. 365,000 5,840
Nordstrom, Inc. 9,000 383
Office Depot, Inc. 22,800 456
* Oshman's Sporting Goods, Inc. 29,300 205
* Paul Harris Stores, Inc. 19,800 101
* Payless Cashways, Inc. 49,500 668
J.C. Penney Co., Inc. 73,000 3,960
Pep Boys (Manny, Moe & Jack) 14,000 443
Petrie Stores Corp. 9,100 224
* Revco Drug Stores, Inc. 221,800 3,549
* Revco Drug Stores, Inc.
Rights Exp. 7/7/94 67,649 127
</TABLE>
7
<PAGE> 8
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- - ----------------------------------------------------------
<S> <C>
SuperValu, Inc. 68,800 $ 2,081
* Toys R Us, Inc. 53,050 1,737
Wal-Mart Stores, Inc. 236,200 5,728
----------
GROUP TOTAL 71,406
----------
- - ----------------------------------------------------------
OTHER CONSUMER (5.8%)
Callaway Golf Co. 11,000 429
Centex Corp. 111,900 2,882
* Champion Enterprises, Inc. 11,700 329
* Coleman Inc. 113,200 3,396
* Devry, Inc. 14,400 403
Diana Corp. 75 1
The Walt Disney Co. 122,300 5,091
* Electronics for Imaging, Inc. 22,700 358
Express Scripts 13,000 312
First Brands Co. 12,000 439
Frame Technology 36,000 378
Hasbro, Inc. 151,400 4,485
Hospitality Franchise
Systems, Inc. 27,200 666
International Game Technology 368,500 6,955
* Landstar System 16,000 456
Mattel, Inc. 46,375 1,177
* Nextel Communications 100,000 3,000
Olsten Corp. 52,200 1,670
Paging Network Inc. 334,500 9,115
* Scholastic Corp. 118,600 4,388
Service Corp. International 16,000 412
Sotheby's Holdings Class A 244,000 3,020
Standard Pacific Corp. 380,000 3,135
* Toll Brothers, Inc. 21,000 268
Vodafone Group PLC ADR 123,100 9,325
----------
GROUP TOTAL 62,090
----------
- - ----------------------------------------------------------
TOTAL CONSUMER 292,594
- - ----------------------------------------------------------
ENERGY (4.7%)
- - ----------------------------------------------------------
OIL & GAS (3.5%)
Ashland Oil, Inc. 137,100 4,610
Atlantic Richfield Co. 2,500 255
British Petroleum Co. PLC ADR 9,900 710
Burlington Resources, Inc. 43,600 1,804
Cabot Corp. 28,900 1,478
Coastal Corp. 15,400 416
Columbus Energy Corp. 17,500 164
Enron Corp. 91,200 2,987
Exxon Corp. 16,900 957
Mobil Corp. 55,500 4,530
Norsk Hydro AS ADR 85,300 2,676
Royal Dutch Petroleum Co. 5,600 586
* Southwest Gas Corp. 24,200 436
Tenneco, Inc. 57,000 2,643
Texaco, Inc. 7,900 477
Tosco Corp. 110,700 3,293
Total Petroleum (North
America) Ltd. 85,200 1,023
Unocal Corp. 240,000 6,870
Western Resources, Inc. 28,900 777
----------
GROUP TOTAL 36,692
----------
- - ----------------------------------------------------------
OIL SERVICES (1.2%)
Energy Services Co. 16,000 280
Foster Wheeler Corp. 22,000 800
* Noble Drilling Corp. 443,000 3,433
Schlumberger Ltd. 144,900 8,567
----------
GROUP TOTAL 13,080
----------
- - ----------------------------------------------------------
TOTAL ENERGY 49,772
- - ----------------------------------------------------------
FINANCE (13.8%)
- - ----------------------------------------------------------
BANKS (5.7%)
Banc One Corp. 300,000 10,275
The Bank of New York Co., Inc. 70,600 2,039
BankAmerica Corp. 23,500 1,075
Barnett Banks of Florida, Inc. 90,900 3,977
Baybanks, Inc. 6,100 364
The Chase Manhattan Corp. 11,100 425
Chemical Banking Corp. 90,800 3,496
Citicorp 82,600 3,294
Crestar Financial Corp. 17,700 805
First Bank System, Inc. 19,484 711
First Chicago Corp. 8,000 385
* First Commercial Bancorp 11,200 34
First Union Corp. 74,000 3,413
Firstar Corp. 270,000 9,551
Meridian Bancorp, Inc. 8,700 263
NationsBank, Inc. 23,644 1,215
Norwest Corp. 171,700 4,486
PNC Bank Corp. 116,300 3,358
Peoples Heritage Financial
Group Inc. 30,000 390
Republic New York Corp. 210,500 9,709
State Street Boston Corp. 26,800 1,035
----------
GROUP TOTAL 60,300
----------
- - ----------------------------------------------------------
INSURANCE (4.2%)
ACE, Ltd. 195,000 4,802
Aflac, Inc. 106,200 3,584
Acordia, Inc. 16,500 458
Aetna Life & Casualty Co. 72,900 4,073
American International
Group, Inc. 56,438 4,889
* American Re Corp. 330,800 10,213
CIGNA Corp. 6,200 453
Central Reserve Life Corp. 21,200 172
The Chubb Corp. 5,200 399
Continental Corp. 126,200 1,956
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- - ----------------------------------------------------------
<S> <C> <C>
The Equitable Cos. 100,000 $ 1,775
General Re Corp. 4,600 501
Jefferson-Pilot Corp. 7,400 361
MBIA, Inc. 37,400 2,146
Orion Capital Corp. 7,200 246
Travelers Inc. 201,296 6,492
UNUM Corp. 44,300 1,982
USLIFE Corp. 24,700 877
----------
GROUP TOTAL 45,379
----------
- - ----------------------------------------------------------
OTHER FINANCE (3.9%)
American Express Co. 91,200 2,348
Bear Stearns Co., Inc. 51,465 875
* Ceridian Corp. 54,800 1,349
Federal Home Loan Mortgage
Corp. 124,200 7,514
Federal National Mortgage
Assn. 132,900 11,097
Fund American Enterprise
Holding Co. 13,400 945
GFC Financial Corp. 45,500 1,518
* Hibernia Corp. Class A 430,000 3,709
John Alden Financial Group 12,000 414
* Lehman Brothers Holdings, Inc. 18,240 276
Merrill Lynch & Co., Inc. 119,600 4,186
Morgan Stanley Group, Inc. 8,000 455
* North American Mortgage 14,000 336
* Rouse Co. 21,000 394
Student Loan Marketing Assn. 35,100 1,264
SunAmerica Inc. 38,500 1,574
Transamerica Corp. 58,700 3,060
----------
GROUP TOTAL 41,314
----------
- - ----------------------------------------------------------
TOTAL FINANCE 146,993
- - ----------------------------------------------------------
INDUSTRIAL (36.1%)
- - ----------------------------------------------------------
AEROSPACE (1.0%)
Allied-Signal, Inc. 13,400 464
The Boeing Co. 136,600 6,318
McDonnell Douglas Corp. 3,600 421
Precision Castparts Corp. 11,700 371
Raytheon Co. 5,500 356
United Technologies Corp. 44,000 2,827
----------
GROUP TOTAL 10,757
----------
- - ----------------------------------------------------------
AUTOMOTIVE (2.8%)
Chrysler Corp. 287,400 13,544
Echlin, Inc. 182,500 5,498
Ford Motor Co. 181,000 10,679
General Motors Corp. 8,700 437
----------
GROUP TOTAL 30,158
----------
- - ----------------------------------------------------------
CHEMICALS (3.2%)
(1) Air Products & Chemicals, Inc. 380,000 16,101
* Airgas, Inc. 75,400 1,989
E.I. du Pont de Nemours & Co. 21,100 1,232
First Mississippi Corp. 24,300 371
* Georgia Gulf Corp. 37,900 1,298
Great Lakes Chemical Corp. 32,600 1,764
* IMC Fertilizer Group, Inc. 90,000 3,116
Monsanto Co. 6,500 492
Morton International, Inc. 87,200 6,802
Praxair, Inc. 22,000 429
Union Carbide Corp. 15,000 401
Wellman, Inc. 16,000 446
----------
GROUP TOTAL 34,441
----------
- - ----------------------------------------------------------
COMPUTERS AND SERVICES (10.1%)
* AST Research, Inc. 13,500 189
Autodesk, Inc. 4,200 207
Automatic Data Processing,
Inc. 118,400 6,290
* Bisys Group, Inc. 20,000 410
* Cabletron Systems, Inc. 4,000 386
* Chipcom Corp. 9,900 389
Cisco Systems, Inc. 450,700 10,423
Compaq Computer Corp. 236,500 7,627
(1) Computer Associates
International, Inc. 143,900 5,756
Computer Sciences Corp. 329,000 13,695
EMC Corp. 122,600 1,655
* Exabyte Corp. 24,000 342
First Data Corp. 16,800 695
* Fiserv, Inc. 31,725 650
General Motors Corp. Class E 56,300 1,964
HBO and Co. 14,000 353
(1) Hewlett-Packard Co. 247,000 18,618
IMRS Inc. 8,200 174
* Megatest Corp. 161,600 2,465
(1)* Microsoft Corp. 345,200 17,778
* Newbridge Networks Corp. 75,000 2,578
* Novell, Inc. 25,400 422
* Parametric Technology Corp. 10,100 227
Paychex, Inc. 5,550 162
* Policy Management Systems
Corp. 10,000 330
* Seagate Technology 142,000 2,769
Silicon Graphics, Inc. 28,500 631
* Solectron Corp. 12,400 315
* Sterling Software, Inc. 83,100 2,493
* Sun Microsystems, Inc. 50,400 1,027
* SynOptics Communications, Inc. 32,900 444
* Systems & Computer
Technology Corp. 219,500 3,348
</TABLE>
9
<PAGE> 10
STATEMENT OF NET ASSETS (Continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- - ----------------------------------------------------------
<S> <C> <C>
Tech Data Corp. 70,200 $ 1,158
* Viewlogic Systems, Inc. 45,000 697
Wellfleet Communications 50,000 1,237
----------
GROUP TOTAL 107,904
----------
- - ----------------------------------------------------------
ELECTRICAL (1.8%)
* Augat, Inc. 50,600 999
Emerson Electric Co. 4,600 262
Gardner Denver Machinery, Inc. 256 2
(1) General Electric Co. 358,200 16,701
Johnson Controls, Inc. 21,300 1,030
Watkins-Johnson Co. 11,700 347
----------
GROUP TOTAL 19,341
----------
- - ----------------------------------------------------------
ELECTRONICS (9.4%)
* Advance Circuits, Inc. 82,000 779
AMP, Inc. 7,900 547
Applied Materials, Inc. 202,300 8,598
* Arrow Electronics, Inc. 6,100 227
Avnet, Inc. 396,800 12,499
Comsat Corp. 20,728 482
* Cypress Semiconductor Corp. 143,400 2,330
* Electroglas, Inc. 12,000 408
L.M. Ericsson Telephone
Co. ADR 80,000 3,960
General Dynamics Corp. 9,000 368
General Motors Corp. Class H 123,000 4,413
(1) Intel Corp. 349,900 20,469
* LSI Logic Corp. 174,000 4,350
(1) Motorola, Inc. 477,000 21,227
* National Semiconductor Corp. 374,000 6,452
Pioneer Standard Electronics
Inc. 17,000 425
* SCI Systems, Inc. 61,700 925
* Symbol Technologies, Inc. 15,300 382
Tellabs, Inc. 14,400 443
Texas Instruments, Inc. 64,000 5,088
* U.S. Robotics, Inc. 54,400 1,455
Varian Associates, Inc. 132,000 4,686
----------
GROUP TOTAL 100,513
----------
- - ----------------------------------------------------------
MACHINERY (2.6%)
* Case Equipment Corp. 180,000 3,397
Caterpillar, Inc. 77,200 7,720
Cummins Engine Co., Inc. 24,800 1,073
Deere & Co. 119,300 8,068
* Detroit Diesel Corp. 80,000 2,040
Ingersoll-Rand Co. 7,200 253
NACCO Industries, Inc. Class A 7,000 376
Stewart & Stevenson Services,
Inc. 7,500 311
* Varity Corp. 103,300 3,758
----------
GROUP TOTAL 26,996
----------
- - ----------------------------------------------------------
METALS AND MINERALS (1.3%)
De Beers Centenary Units ADR 124,000 2,759
Englehard Corp. 203,200 5,131
* LTV Corp. 200,000 3,075
* Magma Copper Co. Class B 25,000 378
Phelps Dodge Corp. 19,100 1,089
* Wheeling Pittsburgh Corp. 77,200 1,351
----------
GROUP TOTAL 13,783
----------
- - ----------------------------------------------------------
PAPER AND HOUSING MATERIALS (.2%)
Armstrong World Industries
Inc. 9,000 420
Masco Corp. 26,200 721
The Mead Corp. 5,800 256
Shaw Industries, Inc. 34,600 571
----------
GROUP TOTAL 1,968
----------
- - ----------------------------------------------------------
TRANSPORTATION (.9%)
* AMR Corp. 5,400 321
Air Express International
Corp. 31,000 678
British Airways PLC 7,000 403
Chicago and Northwestern
Transportation 20,000 463
* Santa Fe Pacific Corp. 180,000 3,757
* Southern Pacific Rail Corp. 70,000 1,374
Swift Transportation Co., Inc. 44,000 1,408
* UAL Corp. 2,400 303
Union Pacific Corp. 7,000 396
----------
GROUP TOTAL 9,103
----------
- - ----------------------------------------------------------
OTHER (2.8%)
* BMC Industries, Inc. 13,500 366
Brunswick Corp. 18,700 411
Cooper Tire & Rubber Co. 33,600 777
Fleetwood Enterprises, Inc. 54,400 1,040
Fluor Corp. 80,000 4,070
The Goodyear Tire & Rubber Co. 102,600 3,694
Harley-Davidson, Inc. 11,300 517
* Hi-Shear Industries, Inc. 33,500 207
* IDEX Corp. 11,000 435
MTS Systems Corp. 118,500 3,348
* Owens-Illinois, Inc. 35,400 389
PPG Industries, Inc. 11,000 413
Pittston Services Group 141,200 3,777
Spartan Motors, Inc. 7,600 94
* Thermo Electron Corp. 108,100 4,027
The Toro Co. 36,900 876
Xerox Corp. 55,200 5,396
----------
GROUP TOTAL 29,837
----------
- - ----------------------------------------------------------
TOTAL INDUSTRIAL 384,801
- - ----------------------------------------------------------
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- - ----------------------------------------------------------
SERVICES (7.6%)
- - ----------------------------------------------------------
<S> <C> <C>
BROADCASTING, NEWSPAPERS &
ADVERTISING (3.5%)
* ALC Communications 15,400 $ 474
Capital Cities/ABC, Inc. 39,700 2,824
Central Newspapers Inc. 13,500 383
Clear Channel Communications 48,900 1,840
Comcast Corp. Class A Special 31,650 566
Dow Jones & Co., Inc. 10,800 335
Gannett Co., Inc. 140,000 6,930
Gaylord Entertainment Class A 24,800 608
Grupo Radio Centro, SA de CV 2,300 56
* Ha-Lo Industries, Inc. 33,400 200
Infinity Broadcasting Corp. 19,800 475
* International Cabletel, Inc. 235,000 4,817
Knight-Ridder, Inc. 7,200 368
* Multimedia, Inc. 158,100 4,545
News Corp. Ltd. ADR 137,000 6,610
Omnicom Group Inc. 10,000 482
Reader's Digest Assn., Inc.
Class A 22,500 934
E.W. Scripps Co. 23,000 673
Scripps Howard Broadcasting 4,000 388
Spelling Entertainment 167,600 1,425
Time Warner, Inc. 14,400 506
The Tribune Co. 8,000 426
* Washington Post Co. Class B 2,000 463
Westcott Communications 150,400 1,391
----------
GROUP TOTAL 37,719
----------
- - ----------------------------------------------------------
CONSUMER (.2%)
Dewolfe Cos., Inc. 20,000 97
Skywest, Inc. 77,100 1,966
----------
GROUP TOTAL 2,063
----------
- - ----------------------------------------------------------
DISTRIBUTION (.4%)
Airborne Freight Corp. 12,100 421
W.W. Grainger, Inc. 11,200 715
* Merisel, Inc. 318,700 2,709
----------
GROUP TOTAL 3,845
----------
- - ----------------------------------------------------------
INFORMATION PROCESSING (.1%)
* Filenet Corp. 14,100 240
* Stratacom, Inc. 18,000 369
----------
GROUP TOTAL 609
----------
- - ----------------------------------------------------------
OTHER SERVICES (3.4%)
American Premier Underwriters
Inc. 96,800 2,432
Browning-Ferris Industries,
Inc. 16,400 498
Casino America, Inc. 17,800 169
* Corrections Corp. of America 27,700 443
* Cyrk International, Inc. 17,000 378
The Dun & Bradstreet Corp. 7,700 427
* General Instrument 109,600 6,247
Harcourt General, Inc. 120,500 4,233
Hilton Hotels Corp. 103,700 5,496
* Itel Corp. 56,900 1,785
Marriott International 11,100 296
McCaw Cellular
Communications, Inc. 14,200 733
* National Education Corp. 67,400 379
National Golf Properties,
Inc. 185,000 3,931
PHH Corp. 52,100 1,856
* Players International, Inc. 20,000 295
Promus Co. Inc. 21,200 628
* United Inns, Inc. 4,500 60
* Varitronic Systems, Inc. 13,300 116
* Waste Management
International 266,600 4,799
Wheelabrator Technologies 80,800 1,505
----------
GROUP TOTAL 36,706
----------
- - ----------------------------------------------------------
TOTAL SERVICES 80,942
- - ----------------------------------------------------------
UTILITIES (3.1%)
- - ----------------------------------------------------------
TELECOMMUNICATIONS (2.9%)
AT&T Corp. 12,700 691
* Comtech Telecommunications
Corp. 29,030 105
ECI Telecom Ltd. 132,900 2,160
GTE Corp. 22,200 699
LDDS Communications, Inc. 103,700 1,789
(1) MCI Communications Corp. 754,700 16,698
Sprint Corp. 190,600 6,647
Telefonica de Espana ADR 22,200 894
* Telefonos de Mexico SA ADR 6,600 369
U.S. West Corp. 19,077 799
----------
GROUP TOTAL 30,851
----------
- - ----------------------------------------------------------
OTHER (.2%)
Commonwealth Edison Co. 23,100 525
DQE Inc. 6,500 192
DPL, Inc. 20,000 395
Entergy Corp. 24,200 599
* Northern Indiana Public
Service Co. 14,000 413
Southern Co. 24,200 454
----------
GROUP TOTAL 2,578
----------
- - ----------------------------------------------------------
TOTAL UTILITIES 33,429
- - ----------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $936,761) 988,531
- - ----------------------------------------------------------
</TABLE>
11
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- - --------------------------------------------------------------
CONVERTIBLE BOND
- - --------------------------------------------------------------
<S> <C> <C>
Hillhaven Corp.
7.75%, 11/1/02 (Cost $314) $ 300 $ 361
- - --------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (7.1%)
- - --------------------------------------------------------------
U.S. TREASURY BILL--Note E
4.26%, 9/22/94 300 297
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.26%, 7/1/94 75,262 75,262
- - --------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $75,559) 75,559
- - --------------------------------------------------------------
TOTAL INVESTMENTS (99.8%)
(Cost $1,012,634) $1,064,451
- - --------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.2%)
Other Assets--Notes C and F 36,314
Liabilities--Note F (34,788)
--------
1,526
- - --------------------------------------------------------------
NET ASSETS (100%)
- - --------------------------------------------------------------
Applicable to 96,309,815
outstanding $.10 par value
shares (authorized 150,000,000
shares) $1,065,977
- - --------------------------------------------------------------
NET ASSET VALUE PER SHARE $11.07
==============================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
(1)Ten largest common stock investments representing 16.3% of net assets.
<TABLE>
<CAPTION>
- - ------------------------------------------------------
AT JUNE 30, 1994, NET ASSETS CONSISTED OF:
- - ------------------------------------------------------
Amount Per
(000) Share
---------------------
<S> <C> <C>
Paid in Capital $ 984,289 $10.22
Undistributed Net
Investment Income 6,810 .07
Accumulated Net Realized Gains 23,086 .24
Unrealized Appreciation
of Investments--Note E 51,792 .54
- - ------------------------------------------------------
NET ASSETS $1,065,977 $11.07
- - ------------------------------------------------------
</TABLE>
12
<PAGE> 13
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1994
(000)
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,068
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,517
- - -------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . 9,585
- - -------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,054
Performance Adjustments . . . . . . . . . . . . . . . . . . . . . . (240) 814
------
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . . . . 1,920
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . 94 2,014
------
Taxes (other than income taxes)--Note A . . . . . . . . . . . . . . . 45
Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . 60
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . 5
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . 4
- - -------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 2,972
- - -------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . 6,613
- - -------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . 23,679
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . (45)
- - -------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . 23,634
- - -------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . (110,576)
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . (28)
- - -------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) . . . . . . (110,604)
- - -------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations . . . . $ (80,357)
=============================================================================================================
</TABLE>
13
<PAGE> 14
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
JUNE 30, 1994 December 31, 1993
(000) (000)
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . $ 6,613 $ 15,570
Realized Net Gain . . . . . . . . . . . . . . . . . . . 23,634 112,423
Change in Unrealized Appreciation (Depreciation) . . . (110,604) (48,008)
- - ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations . . . . . . . . . . . . . . . . (80,357) 79,985
- - ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . -- (15,505)
Realized Net Gain . . . . . . . . . . . . . . . . . . . (9,353) (116,769)
- - ------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . (9,353) (132,274)
- - ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . . . 58,804 136,946
-- In Lieu of Cash Distributions . . . . . . 9,001 114,458
-- Exchange . . . . . . . . . . . . . . . . . 16,276 44,345
-- Exchange for Net Assets of Vanguard
Specialized Portfolios-Service Economy
Portfolio--Note G . . . . . . . . . . . . 29,513 --
Redeemed -- Regular . . . . . . . . . . . . . . . . . (46,665) (105,094)
-- Exchange . . . . . . . . . . . . . . . . . (46,397) (119,543)
- - ------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . 20,532 71,112
- - ------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . (69,178) 18,823
- - ------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . 1,135,155 1,116,332
- - ------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . . . . . . $1,065,977 $1,135,155
==================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . $ -- $ .18
Realized Net Gain . . . . . . . . . . . . . . . . . $ .10 $ 1.35
- - ------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . 6,388 14,199
Issued in Lieu of Cash Distributions . . . . . . . . 740 9,636
Issued in Exchange for Net Assets of Vanguard Specialized
Portfolios-Service Economy Portfolio--Note G . . . 2,556 --
Redeemed . . . . . . . . . . . . . . . . . . . . . . (7,909) (17,544)
- - ------------------------------------------------------------------------------------------------------------------
1,775 6,291
- - ------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . $ 6,810 $ 197
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
SIX MONTHS ENDED -------------------------------------------------
For a Share Outstanding Throughout Each Period JUNE 30, 1994 1993 1992 1991 1990 1989
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.01 $12.65 $12.20 $10.40 $11.72 $10.27
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . .07 .18 .18 .29 .32 .28
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . (.91) .71 .97 2.66 (.50) 2.04
TOTAL FROM INVESTMENT OPERATIONS . . (.84) .89 1.15 2.95 (.18) 2.32
- - -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . -- (.18) (.18) (.29) (.34) (.28)
Distributions from Realized Capital Gains . . . (.10) (1.35) (.52) (.86) (.80) (.59)
TOTAL DISTRIBUTIONS . . . . . . . . . (.10) (1.53) (.70) (1.15) (1.14) (.87)
- - -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . $11.07 $12.01 $12.65 $12.20 $10.40 $11.72
=========================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . -7.07% +7.32% +9.54% +29.33% -1.51% +22.66%
- - -------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- - ------------------------
Net Assets, End of Period (Millions) . . . . . $1,066 $1,135 $1,116 $957 $697 $733
Ratio of Expenses to Average Net Assets . . . . .54%* .49% .48% .46% .55% .51%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . 1.20%* 1.36% 1.51% 2.36% 2.77% 2.38%
Portfolio Turnover Rate . . . . . . . . . . . . 99%* 72% 64% 52% 73% 27%
- - -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
Vanguard/Morgan Growth Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company.
* A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of 4:00 PM on the valuation date; securities not
traded are valued at the mean of the latest quoted bid and asked prices.
Securities not listed are valued at the latest quoted bid prices. Temporary
cash investments are valued at amortized cost which approximates market 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 of Investment Companies, transfers uninvested cash balances into a Pooled
Cash Account, the daily aggregate of which is invested in repurchase agreements
secured by U.S. Government obligations. Securities pledged as collateral for
repurchase agreements are held by the Fund's custodian bank until maturity of
each repurchase agreement. Provisions of each agreement ensure that the market
value of this collateral is sufficient in the event of default: however, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
4. FUTURES: The Fund utilizes futures contracts to a limited extent. The
primary risks associated with the use of futures contracts are imperfect
correlation between the change in market value of the securities held by the
Fund and the prices of futures contracts, and the possibility of an illiquid
market. Futures contracts are valued based upon their quoted daily settlement
prices. Fluctuations in the value of futures contracts are recorded as
unrealized appreciation (depreciation) until terminated, at which time realized
gains (losses) are recognized. Unrealized appreciation (depreciation) related
to open futures contracts is required to be treated as realized gain (loss) for
Federal income tax purposes.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses on
the sale of investment securities are those of specific securities sold.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
* B. Under the terms of investment advisory contracts, the Fund pays Wellington
Management Company, Franklin Portfolio Associates, and Husic Capital Management
investment advisory fees calculated at an annual percentage rate of average net
assets of the Fund. The basic fees of each adviser, other than Husic Capital
Management, are subject to quarterly adjustments based on performance relative
to the Growth Fund Stock Index. For the six months ended June 30, 1994, the
aggregate investment advisory fee represented an effective annual base rate of
.19 of 1% of average net assets, before a decrease of $240,000 (.04 of 1%)
based on performance.
The Vanguard Group, Inc. also provides investment advisory services to a
portion of the Fund on an at-cost basis.
16
<PAGE> 17
* C. The Vanguard Group, Inc. 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
Directors. At June 30, 1994, the Fund had contributed capital of $171,000 to
Vanguard (included in Other Assets), representing .9% of Vanguard's
capitalization. The Fund's directors and officers are also directors and
officers of Vanguard.
* D. During the six months ended June 30, 1994, the Fund made purchases of
$510,543,000 and sales of $522,043,000 of investment securities other than U.S.
Government securities and temporary cash investments.
* E. At June 30, 1994, unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes aggregated $51,817,000, of
which $112,329,000 related to appreciated securities and $60,512,000 related to
depreciated securities.
At June 30, 1994, the aggregate settlement value of open Standard & Poor's 500
Index futures contracts expiring in September, 1994, the related unrealized
depreciation, and the market value of securities deposited as initial margin
for those contracts were $1,780,000, $25,000, and $297,000, respectively.
* F. The market value of securities on loan to broker/dealers at June 30, 1994,
was $19,971,000 for which the Fund had received cash collateral of $20,632,000.
* G. In accordance with the terms of an agreement approved by Vanguard
Specialized Portfolios-Service Economy Portfolio shareholders, on June 2, 1994,
Vanguard/Morgan Growth Fund issued 2,556,000 of its capital shares in exchange
for the net assets of Vanguard Specialized Portfolios-Service Economy Portfolio
of $29,513,000, including $7,453,000 of unrealized appreciation; combined net
assets were $1,117,495,000 as of the merger date. Shareholders of Vanguard
Specialized Portfolios-Service Economy Portfolio received 1.877 shares of
Vanguard/Morgan Growth Fund for each share of Vanguard Specialized
Portfolios-Service Economy Portfolio. The transaction, which was a tax-free
exchange, has been accounted for by combining the assets and liabilities of
each Fund at their value on the date of the merger. The identified cost of
investments were similarly combined.
17
<PAGE> 18
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and
of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc Rorer
Inc.; Director of Sun Company, Inc. and Immune Response Corporation; Trustee of
the Universal Health Realty Income Trust.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of Dayton
Hudson Corporation, American Express Bank Ltd., The St. Paul Companies, Inc.,
and Scott Paper Company.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., and The Southern New England Telephone
Company.
ALFRED M. RANKIN, JR., President and Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company, and The
Standard Products Company.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Company
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas
Company; Director of Cummins Engine Company; Trustee of Vanderbilt University
and the Culver Educational Foundation.
18
<PAGE> 19
HONORARY CHAIRMAN
WALTER L. MORGAN, Founder
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD
Senior Vice President
Planning & Development
JAMES H. GATELY
Senior Vice President
Institutional
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
VINCENT S. MCCORMACK
Senior Vice President
Operations
RALPH K. PACKARD
Senior Vice President
Chief Financial Officer
19
<PAGE> 20
THE VANGUARD FAMILY OF FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund-Money Market Portfolio
Vanguard State Tax-Free Funds (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds (CA, FL, NJ, NY, OH, PA)
FIXED INCOME FUNDS
Vanguard Admiral Funds
Vanguard Bond Index Fund
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
EQUITY FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Index Trust
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund-U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund-International Portfolio
The Vanguard Group * Vanguard Financial Center
Valley Forge, PA 19482
New Account Information: 1-(800) 662-7447
Shareholder Account Services: 1-(800) 662-2739
This Report has been prepared for shareholders and
may be distributed to others only if preceded or
accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q262-06/94
VANGUARD
MORGAN GROWTH FUND
[FLAG PHOTO -- SEE EDGAR APPENDIX]
SEMI-ANNUAL REPORT
JUNE 30, 1994
<PAGE> 21
EDGAR APPENDIX
The back cover of the printed version of this report features the
flags of the United States of America and Vanguard flying from a halyard.
