<PAGE> 1
VANGUARD
MORGAN GROWTH FUND
ANNUAL REPORT 1993
[PHOTO -- SEE EDGAR APPENDIX]
<PAGE> 2
A Brave New World For Investing
With the clarity of hindsight, we can now see that the past two decades
composed one of the great cycles in the history of the financial markets, as
reflected in the chart below.
* During the 1973-1982 decade, the nominal total returns (capital change
plus income) of stocks and bonds averaged only about +6% per year; cash
reserves averaged more than +8% annually. However, high inflation rates,
averaging 8.7% annually, devastated these nominal results. Real returns
(nominal returns less the inflation rate) for each of these three major
asset classes were actually negative.
* During the 1983-1992 decade, quite the opposite situation prevailed.
Nominal returns for stocks and bonds were close to their highest levels
in history and forged well into double-digit territory. To make a good
investment environment even better, inflation was tame (averaging 3.8%
annually), and real returns were solidly positive.
[A TALE OF TWO DECADES CHART -- SEE EDGAR APPENDIX]
This sharp contrast provides us with perspective for the decade that will end
in the year 2002. Some investors will fear a recurrence of the returns of the
first decade, while others will hope for a recurrence of the second; most will
likely anticipate something in between. Whatever the case, there are two
essential elements involved in considering your investment program in the light
of today's circumstances.
First, the yield of each investment class at the start of a decade has
had an important relationship to its future return. Yields were low when 1973
began, high when 1983 began, and are again low today. In fact, current income
yields are remarkably close to the levels of 20 years ago, as shown in the
following table.
<TABLE>
<CAPTION>
INCOME YIELDS (January 1)
---------------------------------------------------
1973 1983 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS 2.7% 4.9% 2.7%
BONDS 5.8 10.7 6.0
RESERVES 3.8 10.5 3.1
- -----------------------------------------------------------------------------------------------
</TABLE>
But there is a second important element to consider: inflation. It got
progressively worse during most of the first decade, but got progressively
better in the second.
<TABLE>
<CAPTION>
---------------------------------------------------
1973 1981 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INFLATION 3.4% 12.4% 2.7%
- -----------------------------------------------------------------------------------------------
</TABLE>
Today's low yield levels suggest that more modest nominal returns are in
prospect for the coming decade than in the 1980s; indeed, returns could
gravitate
(Please turn to inside back cover)
VANGUARD/MORGAN GROWTH FUND SEEKS TO PROVIDE LONG-TERM GROWTH OF CAPITAL BY
INVESTING PRIMARILY IN THE COMMON STOCKS OF ESTABLISHED GROWTH COMPANIES, BUT
MAY ALSO INVEST IN EMERGING AND CYCLICAL GROWTH COMPANIES. CURRENT INCOME AND
SHORT-TERM MARKET FLUCTUATIONS ARE NOT CONSIDERATIONS IN THE SELECTION OF
INVESTMENTS.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
[PHOTO OF JOHN C. BOGLE -- SEE EDGAR APPENDIX]
Although Vanguard/Morgan Growth Fund generated a positive total return of +7.3%
over the past twelve months--outpacing the Standard & Poor's/BARRA Growth Stock
Index--1993 proved somewhat disappointing for the Fund. Our return fell short
of the gains of about +10% achieved both by large blue-chip stocks as a group
and the average growth stock mutual fund.
This table presents our customary comparison of the total returns
(capital change plus income) of Morgan Growth Fund and the unmanaged Standard &
Poor's 500 Composite Stock Price Index for the year:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Total Return
------------------
Year Ended
December 31, 1993
- -------------------------------------------------------------------------------
<S> <C>
VANGUARD/MORGAN GROWTH FUND + 7.3%
- -------------------------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +10.1%
- -------------------------------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $12.65 per share on
December 31, 1992, and $12.01 on December 31, 1993, with the latter figure
adjusted to take into account an annual dividend of $.18 per share from net
investment income, and two distributions totaling $1.35 per share from net
capital gains realized largely during the past year. I would note that, in
March 1994, the Fund will be making a distribution of about $.10 per share from
net capital gains realized from 1993 operations, but taxable to shareholders in
1994.
* THE STOCK MARKET IN 1993
In all, 1993 was a good year for stocks. Indeed, the +10.1% total return of the
Standard & Poor's 500 Index was virtually identical to its long-term
(1926-1993) average annual total return of +10.3%. This 68-year historical span
is by far the longest of any diversified stock market index.
During the year, the market's returns accumulated gradually and with
relative consistency, inch-by-inch, step-by-step, month-by-month. There were
neither explosive rises nor plummeting declines. It is probably fair to say
that such a steady course is the exception rather than the rule in market
history. It remains a virtual certainty that most years will witness the kind
of spasmodic market action--and hence the higher volatility and risk--that has
been typical of the stock market in the past.
The precipitating factor in the market's advance almost certainly was
the decline in long-term interest rates. The yield on the long- term U.S.
Treasury bond, which opened the year at 7.4%, had fallen to 6.4% by year-end,
engendering a price gain of about +14%. This sharp rate decline seemed to be
driven largely by two factors: (1) a stubbornly weak economic recovery that
encouraged the Federal Reserve to make ample credit available; and (2)
continuing evidence that inflation remained under control. The U.S. Consumer
Price Index (CPI) increased 2.7% during 1993, down from 2.9% during 1992. As a
result, despite the decline in interest rates, "real" yields (nominal yields
less
1
<PAGE> 4
[CUMULATIVE PERFORMANCE 1989-1993 CHART -- SEE EDGAR APPENDIX]
the inflation rate) on long-term bonds remain at healthy levels.
Since one factor that investors consider in setting their asset
allocations is the relative yield of stocks versus bonds, falling bond yields
provided impetus to stock prices. During 1993, the dividend yield on stocks (as
measured by the Standard & Poor's 500 Index) declined from 2.8% to 2.7%,
enough, in and of itself, to add some +5% to the price of the stocks in the
Index. This upward revaluation, when added to a dividend yield that is
extremely low by historical standards, accounted for the lion's share of the
+10.1% total return achieved by the Standard & Poor's 500 Index.
During the year, the stock market exhibited a striking bias toward
"value" stocks--companies that provide above-average dividend yields and
below-average price-earnings ratios--over "growth" stocks--companies that
provide lower yields but presumably richer prospects for earnings growth. The
disparity between the two groups' returns during 1993 was little short of
astonishing: value stocks provided a return of +18.6%, while growth stocks
provided a return of but +1.7%.
This dichotomy between growth and value stock returns mirrors the
disparity I described to you in my Annual Report one year ago. The dramatic
shortfall of growth stocks in 1993 is quite the reverse of the clear leadership
that growth stocks enjoyed from 1989 through 1991. The chart to the left
contrasts the cumulative returns of the Standard & Poor's/BARRA Value Index and
Growth Index during the full five-year period. You will note that, despite the
leadership of the Value Index in 1992 and 1993, the Growth Index (+102.0%)
remains ahead of its Value counterpart (+88.7%) for the full five years.
The swings in the market's favoritism toward one style of investing or
another--largely, if not completely, unpredictable--are what investing is all
about. The recent swing toward value stocks made achieving above-market returns
difficult for growth funds in 1993. But the five-year performance of growth
stocks provides substantial evidence that investors should not abandon the
particular investment style that best suits their needs just because of a few
years of relative underperformance.
* THE FUND IN FISCAL 1993
Our shortfall of 2.8 percentage points to the Standard & Poor's 500 Index was
engendered by two distinct factors. First, while our industry sector
commitments were not markedly different from those of the Index, we gained some
ground by virtue of our large position in the high- performing technology group
(20% of Fund net assets versus 9% for the Index). Unfortunately, we lost about
the same amount of ground due to our under-representation in the energy (4% of
Fund net assets versus 11% for the Index) and utilities (2% versus 12%)
sectors, which also provided outstanding returns.
These sector differences pretty much offset one another. Thus, our
performance shortfall was largely the result of the second factor: individual
stock selection. Here, the stocks we selected in the consumer cyclicals group
(autos) and the financial group (banks and insurance) fell well
2
<PAGE> 5
short of their respective sectors. A portion of this "selection" shortfall, I
should note, was offset by our better-than-sector stock selections in the
Fund's holdings in the technology group, which, as noted above, was among the
top-performing sectors.
That said, we also fell short of the return of the average growth
stock mutual fund by 3.3 percentage points. The members of our peer group had
fully 40% of their net assets committed to small- and medium-sized companies,
compared with 29% for Morgan Growth Fund. In a year in which the smaller growth
stocks distinctly outperformed their larger counterparts (which, of course, are
the stocks that dominate the Standard & Poor's/BARRA Growth Stock Index), this
difference was decisive.
The results of our individual managers were mixed. Wellington
Management Company, our adviser since the Fund's inception in 1968, and still
the adviser for the major share of our assets, provided a lower return during
1993 than our other advisers as a group. This shortfall, of course, follows
Wellington's achievement of a superior return during 1992.
Franklin Portfolio Associates was--by an impressive margin--the Fund's
performance leader in 1993, nicely outpacing each of our measurement standards.
With its quantitative, computer-dominated approach to growth stock selection,
Franklin has provided significant "value added" since their retention as an
adviser when we adopted our multi-manager strategy in April 1990.
The laggard among our managers was Roll & Ross Asset Management
Company. After evaluating this firm's results following the three full years of
our relationship--which we believe represents a fair period over which to
evaluate a quantitative strategy, its selection methodology, and the total
returns it achieved relative to growth stock standards--we determined not to
renew our advisory contract when it expired on May 1, and it was terminated by
mutual consent.
Our appointment of Husic Capital Management, established in San
Francisco in 1986, did not become effective until September 24, following the
notification of Morgan Growth Fund shareholders in August. During the interim
period, the Roll & Ross portion of the portfolio was
[CUMULATIVE PERFORMACE DECEMBER 31, 1983, TO DECEMBER 31, 1993 CHART -- SEE
EDGAR APPENDIX]
3
<PAGE> 6
supervised by the Vanguard Core Management Group. Given the effective
performance of the Core Management Group--admittedly over a very short period
of time--we judged that it should continue to be responsible for a small
portion (about 9%) of the Fund's assets.
After evaluating the records of our various managers at year-end, we
determined that some reallocation of responsibilities would be in the best
interest of shareholders. This table shows the allocations to each manager on
December 31, 1993, and the allocations that are expected to become effective
during March 1994:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Share of Total Net Assets
------------------------------------
Dec. 31, 1993 1994
------------------------------------
$ millions % %
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
WELLINGTON MANAGEMENT CO. $578 51% 40%
FRANKLIN PORTFOLIO ASSOCIATES 245 22 33
HUSIC CAPITAL MANAGEMENT 150 13 13
VANGUARD CORE MANAGEMENT 108 9 9
CASH RESERVE 54 5 5
- ---------------------------------------------------------------------------------------
TOTAL $1,135 100% 100%
- ---------------------------------------------------------------------------------------
</TABLE>
Coincident with the reallocation of assets, Wellington Management Company has
appointed Robert D. Rands as the new Portfolio Manager for its portion of the
Fund's assets. He has been associated with Wellington Management Company since
1978, and replaces Frank V. Wisneski, Portfolio Manager since 1979. We are most
appreciative of Mr. Wisneski's service to the Fund.
As you know, selecting investment advisers is a fallible endeavor, and
allocating assets among them no less so. However, when we report to you on our
1994 total return one year hence, we look forward with optimism to relating a
better relative return for Morgan Growth Fund than we achieved in 1993.
* A TEN-YEAR PERSPECTIVE
The return of a given mutual fund during any one-year period is, of course,
only of limited value in appraising its long-term record. The past decade,
however, seems a reasonable time frame for evaluation. During this period,
Morgan Growth Fund provided a cumulative return that was just a tiny fraction
higher than--really, virtually the same as--the cumulative return achieved by
the average growth fund. Both returns, however, were below that of the Standard
& Poor's 500 Stock Index. The chart at the bottom of page 3 shows the
cumulative returns of the Fund and these two competitive standards. The
following table summarizes the results:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Total Return
-----------------------------------
Ten Years Ended December 31, 1993
-----------------------------------
Cumulative Annual Rate
- -----------------------------------------------------------------------------------
<S> <C> <C>
MORGAN GROWTH FUND +211% +12.0%
- -----------------------------------------------------------------------------------
AVERAGE GROWTH FUND +210% +12.0%
STANDARD & POOR'S 500 INDEX +300 +14.9
- -----------------------------------------------------------------------------------
</TABLE>
It should go without saying that these returns are in no way forecasts of
future returns for the Fund, the average growth fund, or the Index.
There are, I think, two reasons for the superiority of the Standard &
Poor's 500 Index over this period. First, market indexes exist only in a "paper
world," and need not bear the essential "real world" costs, largely operating
expenses and portfolio transaction costs, that must be incurred by all mutual
funds. These frictional costs engender a significant reduction in equity mutual
fund returns (perhaps 1% to 2% per year). Second, the decade was one in which
growth stocks (which compose one-half of the weight of the Standard & Poor's
500 Index) lagged value stocks (the other one-half) by more than 1% per year,
making life a bit more difficult for our Fund as well as other funds with a
capital growth objective.
With respect to our essential "tie score" with other growth funds, it
is not a particularly satisfying outcome for us. To put it simply, we aspire to
outperform our competitors over time. Given that these expectations have
exceeded the realities of the Fund's relative returns during most of the 1980s,
we moved to our multi-manager strategy three and one-half years ago. So far,
the results of this change would have to be described as "not proven." We
4
<PAGE> 7
made "hits" in selecting some of our portfolio managers but "errors" in
selecting others.
I should note that the comparison gives the average growth mutual fund
the benefit of a very large doubt. The figures in the table compare fund net
asset values plus any dividends and capital gains, and therefore completely
ignore the sales "loads" charged on purchases or redemptions by many growth
funds. Investors incur these loads in the ownership of some 189 of the 488
growth funds in existence. On average, these sales charges would currently
reduce the returns of such funds by about 4.5% for the one-year investor. For
the investor who purchased one of these load funds ten years ago--when sales
charges approximated 8%--the reduction would have been about 1% annually.
Morgan Growth Fund's lifetime record, going all the way back to 1968,
is slightly above the record of the Standard & Poor's 500 Index (+11.2%
annually for the Fund versus +10.5% for the Index). Some of our advantage, of
course, can be considered "ancient history." Nonetheless, it gives us
confidence in our ability to do a better job for you than we did during the
past decade.
* LOOKING AHEAD
The 1993 rise in the stock market is its eleventh in the past twelve years. The
equity markets have come a long way since the end of 1981. Stock yields are
near all-time historical lows, and interest rates are at their lowest levels in
two decades. So, it would be imprudent not to offer a word of caution about the
stock market, which is surely due for its share of difficult bumps along the
way during the next few years.
What should investors do in this environment? If you have a long-term
investment horizon, and are willing to accept with equanimity the inevitable
peaks and valleys of the stock market, equities should remain a major component
of your portfolio. Funds emphasizing growth stocks--typically a bit more
volatile than the market as a whole--may serve well as a major component of
your equity holdings. However, an appropriate position should be maintained
among bond funds and short-term reserves, and additions to your equity
investments should probably be made gradually over time rather than "at one
fell swoop."
Whatever course you choose, we would recommend that you focus not on
annual fluctuations in absolute and relative performance, but on the long term.
Timing the markets is an inevitably fallible task; therefore we believe that,
provided your overall account is soundly balanced, "stay the course" is
virtually always good advice.
Sincerely,
/S/ JOHN C. BOGLE
- ----------------------------
John C. Bogle
Chairman of the Board
January 18, 1994
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED DECEMBER 31, 1993) ARE AS FOLLOWS:
<TABLE>
<S> <C> <C> <C> <C> <C>
1 YEAR: +7.32% 5 YEARS: +12.93% 10 YEARS: +12.03%
</TABLE>
THE AVERAGE ANNUAL TOTAL RETURN FOR THE TEN-YEAR PERIOD INCLUDES A CAPITAL
RETURN OF +9.59% AND AN INCOME RETURN OF +2.44%. 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.
5
<PAGE> 8
REPORT FROM WELLINGTON MANAGEMENT COMPANY
While investment returns for the past twelve months were solidly positive, it
was a substandard and frustrating period for large "growth" company investors,
especially in the context of the above-average returns generated by other
sectors of the market. The primary issue, as discussed in our mid-year report,
was the performance dichotomy between the "cyclical/value" sector of the market
and the "growth" sector (which is the strategic and longer-term focus of
Vanguard/Morgan Growth Fund). In essence, large growth companies (defined as
companies which show steadily increasing earnings that are not typically
influenced by broader economic cycles) have experienced valuation erosion, as
investors, buoyed by the prospect of improved economic conditions in the U.S.,
have shifted their attention to companies which should show strong earnings
recovery during cyclical upswings.
As discussed in our report of six months ago, we had hoped that this
trend, which has been in place now for the better part of two years, would
begin to reverse during the second half of 1993. While there were some initial
indications of change as the year closed, for the most part our expectations
were premature. We have maintained our fundamental focus on larger, stronger,
high-quality growth companies. We believe that the consistent above-average
earnings growth of such companies makes their stocks attractive at today's
valuation levels.
During 1993, the strongest areas of our portfolio were in the
technology and industrial sectors, while the weakest area was the consumer
staples sector. On average we project the companies held in our portion of
Morgan Growth Fund to show earnings growth of 16.3% during 1994 (15.9% was the
figure in 1993). The price-earnings multiple for this level of growth is only
15.1 times--virtually equal to the price-earnings multiple for the Standard &
Poor's Index--while 1994's growth is anticipated to be about one-third slower
than that of our portfolio companies. Sector weightings for the
Wellington-managed portion of Morgan Growth Fund are detailed in the table
below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
December 31, 1993
------------------------
Industry Sector Percentage of Net Assets
- -----------------------------------------------------------------------------------
<S> <C>
CONSUMER STAPLES 27%
CONSUMER CYCLICAL 12
SERVICES 10
FINANCE & UTILITY 16
ENERGY 3
INDUSTRIAL 12
TECHNOLOGY 18
CASH RESERVES 2
- -----------------------------------------------------------------------------------
TOTAL 100%
- -----------------------------------------------------------------------------------
</TABLE>
Over one-quarter of our assets under management are invested in the consumer
staples sector (which includes the health-care area)--probably the "growth"
segment most questioned at the present time. Our holdings, which range from
PepsiCo and General Mills in the food area, to Gillette in household products,
to Johnson & Johnson and Medtronic in the health area, are all expected to
continue to demonstrate strong fundamental performance. In particular, with the
Administration's health-care reform proposals now public, some health-care
companies (including those we hold) should perform solidly during the coming
year.
The consumer cyclical sector remains an important part of the assets
we manage, although we have a marginally lower weighting than twelve months
ago. Our major holdings are in department stores (May and Dillard) and
restaurants (McDonald's), although we have recently added more durable-oriented
consumer companies (Coleman).
The services sector represents 50% more of our Portfolio now than it
did at the beginning of the year, primarily due to second-half purchases of
Gannett and Disney. We continue to be attracted to this area and are looking
for additional companies that meet our quality and valuation standards.
The finance and utility sector representation is down significantly
from last year, mostly due to
6
<PAGE> 9
the elimination of our Bell System telephone holdings, which had been extremely
successful. Regional bank companies are the focus of the sector currently and,
although this type of bank lagged the market during 1993, strong loan growth,
solid balance sheets, and continuing 10%-15% earnings growth make us more
optimistic for the coming year.
Within the industrial sector, major holdings in cyclical growth
companies have been retained (General Electric, Air Products & Chemicals),
while research continues on smaller industrial companies with a special edge
(e.g., Morton Intl., with its air-bag expertise).
Finally, the technology sector weighting remains about the same as
last year with some significant changes in emphasis. Semiconductor exposure
(Intel, Applied Materials, and Motorola) has been reduced significantly with
several eliminations, while more service-oriented companies (Computer Sciences
and Electronic Data Systems) have been added, with special attention to those
firms well positioned in the outsourcing area.
Looking forward, the strength of these holdings, the relative
assuredness of their growth, and, most of all, the historically low relative
stock valuations give us substantial reason to anticipate solid investment
returns during 1994.
Respectfully,
Frank V. Wisneski, Senior Vice President
Portfolio Manager
Wellington Management Company
January 12, 1994
7
<PAGE> 10
TOTAL INVESTMENT RETURN
The lifetime returns for VANGUARD/MORGAN GROWTH FUND are illustrated in the
table below. 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>
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA* YEAR-END VALUE TOTAL INVESTMENT RETURN
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Percentage Change**
Value with Income ---------------------------
Year Ended Net Asset Income Capital Gain Dividends & Capital Vanguard/Morgan S&P 50 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 $ 10,00 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
1969 6.89 -- -- 6.89 10,330 9,16 + 3.3% - 8.4%
- ------------------------------------------------------------------------------------------------------------------------------------
1970 6.38 $ .06 $ .09 6.54 9,802 9,51 - 5.1 + 3.9
- ------------------------------------------------------------------------------------------------------------------------------------
1971 8.06 .10 -- 8.38 12,565 10,87 +28.2 +14.2
- ------------------------------------------------------------------------------------------------------------------------------------
1972 9.18 .07 .48 10.21 15,301 12,93 +21.8 +19.0
- ------------------------------------------------------------------------------------------------------------------------------------
1973 7.12 .09 .27 8.25 12,370 11,03 -19.2 -14.7
- ------------------------------------------------------------------------------------------------------------------------------------
1974 4.74 .11 -- 5.59 8,381 8,13 -32.2 -26.3
- ------------------------------------------------------------------------------------------------------------------------------------
1975 6.62 .13 -- 8.00 11,993 11,15 +43.1 +37.1
- ------------------------------------------------------------------------------------------------------------------------------------
1976 7.77 .11 -- 9.53 14,287 13,80 +19.1 +23.8
- ------------------------------------------------------------------------------------------------------------------------------------
1977 8.18 .15 -- 10.24 15,350 12,81 + 7.4 - 7.2
- ------------------------------------------------------------------------------------------------------------------------------------
1978 9.35 .21 .11 12.21 18,311 13,65 +19.3 + 6.5
- ------------------------------------------------------------------------------------------------------------------------------------
1979 9.47 .29 1.13 14.51 21,761 16,16 +18.8 +18.4
- ------------------------------------------------------------------------------------------------------------------------------------
1980 12.36 .31 -- 19.55 29,317 21,41 +34.7 +32.4
- ------------------------------------------------------------------------------------------------------------------------------------
1981 11.05 .29 .45 18.61 27,911 20,36 - 4.8 - 4.9
- ------------------------------------------------------------------------------------------------------------------------------------
1982 12.01 .30 1.31 23.76 35,634 24,74 +27.7 +21.5
- ------------------------------------------------------------------------------------------------------------------------------------
1983 13.84 .25 1.04 30.51 45,743 30,30 +28.4 +22.5
- ------------------------------------------------------------------------------------------------------------------------------------
1984 11.45 .31 1.39 28.66 42,970 32,19 - 6.1 + 6.2
- ------------------------------------------------------------------------------------------------------------------------------------
1985 13.82 .25 .60 37.34 55,984 42,37 +30.3 +31.6
- ------------------------------------------------------------------------------------------------------------------------------------
1986 11.50 .43 2.88 40.27 60,365 50,26 + 7.8 +18.6
- ------------------------------------------------------------------------------------------------------------------------------------
1987 9.39 .20 2.45 42.29 63,395 52,87 + 5.0 + 5.2
- ------------------------------------------------------------------------------------------------------------------------------------
1988 10,27 .24 .98 51.71 77,518 61,59 +22.3 +16.5
- ------------------------------------------------------------------------------------------------------------------------------------
1989 11.72 .28 .59 63.43 95,080 81,05 +22.7 +31.6
- ------------------------------------------------------------------------------------------------------------------------------------
1990 10.40 .34 .80 62.47 93,644 78,52 - 1.5 - 3.1
- ------------------------------------------------------------------------------------------------------------------------------------
1991 12.20 .29 .86 80.79 121,112 102,39 +29.3 +30.4
- ------------------------------------------------------------------------------------------------------------------------------------
1992 12.65 .18 .52 88.50 132,672 110,18 + 9.5 + 7.6
- ------------------------------------------------------------------------------------------------------------------------------------
1993 12.01 .18 1.35 94.98 142,384 121,27 + 7.3 +10.1
- ------------------------------------------------------------------------------------------------------------------------------------
LIFETIME $5.17 $17.30 + 1,323.8% +1,112.7% +11.2% + 10.5%
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
8
<PAGE> 11
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS
December 31, 1993
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (93.4%)
- ----------------------------------------------------------------------------
CONSUMER (29.7%)
- ----------------------------------------------------------------------------
DRUGS (4.5%)
Bristol-Myers Squibb Co. 21,700 $ 1,261
* Cambridge Neuroscience, Inc. 23,900 173
* Genentech Inc.6,000303
* Genzyme Corp.7,900217
(1)Johnson & Johnson575,90025,771
Mylan Laboratories, Inc. 4,700 119
* National Intergroup, Inc. 70,600 935
Pfizer, Inc. 221,800 15,304
Rhone-Poulenc Rorer, Inc. 4,600 168
* Roberts Pharmaceuticals 21,500 844
Schering-Plough Corp. 33,500 2,295
Smithkline Beecham PLC 7,400 221
Upjohn Co. 52,800 1,538
Warner-Lambert Co. 18,300 1,235
Wellcome PLC ADR 16,400 160
----------
GROUP TOTAL 50,544
----------
- ----------------------------------------------------------------------------
FOOD, BEVERAGE & TOBACCO (8.3%)
Anheuser-Busch Co., Inc. 6,400 314
Archer-Daniels-Midland Co. 45,244 1,029
Buenos Aires Embotellado SA ADR 126,300 5,683
CPC International, Inc. 1,500 71
Campbell Soup Co. 26,400 1,082
General Mills, Inc. 335,000 20,351
H.J. Heinz Co. 26,100 936
IBP, Inc. 21,100 546
McCormick & Co., Inc. 14,300 350
(1)McDonald's Corp. 416,900 23,763
(1)PepsiCo, Inc. 563,869 23,048
Philip Morris Cos., Inc. 48,000 2,676
* RJR Nabisco, Inc. 324,100 2,066
Sara Lee Corp. 440,000 11,000
Universal Corp. 16,800 430
Wendys International, Inc. 33,100 575
----------
GROUP TOTAL 93,920
----------
- ----------------------------------------------------------------------------
HOUSEHOLD PRODUCTS (4.2%)
CML Group, Inc. 39,500 933
Colgate-Palmolive Co. 6,900 430
* Danskin, Inc. 37,100 176
* Fruit of the Loom, Inc. 45,100 1,088
Gillette Co. 245,400 14,632
(1)Kimberly-Clark Corp. 420,000 21,787
Mohawk Industries, Inc. 129,000 4,354
* Nantucket Industries, Inc. 1,400 9
Newell Co. 23,200 937
Procter & Gamble Co. 1,100 63
The Stanley Works 8,900 396
* Toastmaster, Inc. 24,500 $ 159
Unilever NV 3,200 370
Wolverine World Wide, Inc. 62,600 1,901
----------
GROUP TOTAL 47,235
----------
- ----------------------------------------------------------------------------
MEDICAL PRODUCTS AND SERVICES (3.8%)
Baxter International, Inc. 517,000 12,602
* Forest Laboratories, Inc. 47,300 2,253
* HEALTHSOUTH Rehabilitation Corp. 2,800 71
* Horizon Healthcare Corp. 20,600 414
IVAX Corp. 8,400 241
Lincare Holdings Inc. 36,000 891
Manor Care Inc. 29,600 721
McKesson Corp. 16,200 875
* Medical Diagnostics, Inc. 15,400 64
(1)Medtronic, Inc. 259,100 21,278
* Somatix Therapy Corp. 65,300 547
U.S. Healthcare, Inc. 28,900 1,654
United States Surgical Corp. 19,200 432
* Vencor, Inc. 52,200 1,559
----------
GROUP TOTAL 43,602
----------
- ----------------------------------------------------------------------------
RETAIL (5.6%)
Albertson's, Inc. 13,400 358
American Stores Co. 43,100 1,853
Blockbuster Entertainment Corp. 113,000 3,461
* Bon-Ton Stores Inc. 36,900 286
Circuit City Stores, Inc. 65,800 1,431
Claire's Stores, Inc. 42,500 770
Dillard Department Stores Class A 338,600 12,867
* 50-Off Stores, Inc. 25,200 173
Fleming Cos., Inc. 47,355 1,172
The Gap, Inc. 32,000 1,260
* Good Guys, Inc. 64,200 835
Home Depot, Inc. 23,133 914
Kmart Corp. 11,500 244
* The Kroger Co. 67,000 1,348
Lowes Cos., Inc. 6,400 379
(1)May Department Stores Co. 544,400 21,436
* Musicland Stores Corp. 7,000 145
Office Depot, Inc. 9,700 326
* Oshman's Sporting Goods, Inc. 29,300 190
J.C. Penney Co., Inc. 60,500 3,169
Petrie Stores Corp. 9,100 265
* Price/Costco Inc. 27,600 531
* QVC Network, Inc. 4,500 175
* Revco Drug Stores, Inc. 170,400 2,471
* Ryan's Family Steak Houses, Inc. 177,000 1,593
* Show Biz Pizza Time, Inc. 19,700 256
SuperValu, Inc. 68,800 2,494
* Toys R Us, Inc. 50,650 2,070
* Value City Department Stores, Inc. 10,800 158
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------------
<S> <C> <C>
Wal-Mart Stores, Inc. 53,100 $ 1,327
----------
GROUP TOTAL 63,957
----------
- ----------------------------------------------------------------------------
OTHER CONSUMER (3.3%)
* Coleman Inc. 348,900 9,769
Diana Corp. 8,000 52
Hasbro, Inc. 89,100 3,230
Houghton Mifflin Co. 285,000 13,858
International Game Technology 15,000 442
Mattel, Inc. 37,100 1,025
Nike, Inc. Class B 13,600 631
Olsten Corp. 88,600 2,602
* Scholastic Corp. 114,600 4,899
Sotheby's Holdings Class A 51,100 786
* Toll Brothers, Inc. 21,000 360
----------
GROUP TOTAL 37,654
----------
- ----------------------------------------------------------------------------
TOTAL CONSUMER 336,912
- ----------------------------------------------------------------------------
ENERGY (3.6%)
- ----------------------------------------------------------------------------
OIL & GAS (1.5%)
Ashland Oil, Inc. 3,600 123
Atlantic Richfield Co. 2,500 263
Atmos Energy Corp. 27,000 746
Burlington Resources, Inc. 55,100 2,335
Enron Corp. 95,600 2,772
Enron Oil & Gas Co. 39,300 1,533
Exxon Corp. 16,900 1,065
Mobil Corp. 60,300 4,764
Royal Dutch Petroleum Co. 300 31
Societe Nationale Elf Aquitaine ADR 6,800 240
Tenneco, Inc. 57,000 3,000
Texaco, Inc. 7,900 511
----------
GROUP TOTAL 17,383
----------
- ----------------------------------------------------------------------------
OIL SERVICES (2.1%)
Baroid Corp. 25,400 210
McDermott International, Inc. 42,000 1,113
* Nabors Industries, Inc. 58,100 458
* Noble Drilling Corp. 259,300 2,269
Schlumberger Ltd. 331,700 19,612
----------
GROUP TOTAL 23,662
----------
- ----------------------------------------------------------------------------
TOTAL ENERGY 41,045
- ----------------------------------------------------------------------------
FINANCE (16.4%)
- ----------------------------------------------------------------------------
BANKS (8.3%)
Banc One Corp. 426,000 16,667
The Bank of New York Co., Inc. 44,400 2,531
BankAmerica Corp. 23,500 1,090
Bankers Trust New York Corp. 21,400 1,693
Barnett Banks of Florida, Inc. 90,900 3,772
Chemical Banking Corp. 148,000 5,939
Citicorp 60,900 $ 2,238
Crestar Financial Corp. 17,700 741
D & N Financial Corp. 7,600 57
First Bank System, Inc. 350,000 10,763
First Chicago Corp. 8,000 346
First Security Corp. 515,900 13,284
First Union Corp. 78,200 3,226
Firstar Corp. 487,500 14,991
Grove Bank 11,200 179
Hibernia Corp. Class A 428,000 3,317
Keycorp 8,050 285
MBNA Corp. 11,700 390
J.P. Morgan & Co., Inc. 3,723 258
NationsBank, Inc. 23,189 1,136
Norwest Corp. 171,700 4,185
PNC Bank Corp. 141,800 4,112
Society Corp. 36,400 1,083
State Street Boston Corp. 26,800 998
Sterling Financial Corp. 9,030 113
Zions Bancorp. 6,900 252
----------
GROUP TOTAL 93,646
----------
- ----------------------------------------------------------------------------
INSURANCE (4.6%)
Aflac, Inc. 106,200 3,027
Aetna Life and Casualty Co. 29,100 1,757
American International Group, Inc. 162,163 14,230
* Berkshire Hathaway 35 571
Central Reserve Life Corp. 30,000 210
The Chubb Corp. 133,500 10,396
Conseco, Inc. 4,100 228
Continental Corp. 7,100 196
The Equitable Cos. 240,000 6,480
General Re Corp. 4,600 492
Horace Mann Educators Corp. 35,200 880
MBIA, Inc. 39,200 2,465
Orion Capital Corp. 2,500 80
Progressive Corp. of Ohio 43,400 1,758
The Travelers Corp. 165,000 5,136
UNUM Corp. 58,300 3,061
USLIFE Corp. 14,700 564
----------
GROUP TOTAL 51,531
----------
- ----------------------------------------------------------------------------
OTHER FINANCE (3.5%)
Alliance Capital Management LP 43,500 1,191
American Express Co. 61,200 1,890
Bear Stearns Co., Inc. 117,815 2,577
* Ceridian Corp. 114,000 2,166
Countrywide Credit Industries, Inc. 56,000 1,407
Federal Home Loan Mortgage Corp. 79,100 3,945
Federal National Mortgage Assn. 119,900 9,412
Fund American Enterprise Holding Co. 13,400 1,052
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------------
<S> <C> <C>
Merrill Lynch & Co., Inc. 113,800 $ 4,780
Primerica Corp. 115,299 4,482
Student Loan Marketing Assn. 40,500 1,817
SunAmerica Inc. 114,900 4,969
Transamerica Corp. 3,700 210
United Dominion Realty 12,400 177
* White River 6,700 218
----------
GROUP TOTAL 40,293
----------
- ----------------------------------------------------------------------------
TOTAL FINANCE 185,470
- ----------------------------------------------------------------------------
INDUSTRIAL (30.3%)
- ----------------------------------------------------------------------------
AEROSPACE (.4%)
Allied-Signal, Inc. 6,700 529
The Boeing Co. 6,200 268
Raytheon Co. 4,500 297
United Technologies Corp. 64,000 3,968
----------
GROUP TOTAL 5,062
----------
- ----------------------------------------------------------------------------
AUTOMOTIVE (2.2%)
Chrysler Corp. 328,300 17,482
Echlin, Inc. 84,600 2,813
Ford Motor Co. 83,800 5,405
----------
GROUP TOTAL 25,700
----------
- ----------------------------------------------------------------------------
CHEMICALS (4.3%)
(1)Air Products & Chemicals, Inc. 550,900 24,377
Airgas, Inc. 29,800 648
E.I. du Pont de Nemours & Co. 21,100 1,018
* Georgia Gulf Corp. 37,900 848
Great Lakes Chemical Corp. 19,000 1,418
International Flavors &
Fragrances, Inc. 58,000 6,598
Morton International, Inc. 90,000 8,415
Rohm & Haas Co. 90,000 5,355
----------
GROUP TOTAL 48,677
----------
- ----------------------------------------------------------------------------
COMPUTERS AND SERVICES (9.5%)
* AST Research, Inc. 13,500 304
Automatic Data Processing, Inc. 295,000 16,299
* Cabletron Systems, Inc. 4,000 450
* Chipcom Corp. 9,900 493
Cisco Systems, Inc. 11,600 748
* Compaq Computer Corp. 70,400 5,210
Computer Associates International, Inc. 76,600 3,064
Computer Sciences Corp. 167,000 16,617
* Conner Peripherals, Inc. 3,200 47
Electronic Arts 8,600 258
General Motors Corp. Class E 672,100 19,659
(1)Hewlett-Packard Co. 264,900 20,927
Informix Corp. 92,400 1,917
Mentor Graphics Corp. 187,400 2,530
* Micro Healthsystems, Inc. 1,600 8
* Microsoft Corp. 48,300 $ 3,888
Nashua Corp. 27,700 762
* Novell, Inc. 37,700 778
Parametric Technology Corp. 8,800 337
Paychex, Inc. 4,250 147
* Seagate Technology 145,100 3,446
Solectron Corp. 6,400 182
* Sterling Software, Inc. 94,300 2,676
* Sun Microsystems, Inc. 95,900 2,793
SynOptics Communications, Inc. 32,900 913
* Tech Data Corp. 19,700 704
* Unisys Corp. 250,700 3,165
----------
GROUP TOTAL 108,322
----------
- ----------------------------------------------------------------------------
ELECTRICAL (2.5%)
Cooper Industries, Inc. 4,800 236
Emerson Electric Co. 3,900 235
(1)General Electric Co. 249,600 26,177
Johnson Controls, Inc. 23,400 1,243
Maxwell Laboratories, Inc. 3,360 33
----------
GROUP TOTAL 27,924
----------
- ----------------------------------------------------------------------------
ELECTRONICS (7.6%)
ADC Telecommunications, Inc. 114,500 4,065
* Advance Circuits, Inc. 74,200 1,141
AMP, Inc. 7,900 499
Applied Materials, Inc. 123,800 4,797
* Arrow Electronics, Inc. 5,100 213
Avnet, Inc. 445,400 17,371
CUC International, Inc. 105,000 3,780
* Cyberoptics Corp. 27,600 162
General Motors Corp. Class H 16,700 649
Intel Corp. 108,000 6,696
* Maxim Integrated Products, Inc. 5,500 261
Micron Technology Inc. 4,800 223
(1)Motorola, Inc. 255,700 23,620
* National Semiconductor Corp. 541,400 8,730
Radiation Systems, Inc. 30,575 451
* SCI Systems, Inc. 155,300 2,718
Scientific-Atlanta, Inc. 150,000 4,950
Texas Instruments, Inc. 16,000 1,016
* U.S. Robotics, Inc. 44,400 1,532
Varian Associates, Inc. 51,000 3,060
----------
GROUP TOTAL 85,934
----------
- ----------------------------------------------------------------------------
MACHINERY (.4%)
Cognex Corp. 71,500 1,001
Cummins Engine Co., Inc. 51,800 2,784
Ingersoll-Rand Co. 5,700 218
Stewart & Stevenson Services, Inc. 7,500 383
* Varity Corp. 9,700 434
----------
GROUP TOTAL 4,820
----------
- ----------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
<S> <C> <C>
- ----------------------------------------------------------------------------
METALS AND MINERALS (.5%)
Inco Ltd. 8,800 $ 237
* LTV Corp. 200,000 3,225
Minerals Technologies, Inc. 4,300 125
Phelps Dodge Corp. 19,100 931
* Wheeling Pittsburgh Corp. 73,200 1,254
----------
GROUP TOTAL 5,772
----------
- ----------------------------------------------------------------------------
PAPER AND HOUSING MATERIALS (.3%)
Masco Corp. 26,200 969
The Mead Corp. 4,800 216
Oakwood Homes Corp. 7,700 208
St. Joe Paper Co. 4,000 203
Shaw Industries, Inc. 34,600 878
* Shorewood Packaging 42,900 590
----------
GROUP TOTAL 3,064
----------
- ----------------------------------------------------------------------------
TRANSPORTATION (.9%)
Conrail, Inc. 21,400 1,431
* Detroit Diesel Corp. 80,000 2,880
Mesa Airlines, Inc. 204,000 3,519
Skywest, Inc. 43,100 1,476
Union Pacific Corp. 6,600 413
----------
GROUP TOTAL 9,719
----------
- ----------------------------------------------------------------------------
OTHER (1.7%)
Cooper Tire & Rubber Co. 33,600 840
* Crown Cork & Seal Co., Inc. 46,327 1,940
The Goodyear Tire & Rubber Co. 58,700 2,686
Harley-Davidson, Inc. 88,600 3,909
MTS Systems Corp. 136,900 4,073
* Owens-Illinois, Inc. 109,200 1,351
Pittston Services Group 42,100 1,216
Quixote Corp. 2,800 48
Spartan Motors, Inc. 28,500 481
The Toro Co. 76,600 2,145
Unifi, Inc. 36,300 976
----------
GROUP TOTAL 19,665
----------
- ----------------------------------------------------------------------------
TOTAL INDUSTRIAL 344,659
- ----------------------------------------------------------------------------
SERVICES (10.0%)
- ----------------------------------------------------------------------------
BROADCASTING, NEWSPAPERS & ADVERTISING (4.8%)
* Cablevision Systems Corp. Class B 43,000 2,935
Capital Cities/ABC, Inc. 1,700 1,053
The Walt Disney Co. 264,300 11,266
Gannett Co., Inc. 285,000 16,316
* Grupo Televisa SA 43,100 3,017
* International Family Entertainment Class B 75,300 1,534
Interpublic Group of Cos., Inc. 24,300 778
* Multimedia, Inc. 163,600 5,603
News Ltd. ADR 7,700 406
Reader's Digest Assn., Inc. Class A 22,500 $ 1,013
* Silver King Communications 135,000 1,283
Spelling Entertainment 112,500 1,125
* Starsight Telecast, Inc. 111,200 2,057
* Tele-Communications, Inc. Class A 40,100 1,208
Time Warner, Inc. 22,800 1,009
* Viacom International Class B 55,000 2,468
Westcott Communications 64,500 1,177
----------
GROUP TOTAL 54,248
----------
- ----------------------------------------------------------------------------
OTHER SERVICES (5.2%)
Centex Corp. 86,900 3,650
* Corrections Corp. of America 27,700 246
Courier Corp. 5,600 101
* Dianon Systems Inc. 19,300 116
* GC Cos. 2,050 71
Harcourt General, Inc. 32,800 1,189
Hilton Hotels Corp. 73,700 4,477
Hollywood Park, Inc. 129,200 3,844
Host Marriott 11,100 101
ITT Corp. 6,600 602
* Information Resources, Inc. 5,900 226
* Itel Corp. 20,400 571
* Koll Management Services, Inc. 14,000 161
* MGM Grand Inc. 96,000 3,756
Marriott International 11,100 322
Mirage Resorts Inc. 143,750 3,432
National Golf Properties, Inc. 185,000 4,047
PHH Corp. 12,500 519
Penn Central Corp. 13,100 424
President Riverboat Casinos, Inc. 94,000 2,068
* Primadonna Resorts, Inc. 122,700 3,436
Promus Co., Inc. 78,000 3,569
* Regal Communications Corp. 5,100 21
* Right Management Consultants 9,300 172
* TRC Cos., Inc. 24,000 258
* Varitronic Systems, Inc. 18,300 192
* WMS Industries, Inc. 175,800 5,054
WMX Technologies Inc. 31,000 818
* Waste Management International 598,900 10,481
Wheelabrator Technologies 297,900 5,288
----------
GROUP TOTAL 59,212
----------
- ----------------------------------------------------------------------------
TOTAL SERVICES 113,460
- ----------------------------------------------------------------------------
UTILITY (3.4%)
- ----------------------------------------------------------------------------
American Telephone &
Telegraph Co. 42,000 2,205
British Telecommunications
PLC ADR 400 28
* California Energy Co. 44,800 829
Commonwealth Edison Co. 23,100 653
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------------
<S> <C> <C>
DQE Inc. 5,200 $ 179
* Entergy Corp. 43,000 1,548
GTE Corp. 22,200 777
General Public Utilities Corp. 22,700 701
MCI Communications Corp. 679,900 19,122
Phillippine Long Distance Telephone Co. 4,600 373
Pinnacle West Capital Corp. 33,500 750
Southern Co. 12,100 534
Southwestern Bell Corp. 24,800 1,029
Sprint Corp. 11,800 410
Telefonica de Espana ADR 22,200 866
Telefonos de Mexico SA ADR 56,900 3,841
U.S. West Corp. 19,000 872
Vodafone Group PLC ADR 38,100 3,400
- ----------------------------------------------------------------------------
TOTAL UTILITIES 38,117
- ----------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $904,723) 1,059,663
- ----------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS(6.6%)
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
--------
<S> <C> <C>
U.S. TREASURY BILL--Note E
3.06%, 3/24/94 $ 1,000 993
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
3.26%, 1/3/94 73,970 73,970
- ----------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $74,963) 74,963
- ----------------------------------------------------------------------------
TOTAL INVESTMENTS (100%)
(Cost $979,686) 1,134,626
- ----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- ----------------------------------------------------------------------------
Other Assets--Notes C and F 32,296
Liabilities--Note F (31,767)
----------
529
- ----------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------
Applicable to 94,534,215 outstanding
$.10 par value shares
(authorized 150,000,000 shares) $1,135,155
- ----------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $12.01
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
See Note A to Financial Statements.
(1)Ten largest common stock investments representing 20.5% of net assets.
* Non-Income Producing Security.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
AT DECEMBER 31, 1993,
NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------
Amount Per
(000) Share
---------- ------
<S> <C> <C>
Paid in Capital--Note G $971,210 $10.28
Undistributed Net Investment Income--Note G 197 --
Accumulated Net Realized Gains--Note G 8,805 .09
Unrealized Appreciation of Investments 154,943 1.64
- ----------------------------------------------------------------------------
NET ASSETS $1,135,155 $12.01
- ----------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1993
(000)
- ------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 17,983
Interest 3,134
- ------------------------------------------------------------------------------------
Total Income 21,117
- ------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fees $2,010
Performance Adjustments (322) 1,688
------
The Vanguard Group--Note C
Management and Administrative 3,303
Marketing and Distribution 225 3,528
------
Taxes (other than income taxes)--Note A 93
Custodian's Fees 78
Auditing Fees 10
Shareholders' Reports 127
Annual Meeting and Proxy Costs 20
Directors' Fees and Expenses 3
- ------------------------------------------------------------------------------------
Total Expenses 5,547
- ------------------------------------------------------------------------------------
Net Investment Income 15,570
- ------------------------------------------------------------------------------------
REALIZED NET GAIN--Note D
Investment Securities Sold 111,634
Futures Contracts 789
- ------------------------------------------------------------------------------------
Realized Net Gain 112,423
- ------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)--Notes D and E
Investment Securities (48,011)
Futures Contracts 3
- ------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation) (48,008)
- ------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations $ 79,985
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
DECEMBER 31, 1993 December 31, 1992
(000) (000)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 15,570 $ 15,165
Realized Net Gain--Note D 112,423 47,362
Change in Unrealized Appreciation (Depreciation)--
Notes D and E (48,008) 32,808
- --------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 79,985 95,335
- --------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income (15,505) (15,125)
Realized Net Gain (116,769) (43,395)
- --------------------------------------------------------------------------------------------------------
Total Distributions (132,274) (58,520)
- --------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular 136,946 118,319
-- In Lieu of Cash Distributions 114,458 56,094
-- Exchange 44,345 86,138
Redeemed -- Regular (105,094) (60,643)
-- Exchange (119,543) (77,197)
- --------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions 71,112 122,711
- --------------------------------------------------------------------------------------------------------
Total Increase 18,823 159,526
- --------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 1,116,332 956,806
- --------------------------------------------------------------------------------------------------------
End of Year (3) $1,135,155 $1,116,332
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
(1) Distributions Per Share
Net Investment Income $ .18 $ .18
Realized Net Gain $ 1.35 $ .52
- --------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued 14,199 16,623
Issued in Lieu of Cash Distributions 9,636 4,488
Redeemed (17,544) (11,278)
- --------------------------------------------------------------------------------------------------------
6,291 9,833
- --------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income--Note G $ 197 $ 775
- --------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------
For a Share Outstanding Throughout Each Year 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.65 $12.20 $10.40 $11.72 $10.27
INVESTMENT OPERATIONS
Net Investment Income .18 .18 .29 .32 .28
Net Realized and Unrealized Gain
(Loss) on Investments .71 .97 2.66 (.50) 2.04
------- ----- ------ ----- ------
TOTAL FROM INVESTMENT OPERATIONS .89 1.15 2.95 (.18) 2.32
- --------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.18) (.18) (.29) (.34) (.28)
Distributions from Realized Capital Gains (1.35) (.52) (.86) (.80) (.59)
------- ----- ------ ----- ------
TOTAL DISTRIBUTIONS (1.53) (.70) (1.15) (1.14) (.87)
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.01 $12.65 $12.20 $10.40 $11.72
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
TOTAL RETURN +7.32% +9.54% +29.33% -1.51% +22.66%
- --------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) $1,135 $1,116 $957 $697 $733
Ratio of Expenses to Average Net Assets .49% .48% .46% .55% .51%
Ratio of Net Investment Income to
Average Net Assets 1.36% 1.51% 2.36% 2.77% 2.38%
Portfolio Turnover Rate 72% 64% 52% 73% 27%
- --------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
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 the 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 may utilize 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, Roll & Ross Asset Management
Corp. (until April 30, 1993), and Husic Capital Management (effective September
24, 1993) 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 Morningstar Growth Stock Fund Index. For the year
ended December 31, 1993, the aggregate investment advisory fee represented an
effective annual base rate of .18 of 1% of average net assets, before a net
decrease of $322,000 (.03 of 1%) based on performance.
Effective April 30, 1993, The Vanguard Group, Inc. also provides investment
advisory services to a portion of the Fund on an at-cost basis.
* 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
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (continued)
by the Board of Directors. At December 31, 1993, the Fund had contributed
capital of $186,000 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 year ended December 31, 1993, the Fund made purchases of
$750,359,000 and sales of $757,008,000 of investment securities other than U.S.
Government securities and temporary cash investments. At December 31, 1993,
unrealized appreciation for financial reporting and Federal income tax purposes
aggregated $154,940,000 of which $181,104,000 related to appreciated securities
and $26,164,000 related to depreciated securities.
* E. At December 31, 1993, the aggregate settlement value of open Standard &
Poor's 500 Index futures contracts expiring in March, 1994, the related
unrealized appreciation, and the market value of securities deposited as
initial margin for those contracts were $467,000, $3,000, and $993,000,
respectively.
* F. The market value of securities on loan to broker/dealers at December 31,
1993, was $4,691,000 for which the Fund had received cash collateral of
$4,839,000.
* G. Effective in 1993, generally accepted accounting principles require that
differences between undistributed net investment income or accumulated net
realized capital gains for financial reporting and tax purposes, if permanent,
be reclassified to paid in capital. In connection with the adoption of this
accounting method, prior years' permanent book/tax differences of $643,000 and
$16,157,000 have been reclassified from undistributed net investment income and
accumulated net realized gains, respectively, to paid in capital. These
reclassifications have no effect on net assets or net asset values per share.
SPECIAL 1993 TAX INFORMATION (UNAUDITED)
FOR VANGUARD/MORGAN GROWTH FUND, INC.
Corporate shareholders should note that for the fiscal year ended December 31,
1993, 100% of the Fund's dividend income qualifies for the intercorporate
dividends received deduction.
18
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard/Morgan Growth Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard/Morgan Growth Fund (the "Fund") at December 31, 1993, the results of
its operations, the changes in its net assets and the financial highlights for
each of the respective periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities by correspondence with the custodian and brokers and
the application of alternative auditing procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 24, 1994
19
<PAGE> 22
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 Director of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt University and the Culver
Educational Foundation.
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
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
20
<PAGE> 23
(Continued from inside front cover)
toward those of the 1970s. However, the current level of inflation suggests
that future real returns may prove to be satisfactory. Looking forward, the
main risks to the investor are two: (1) that yields on financial assets will
rise sharply, reducing the prices of stocks and bonds alike; and (2) that
inflation, presently at moderate levels, will accelerate.
SOME COURSES OF ACTION
What, if any, present action should be taken by investors to deal with these
two major risks? Should your allocation of assets among stock funds, bond
funds, and money market funds be adjusted? Here are some reasonable courses of
action to consider:
* For long-term investors who have built a substantial balanced portfolio of
stock, bond, and money market funds, stay the course. Even if withdrawing
from the stock market proves to be justified, the next decision--when to
return--will one day be required. "Being right twice" is no mean challenge.
* For long-term investors gradually accumulating assets for, say, retirement,
stay your present course. Continue to invest regularly. By doing so, you
buy more shares of a mutual fund when its price falls, and fewer shares
when its price rises, virtually assuring a reasonable average cost.
* For risk-averse investors who are highly confident that stock prices are
"too high," make only marginal--not "all or nothing"--changes in your
portfolio balance. Given the perils of predicting the future, any changes
should be limited to, say, 15 percentage points. That is, if your normal
portfolio allocation is 60% in stock funds, it might be reduced to 45%; if
85%, to 70%.
* For investors who simply must have more income, never lose sight of the
added principal risk involved in shifting from money market funds to bond
funds. Long-term bond funds provide a generous and durable income stream,
but their prices are highly volatile. Short-term and intermediate-term bond
funds offer a "middle way" of increasing income with more modest risk to
principal.
* For investors who are tempted to find an "easy way" to higher returns,
never forget that risk and reward go hand in hand. Precipitously replacing
certificates of deposit with broad-based common stock funds verges on the
irrational. Funds investing in other securities markets--emerging nations,
international stocks and bonds, and small U.S. companies--carry their own
special risks. Generally, limit such alternative investments to, say, 20%
of your total portfolio.
For all investors, be prepared for sharp interim swings in stock and bond
prices. The central tenet of investing is "prices fluctuate," and sensible
long-term investors simply must take such fluctuations in their stride.
Successful investing is as much a function of your own discipline and
equanimity as it is of the returns available in the securities markets.
THREE ESSENTIAL PRINCIPLES
As we confront the brave new world of investing that may well lie ahead in the
coming decade--and it is important to think in decade-length terms--we would
underscore three caveats:
1. Have "rational expectations" for future returns. At prices prevailing
today, it seems highly unlikely that the returns enjoyed by investors in
the past decade will be repeated in the coming decade.
2. Maintain a balanced portfolio consisting of stock, bond, and money market
funds. Each asset class has its own risk and reward characteristics. By
allocating your resources among the three asset classes according to your
own requirements, you can build a portfolio providing appropriate elements
of capital appreciation, capital conservation, and current income.
3. In balancing risk against reward, be sure to consider cost. Many mutual
funds carry hefty sales charges or high expense ratios, or both. Other
factors held equal, expenses reduce returns, dollar for dollar. Put another
way, high-cost funds must select investments with higher prospective gross
returns--which entail higher risks--to match the net returns earned by
low-cost funds.
This brief Annual Report essay can provide only an elementary look at the
challenges investors face today. History can give us perspective, but it cannot
give us performance. Famed British economist Lord Keynes had it right when he
said, "the inevitable never happens. It is the unexpected always."
<PAGE> 24
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
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Long-Term Portfolios
(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 Small Capitalization Stock Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
[VANGUARD GROUP LOGO]
Vanguard Financial Center * Valley Forge, Pennsylvania 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.
Q260-12/93
<PAGE> 25
EDGAR Appendix
This appendix describes components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features the flags of
The United States of America and Vanguard flying from a halyard.
A bar chart called "A Tale of Two Decades" appears on the inside front
cover. This chart illustrates Average Annual Total Return, in nominal and real
terms, of Stocks, Bonds and Reserves (U.S. Treasury bills) for the two decades
since 1973.
A running head featuring the Vanguard flag logo appears at the top of
pages one through 24.
A photograph of John C. Bogle appears at the upper-right of page one.
A line chart of the Indexed Value (Standard & Poor's Growth Index and
Standard & Poor's Value Index) of the Morgan Growth Portfolio for the
Fiscal Years 1988 through 1993 appears at the upper-left of page two.
Line charts illustrating cumulative performance of the Vanguard Morgan
Growth Portfolio compared to (i) the S&P 500 Index and (ii) Average Growth and
International Funds for the Fiscal Years 1984 through 1993 appear on page
three.
