<PAGE> 1
VANGUARD
MORGAN
GROWTH FUND
ANNUAL REPORT 1994
THE VANGUARD VOYAGE . . . STAYING THE COURSE
<PAGE> 2
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations on
June 30, 1929. Its first fifteen years were a struggle for survival in an
industry that was shaken to its roots by the Great Crash of 1929-1933. From an
initial base of $100,000, Wellington's assets had grown to but $27 million by
the end of World War II. The Vanguard Group was founded on September 24, 1974.
Soon thereafter, we assumed responsibility for the management of Wellington
Fund and ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were marked
by exceptional growth. Today, Wellington Fund, with assets of nearly $9
billion, remains one of the largest mutual funds in the nation. And Vanguard,
now managing 85 mutual fund portfolios, is entrusted with assets of $134
billion, and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio at a time when
holding individual securities was the conventional strategy. It incurred no
debt in an era of high leverage that would soon come back to haunt less
cautious investors. And it was a "balanced" fund--in fact, Wellington is
America's oldest balanced fund--with holdings from each of the three basic
financial asset classes: cash reserves, bonds, and common stocks. In short,
Wellington Fund was a staid investment in an era of stock speculation that was
to become, almost within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still
our watchword, because the three basic financial asset classes have
different--and usually countervailing--investment characteristics. When it
began, Wellington Fund provided a balanced program in a single investment; in
1994, such a balance is often achieved by a combination of Vanguard money
market, bond, and stock funds.
"Conservatism," too, remains our standard. Over the years, we have
tried to maintain the discipline to eschew offering funds that lack sound
financial principles, often based on marketplace fads that could not--and did
not--endure. Our conservatism applies not only to the funds we offer, but to
the instruments in which they invest. For example, we have steered clear of
exotic derivative securities with unpredictable investment characteristics. Too
many fund managers have been taken in by these highly risky instruments, and
their shareholders have paid a heavy price--except in cases where the manager
has "made the fund whole," when to do otherwise would have shocked investors
and impaired their confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But
the investment principles to which we have adhered since Wellington Fund began
in 1929 remain firm:
* We offer Funds with sound and durable investment objectives, designed for
long-term investors.
(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:
During the twelve months ended December 31, 1994, a period in which most
stocks--and most equity mutual funds--tumbled, Vanguard/Morgan Growth Fund came
close to "holding its own." Even a moderately negative total return is little
to brag about, but it does follow positive returns earned by the Fund in 16 of
the past 19 years.
With a total return (capital change plus income) of -1.7%, the Fund's
performance was just a bit better than the -2.2% return of the average growth
mutual fund. However, we fell short of the stock market as a whole--as measured
by the unmanaged Standard & Poor's 500 Composite Stock Price Index--which
turned in a gain of +1.3%. This tabulation presents our 1994 results:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Total Return
----------------------------
Year Ended
December 31, 1994
- -----------------------------------------------------------------------------------------------
<S> <C>
MORGAN GROWTH FUND -1.7%
- -----------------------------------------------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +1.3%
- -----------------------------------------------------------------------------------------------
</TABLE>
The Fund's return is based on net asset values of $12.01 per share on December
31, 1993, and $11.36 on December 31, 1994, with the latter figure adjusted to
take into account the reinvestment of our annual dividend of $.14 per share
from net investment income and two distributions totaling $.31 per share from
net capital gains, nearly all of which were realized during the calendar year.
THE STOCK MARKET IN 1994
During the year, the stock market enjoyed four "ups" and endured four "downs."
A pattern of quarterly declines in the late weeks of March, June, and September
was broken when a November to mid-December decline was aborted by a solid
year-end rally, which recaptured most of the year's earlier lost ground. On
balance, the price of the Standard & Poor's 500 Composite Stock Price Index
edged just a notch lower, from 466 when the year began to 459 at its close,
down -1.5%. The positive total return (+1.3%) on the Index, then, was more than
accounted for by the dividend income that it generated.
As always, there were some important cross-currents in the financial
markets. And in 1994, many of them were just the reverse of 1993. In
particular, a year ago value stocks (those with above-average yields and
below-average market price-to-book value ratios) provided a return of +18.6%,
and overwhelmingly dominated the +1.7% return on growth stocks (those with the
opposite characteristics, and with above-average prospects for consistent
earnings growth). In 1994, however, growth stocks turned the tables and led the
way, if by a far more modest margin (+3.1% vs. -0.6%) than for value stocks in
1993. So, just as last year redounded to the benefit of value-oriented
investors, this past year redounded to the benefit of investors in growth
equities.
If the performance of the stock market was "so-so" during the past
year, nothing that gentle could be said about the bond market. The total return
on the Lehman Long-Term U.S. Treasury Bond Index was -7.6% (-14.5% decline in
price, partly offset by interest income of +6.9%), as long Treasury yields rose
from 6.4% to 7.8%. Yields on short-term and
[FIGURE 1]
1
<PAGE> 4
[FIGURE 2]
intermediate-term bonds also rose sharply; however, because of their shorter
maturities, price declines were much smaller. This rising rate environment was
surely a major factor in dampening the returns on stocks of all stripes.
A primary cause of the interest rate rise was investor fears about a
resurgence of inflation. So far, at least, the U.S. Consumer Price Index gives
little evidence of it. The CPI has risen just 2.7% over the past twelve months,
although more sensitive indicators--such as commodity prices and producer
prices--have been rising at higher rates.
In an effort to quell inflationary fears, the Federal Reserve acted to
"tighten" the money supply in order to slow economic growth and rein in
potential future inflation. Fully six rate increases--in February, March,
April, May, August, and again in November--combined to raise the Federal funds
rate (at which banks borrow from one another) from 3.00% to 5.50%. Still, the
specter of inflation remains, and further rate increases may well lie in
prospect.
As you know, your Fund falls squarely in the growth category of mutual
funds, and, in general, our returns follow the pattern of returns earned by
other growth funds. The annual returns of growth stocks and value stocks may
vary substantially during interim periods, but they have a tendency to even out
over time. By way of perspective, the chart to the left compares the returns of
growth stocks and value stocks during the past five years. While you can see
that "cycles of superiority" occurred throughout the period, when all was said
and done, the annual rates of return were quite close: Growth +8.8%; Value
+8.3%.
This outcome suggests the wisdom of consistently sticking to your
objectives, rather than endeavoring (fruitlessly, I believe) to switch back and
forth between these two market segments in the search for higher returns. Put
another way, most investors would benefit by "staying the course" that best
meets their needs, whether in growth stocks or value stocks, or some steady mix
of the two.
I would call your particular attention to the modesty of both annual
rates of return. With the first half of the decade of the 1990s now behind us,
investors who had expected equity returns in this decade to be a reprise of the
"Golden Eighties" (when the average annual total return of the Standard &
Poor's 500 Index was +17.5%) are doubtless disappointed. Nonetheless, we should
not lose sight of the fact that the long-term (since 1926) return of the Index
has averaged +10.2% per annum. History, it seems clear, has a message to give
us about maintaining realistic performance expectations.
THE FUND IN 1994
Our net shortfall of 3.0 percentage points to the Standard & Poor's 500 Index
was of mixed derivation. Our industry selections were quite good; in
particular, the Fund's largest weighting (23% of net assets versus 9% for the
Index) was in the technology sector, the best-performing major segment of the
stock market during the year. We also benefited from minimal exposure to the
market's worst-performing major sector--utility stocks--which fell -9.8%. Our
3% weighting in utilities was but a fraction of the 12% weighting for the
Index. (It would, of course, be surprising if any growth fund had a major
representation in this higher-yielding, slower-growing sector.)
More than offsetting our successful choice of industry sectors,
however, were our individual stock
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<PAGE> 5
selections, which, in most sectors, left something to be desired. The biggest
gap, paradoxically, came in the technology sector, where our holdings provided
total returns averaging +15.0%, compared to +20.3% for the technology stocks in
the Index. To make a long story short, we could have--and should have--done
better. Reports on pages 6 and 7 from our two principal advisers, Wellington
Management Company and Franklin Portfolio Associates, provide further details.
We succeeded in carving out a positive margin over the average growth
fund, but only by a paper-thin margin of +0.5 percentage points: -1.7% for the
Fund versus -2.2% for the average growth fund. It is not really possible to
precisely account for this small difference, given the striking similarity of
industry sector weightings between Morgan Growth Fund and its peers. However,
the competitive growth funds had a somewhat greater "small cap" bias during the
year, a negative factor for them given that the returns on small cap stocks
generally trailed those of their large cap cousins.
Our four investment advisers, as you might have expected, provided
mixed returns. The results achieved by Wellington, Franklin, and the Vanguard
Core Management Group were reasonably close to one another. However, the
results achieved by our fourth manager, Husic Capital Management, lagged the
group. Husic's investment strategy is most similar to that of the more
aggressive growth funds, and 1994 was a year in which the more aggressive funds
were laggards--precisely the reverse of 1993. This table shows the proportion
of the Fund's assets supervised by each of our four advisers on December 31,
1994, and one year earlier:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Total Net Assets
----------------------------------------
December 31, 1994 1993
----------------------------------------
Millions % %
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
WELLINGTON MANAGEMENT COMPANY $ 431 40% 51%
FRANKLIN PORTFOLIO ASSOCIATES 363 34 22
HUSIC CAPITAL MANAGEMENT 133 12 13
VANGUARD CORE MANAGEMENT GROUP 107 10 9
CASH RESERVES 41 4 5
- ------------------------------------------------------------------------------------------
TOTAL $1,075 100% 100%
- ------------------------------------------------------------------------------------------
</TABLE>
As the table shows, we reallocated more than 10% of the Fund's assets
to Franklin Portfolio Associates, reducing the allocation to Wellington by a
commensurate amount, a shift that was completed by June 1994. (Husic was
selected as an adviser to the Fund in mid-1993, and assumed management
responsibilities on September 24, 1993.)
I hardly need repeat what I said to shareholders one year ago:
"selecting investment advisers is a fallible endeavor, and allocating assets
among them no less so." Nonetheless, we did achieve in 1994 our stated
objective of improving the relative return of Morgan Growth Fund. In 1993, we
experienced a shortfall of -3.3 percentage points to the average growth
fund--totally unsatisfactory by our standards. This past year, we moved to a
positive, if assuredly modest, advantage of +0.5 percentage points. It is "a
step in the right direction," and we expect no further reallocation of assets
during the coming year.
A TEN-YEAR PERSPECTIVE
As we have repeatedly emphasized, the return of a given mutual fund during any
one-year period is of only limited value in appraising its long-term record. A
full decade, however, seems a reasonable time frame for evaluation. The chart
on the following page presents the Fund's record over the past ten years
compared to our two traditional benchmarks, the unmanaged Standard & Poor's 500
Stock Index and the average growth mutual fund. During the decade, the Fund's
average annual rate of return was a solid +12.5%. This return was slightly
above the +12.1% return for our peer group, but less than the +14.3% return of
the Standard & Poor's 500 Stock Index.
The following summary table presents a comparison of an investment in
the Fund with that of the most appropriate "real world" option available--the
average growth mutual fund. The table illustrates the results assuming an
investment of $10,000 in Morgan Growth Fund and the average growth fund on
December 31, 1984, with all dividends and capital gains reinvested. On December
31, 1994, the investor in our Fund would have accumulated $32,600; the investor
in the average growth fund, $31,280. This $1,320 of extra performance is
equivalent to 13% of the initial $10,000 investment.
3
<PAGE> 6
[FIGURE 3]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1994
- ------------------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MORGAN GROWTH FUND -1.67% +8.05% +12.54%
AVERAGE GROWTH FUND -2.17 +8.45 +12.08
STANDARD & POOR'S 500 INDEX +1.31 +8.68 +14.33
</TABLE>
Note: Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Total Return
-----------------------------------------
Ten Years Ended December 31, 1994
-----------------------------------------
Final Value
of Initial
Annual Rate Investment
of Return of $10,000
- -------------------------------------------------------------------------------------------
<S> <C> <C>
MORGAN GROWTH FUND +12.5% $32,600
AVERAGE GROWTH FUND +12.1 31,280
- -------------------------------------------------------------------------------------------
MORGAN ADVANTAGE + 0.4% $ 1,320
- -------------------------------------------------------------------------------------------
</TABLE>
It should go without saying that the returns reflected in the table are merely
history. Future returns of the Fund--both on an absolute basis and relative to
the average growth fund--are unpredictable, and may be better or worse than
those illustrated.
Our modest edge over most other growth funds during the decade is not
a particularly satisfying outcome for us. In fact, our annual expense ratio
advantage of 0.8% (we operate with costs equal to about 0.5% of assets, while
the cost of the average growth fund is 1.3%) more than accounts for our total
margin of advantage. To put it simply, we aspire to outperform our competitors
over time before taking into account our cost advantage. Given that this
expectation exceeded the realities of the Fund's relative returns during most
of the 1980s, we moved to our multi-manager strategy four and one-half years
ago. So far, the results of this change would have to be described as "not
proven." But we look for a better verdict in the years to come.
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, but completely ignore the
sales "loads" charged on purchases or redemptions by most growth funds.
Investors would have incurred these loads in the ownership of some 71 of the
132 growth funds in existence during the period. We estimate, very roughly,
that the impact of these sales charges--which approximated 7%--would have
reduced the return of the average growth fund by about 0.5% per year, from
12.1% to 11.6%.
I acknowledge that the chart above also reflects our shortfall in
return relative to the Standard & Poor's 500 Index. This Index, as you know, is
a tough
4
<PAGE> 7
competitor for actively managed mutual funds. It always has been! But the Index
is calculated "on paper," without the "real world" expenses of fund operations,
advisory fees, portfolio transaction costs, and the impact of cash reserves.
Mutual funds, on the other hand, must incur such costs, and it is difficult for
most professional managers to provide more than compensatory returns. Indeed,
during the past decade, only 31 of the 132 growth funds in operation throughout
the period outpaced the Index.
Nonetheless, I would note that Morgan Growth Fund's lifetime record,
going all the way back to 1968, has in fact slightly exceeded the record of the
Standard & Poor's 500 Index (+10.7% annually for the Fund versus +10.1% for the
Index). This long-term return--against a standard that most mutual funds fail
to match--gives us added confidence in our ability to meet your expectations in
the years to come.
LOOKING AHEAD
In my Chairman's letter one year ago, I noted that "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 level 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." Certainly, 1994 validated that opinion, and, with stock yields almost
as low today, the possibility of further bumps cannot be ignored.
On this note, it is worth reemphasizing that investing in stocks is
risky. That is, in essence, why stocks offer higher reward potential than bonds
and short-term reserves. The greatest risk is faced by short-term investors who
look for quick stock market returns or transitory stock market trends. The
lowest risk and the highest rewards--at least in the past--have been achieved
by long-term investors who have "stayed the course" with a sound investment
approach that is consistent with their own financial objectives. We urge you to
do the same.
We, too, intend to stay the course with the consistent objectives and
policies that we established for Morgan Growth Fund at the outset 26 years ago,
and to which we have hewed ever since. The Fund provides a sound participation
in a highly diversified list of common stocks selected primarily for their
capital growth possibilities. As part of a balanced portfolio of mutual funds--
including stock funds, bond funds, and money market funds--Morgan Growth Fund
should be a suitable investment in helping you to implement the investment
course you have chosen to follow.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board January 23, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND (PERIODS ENDED DECEMBER 31, 1994)
ARE AS FOLLOWS:
<TABLE>
<CAPTION>
10 YEARS
----------------------------------
INCEPTION TOTAL CAPITAL INCOME
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
--------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
MORGAN GROWTH FUND 12/31/68 -1.67% +8.05% +12.54% +10.20% +2.34%
</TABLE>
ALL OF THESE 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
ENVIRONMENT AND OUTLOOK
The Federal Reserve's tightening of monetary policy was the key financial
headline of this past year. Meanwhile, the U.S. economy remained strong
throughout the year, creating 3.5 million new jobs, the largest annual gain in
a decade. This forced the Fed to move from a position of ease, which had been
adopted in the early 1990s, to one of moderate tightness. To date these moves
have had little impact on the broad economy.
We are forecasting real growth of 3.2% in 1995. Given the current
underlying strength in domestic business, we believe the risk in our forecast
lies in the direction of an upside surprise in growth rather than a shortfall.
Such an upside surprise would mean that the Fed would continue to push interest
rates higher. As a result, the economy would be more likely to go through a
mini-boom/bust cycle as compared to a more hoped for soft landing. We believe
that a cyclical upturn in inflation is occurring, but we feel that this upturn
is more of a shift in pricing power to the industrial sector from the consumer
area rather than a significant inflationary problem. We do look for overall
inflation to move to the 3.5% to 4.0% range during the next two years.
The tug of war between a strong U.S. economy and the Fed's desire to
keep inflation under control is apt to make for a difficult stock market
environment. On the other hand, the Fed's intransigent anti-inflationary
policies should certainly allay bond market concerns, especially after the
second worst bond market performance in a century. The wild card in the mix is
the unexpected Republican rout in the fall elections. The takeover of Congress
by the GOP, with its dedication to the "Contract With America," is an event
that must be watched closely for any changes in tax and spending policies that
might impact the economy.
STRATEGY
Our portfolio structure is driven by our desire to have exposure to the
international economic rebound now in place. At the same time, we have
identified two key strategic trends, the Telemedia Revolution and the Rise of
Global Capitalism, to lead us to investment opportunity. We have implemented
these ideas by emphasizing companies with a strong global presence. For
example, in technology-based capital goods, we own Hewlett-Packard. In
worldwide wireless communications infrastructure development, we hold Motorola,
Ericsson, and Nokia. In the telemedia area, we like content-providers, such as
Viacom, and equipment suppliers, such as General Instrument. To participate in
consumer demand for quality products in the growing developing world, we own
Gillette and Ralston Purina, a restructured company with very strong operations
in pet food and Eveready batteries.
We have underweighted our holdings in established consumer growth
names in the traditional growth areas of consumer non-durables and retail,
where we see a continued price-cost squeeze caused by rising intermediate goods
prices and a value-conscious consumer. Instead, we have invested more in the
media and entertainment sectors, where we hope to benefit from the exciting
changes ahead in the merger of information, entertainment, and communication.
We have overweighted the health care and reinsurance areas, a more traditional
industry weighting profile for a growth fund manager. Not surprisingly, we have
low asset weightings in utilities and energy stocks, although we have recently
increased our exposure to domestic natural gas producers, namely Burlington
Resources and Vastar Resources.
Other key transactions in the portfolio included the following
additions: Hafslund Nycomed, a world leader in the medical diagnostic business
that recently scored a coup by purchasing Kodak's business at a very attractive
price; Sports Authority, the leading U.S. sports superstore; Sprint, a leading
broadline telephone service company; and BMC Software, a software company that
is an inexpensive way to play mainframe MIPS growth. We sold stocks that had
reached our price targets, such as Paging Network, and companies whose
fundamentals did not match up to our long-term standards, namely Banc One,
Dillard, Newbridge, and Intel. Because of our concern about further Fed
tightening, we have retained slightly more in cash reserves than is normal. We
hope to put this cash to good use in the new year.
Robert D. Rands, Senior Vice President
Portfolio Manager
Wellington Management Company January 12, 1995
6
<PAGE> 9
REPORT FROM FRANKLIN PORTFOLIO ASSOCIATES
A strange economic recovery continues in most areas of the economy and the
country. While most Americans are not feeling better off, trade and economic
activity continue to grow. The surprising results of the mid-term elections
have added to investor uncertainty. The recent fall of the Mexican peso and
political upheaval across the world have shown that the New World Order does
not insure stability. In the United States, it would appear that the driving
force of the consumer in the economy had weakened by the Christmas season. A
weaker consumer makes the economic outlook for 1995 more doubtful than would
otherwise be the case.
There were positive developments in 1994, including a movement toward
free trade with both the North American Free Trade Agreement (NAFTA) and the
General Agreement on Tariffs and Trades (GATT). The early returns suggest that
NAFTA was indeed beneficial for the economy, as unemployment continues to fall.
The Haiti initiative has not had any negative repercussions. Those who see the
glass as half full can point out that there were many, many worse years than
1994.
Many observers took heart from the dramatic mid-term election results.
Certainly the voting populace desired a change in direction, and the election
results seem to promise that. However, we would caution against over-enthusiasm
until the power structure in Washington and the direction of policy begin to
manifest themselves in the day-to-day workings of government.
The financial market environment during 1994 was not salubrious. It is
interesting to us that some of the better-performing areas of the stock market
included service industries and the health care sector, while consumer areas,
such as autos and consumer discretionary stocks, lagged. Utilities suffered
from weakness throughout the year. Uncertainty, fear of over-heating, and
Federal Reserve decisions led to a flat see-saw environment for equities and a
modest down year (in terms of total return) for fixed-income investors. The
upward pressure on interest rates has, in our opinion, run its course. The
abatement of these pressures will be a modest positive in the months ahead.
For those who are sensitive to "value," we would also point out that a
growing economy with flat-to-modestly-down equity valuations means that equity
prices are relatively lower. Depending on one's perspective, overvaluation of
equities has lessened or undervaluation has increased. We are cautiously
optimistic in both the short-run and the long-run, although there remain many
"trip wires" that could cause an equity sell-off in the near and intermediate
terms.
We have been managers for a portion of the Morgan Growth Fund assets
for just over four and one-half years. Recent relative performance has been
below that of the Growth Fund Stock Index; however, results since inception
remain ahead of the benchmark. When we examine our performance versus the
entire Morningstar universe of 627 Growth funds, we find ourselves in the 45th
percentile for the 12-month period ending December 31, 1994, but in the 41st
percentile over the longer three-year period ended December 31, 1994. Our
expectations and objectives are for a larger margin of superiority, and we are
constantly working toward that end.
The recent weakness in our relative performance has been attributable
(in part) to a failure of our earnings momentum measures to discriminate among
future winners and losers. We have encountered periods such as these in the
past, and 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 at all times. This means that the
market value of our portion of the portfolio is almost certain to decline in a
sustained bear market for equities. Our strategy is more compatible with the
needs of long-term equity investors than with those of speculators. We look
forward to 1995 with considerable optimism.
Respectfully,
Franklin Portfolio Associates
January 11, 1995
7
<PAGE> 10
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
MORGAN GROWTH FUND for the 25-year period ended December 31, 1994. During the
period illustrated, stock prices fluctuated widely; these results should not be
considered a representation of the dividend income or capital gain or loss that
may be realized from an investment made in the Fund today.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA* TOTAL INVESTMENT RETURN**
- -----------------------------------------------------------------------------------------------------------------------------------
Morgan Growth Fund
Value with Income ------------------------------- S&P 500
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Index Total
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1970 $ 6.38 $ .09 $ .06 $ 6.54 - 6.0% +0.9% - 5.1% + 3.9%
- -----------------------------------------------------------------------------------------------------------------------------------
1971 8.06 -- .10 8.38 +26.3 +1.9 +28.2 +14.2
- -----------------------------------------------------------------------------------------------------------------------------------
1972 9.18 .48 .07 10.20 +20.7 +1.1 +21.8 +19.0
- -----------------------------------------------------------------------------------------------------------------------------------
1973 7.12 .27 .09 8.25 -20.0 +0.8 -19.2 -14.7
- -----------------------------------------------------------------------------------------------------------------------------------
1974 4.74 -- .11 5.59 -33.4 +1.1 -32.3 -26.3
- -----------------------------------------------------------------------------------------------------------------------------------
1975 6.62 -- .13 8.00 +39.7 +3.4 +43.1 +37.1
- -----------------------------------------------------------------------------------------------------------------------------------
1976 7.77 -- .11 9.53 +17.4 +1.7 +19.1 +23.8
- -----------------------------------------------------------------------------------------------------------------------------------
1977 8.18 -- .15 10.24 + 5.2 +2.2 + 7.4 - 7.2
- -----------------------------------------------------------------------------------------------------------------------------------
1978 9.35 .11 .21 12.21 +16.1 +3.2 +19.3 + 6.5
- -----------------------------------------------------------------------------------------------------------------------------------
1979 9.47 1.13 .29 14.51 +15.3 +3.5 +18.8 +18.4
- -----------------------------------------------------------------------------------------------------------------------------------
1980 12.36 -- .31 19.55 +30.5 +4.2 +34.7 +32.4
- -----------------------------------------------------------------------------------------------------------------------------------
1981 11.05 .45 .29 18.61 - 7.1 +2.3 - 4.8 - 4.9
- -----------------------------------------------------------------------------------------------------------------------------------
1982 12.01 1.31 .30 23.77 +24.1 +3.6 +27.7 +21.5
- -----------------------------------------------------------------------------------------------------------------------------------
1983 13.84 1.04 .25 30.51 +25.8 +2.6 +28.4 +22.5
- -----------------------------------------------------------------------------------------------------------------------------------
1984 11.45 1.39 .31 28.66 - 8.1 +2.0 - 6.1 + 6.2
- -----------------------------------------------------------------------------------------------------------------------------------
1985 13.82 .60 .25 37.34 +27.5 +2.8 +30.3 +31.6
- -----------------------------------------------------------------------------------------------------------------------------------
1986 11.50 2.88 .43 40.26 + 4.2 +3.6 + 7.8 +18.6
- -----------------------------------------------------------------------------------------------------------------------------------
1987 9.39 2.45 .20 42.28 + 3.3 +1.7 + 5.0 + 5.2
- -----------------------------------------------------------------------------------------------------------------------------------
1988 10.27 .98 .24 51.73 +19.8 +2.5 +22.3 +16.5
- -----------------------------------------------------------------------------------------------------------------------------------
1989 11.72 .59 .28 63.45 +19.9 +2.8 +22.7 +31.6
- -----------------------------------------------------------------------------------------------------------------------------------
1990 10.40 .80 .34 62.49 - 4.4 +2.9 - 1.5 - 3.1
- -----------------------------------------------------------------------------------------------------------------------------------
1991 12.20 .86 .29 80.82 +26.3 +3.0 +29.3 +30.4
- -----------------------------------------------------------------------------------------------------------------------------------
1992 12.65 .52 .18 88.54 + 8.1 +1.4 + 9.5 + 7.6
- -----------------------------------------------------------------------------------------------------------------------------------
1993 12.01 1.35 .18 95.02 + 5.9 +1.4 + 7.3 +10.1
- -----------------------------------------------------------------------------------------------------------------------------------
1994 11.36 .31 .14 93.44 - 2.9 +1.2 - 1.7 + 1.3
- -----------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL +1,256.1% +1,241.3%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL RATE OF RETURN +11.0% +10.9%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Adjusted for the 3-for-2 stock split, February 3, 1979.
** Adjusted to include reinvestment of income dividends and any capital gains
distributions both for the Fund and the Index.
Note: The initial net asset value was $6.89 on December 31, 1969. No adjustment
has been made for income taxes payable by shareholders on reinvested income
dividends and capital gains distributions.
8
<PAGE> 11
FINANCIAL STATEMENTS
December 31, 1994
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (93.7%)
- ----------------------------------------------------------------------
BASIC MATERIALS (6.7%)
* AK Steel Holding Corp. 75,000 $ 2,287
Air Products & Chemicals, Inc. 345,000 15,396
* Airgas, Inc. 53,900 1,145
Birmingham Steel Corp. 63,300 1,266
Blount, Inc. 10,000 465
British Steel PLC ADR 18,700 453
Cabot Corp. 57,800 1,640
Cyprus Amax Minerals Co. 15,400 402
E.I. du Pont de Nemours & Co. 21,100 1,187
Engelhard Corp. 248,700 5,534
Federal Paper Board Co., Inc. 11,500 333
First Mississippi Corp. 59,600 1,490
* Georgia Gulf Corp. 37,900 1,473
Georgia-Pacific Corp. 7,800 558
M.A. Hanna Co. 23,900 568
IMC Global Inc. 90,000 3,892
* Inland Steel Industries, Inc. 10,200 358
Kimberly-Clark Corp. 105,000 5,302
* LTV Corp. 24,600 400
Louisiana-Pacific Corp. 51,500 1,403
* Magma Copper Co. Class B 25,000 419
Monsanto Co. 8,200 578
Morton International, Inc. 275,600 7,855
National Steel Corp. Class B 198,500 2,878
PPG Industries, Inc. 12,100 449
Phelps Dodge Corp. 19,100 1,182
Praxair, Inc. 121,500 2,491
Scott Paper Co. 68,400 4,728
* Stone Container Corp. 124,400 2,146
Temple-Inland Inc. 46,900 2,116
* WHX Corp. 126,200 1,672
Wellman, Inc. 16,000 452
----------
GROUP TOTAL 72,518
----------
- ----------------------------------------------------------------------
CAPITAL GOODS (8.1%)
AGCO Corp. 58,950 1,791
The Boeing Co. 94,700 4,427
Browning-Ferris Industries, Inc. 16,400 465
Case Corp. 210,000 4,515
Caterpillar, Inc. 110,800 6,108
* Clark Equipment Co. 5,000 271
Cummins Engine Co., Inc. 30,100 1,362
Deere & Co. 86,500 5,731
* Fore Systems, Inc. 38,000 2,546
General Dynamics Corp. 10,000 435
General Electric Co. 324,300 16,539
* General Instrument 437,900 13,137
General Motors Corp. Class H 133,500 4,656
W.W. Grainger, Inc. 15,400 889
* IDEX Corp. 11,000 465
* International Rectifier Corp. 42,100 1,021
Johnson Controls, Inc. 16,000 784
MTS Systems Corp. 88,500 1,925
McDonnell Douglas Corp. 4,400 625
Millipore Corp. 7,200 348
NACCO Industries, Inc. Class A 7,000 339
Northrop Grumman Corp. 2,000 84
* OHM Corp. 213,100 1,811
* Owens-Corning Fiberglas Corp. 45,400 1,453
Raytheon Co. 5,500 351
Standard Pacific Corp. 388,500 2,477
The Timkin Co. 10,000 352
The Toro Co. 37,500 1,078
Unicom Corp. 10,000 240
* Varity Corp. 66,800 2,421
* Waste Management International 210,000 2,389
Watkins-Johnson Co. 13,200 393
Wheelabrator Technologies 80,800 1,192
York International Corp. 115,000 4,241
----------
GROUP TOTAL 86,861
----------
- ----------------------------------------------------------------------
CONSUMER CYCLICALS (18.2%)
* Ann Taylor Stores Inc. 9,900 340
Bob Evans Farms, Inc. 20,000 410
* Bon-Ton Stores, Inc. 40,600 436
* Broderbund Software 60,000 2,805
Brunswick Corp. 127,100 2,399
* Caldor Corp. 18,500 412
Callaway Golf Co. 12,100 401
Capital Cities/ABC, Inc. 74,700 6,368
Cedar Fair Limited Partnership 14,600 431
Central Newspapers Inc. 15,000 422
* Champion Enterprises, Inc. 13,100 400
Chrysler Corp. 289,600 14,190
Circuit City Stores, Inc. 132,400 2,946
* Clear Channel Communications 48,900 2,482
* Dick Clark Productions, Inc. 12,100 94
* Comcast Corp. Class A Special 31,650 495
Comcast UK Cable Partners 87,600 1,391
* Cyrk International, Inc. 16,000 660
* Detroit Diesel Corp. 80,000 1,710
The Walt Disney Co. 109,200 5,037
The Dun & Bradstreet Corp. 7,700 423
Echlin, Inc. 114,000 3,420
* Electronic Arts 134,800 2,578
Exide Corp. 72,000 4,050
* Federated Department Stores 152,600 2,938
* Fieldcrest Cannon, Inc. 14,400 367
Fleetwood Enterprises, Inc. 104,200 1,954
Ford Motor Co. 247,800 6,938
Gannett Co., Inc. 151,700 8,078
The Gap, Inc. 13,400 409
Gaylord Entertainment Class A 163,500 3,720
* Good Guys, Inc. 54,800 630
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
The Goodyear Tire & Rubber Co. 48,300 $ 1,624
* Ha-lo Industries, Inc. 33,400 200
Harman International Industries, Inc. 11,800 437
* Heritage Media Corp. Class A 23,000 618
Hilton Hotels Corp. 103,700 6,987
Home Depot, Inc. 25,200 1,159
* Home Shopping Network, Inc. 402,000 4,020
* Hospitality Franchise Systems, Inc. 36,100 957
* Infinity Broadcasting Corp. 19,800 624
International Game Technology 200,000 3,100
K-Swiss, Inc. 1,600 32
Knight-Ridder, Inc. 8,600 434
* Lin Broadcasting Corp. 6,000 801
Lowes Cos., Inc. 13,800 480
Magna International, Inc. Class A 45,300 1,738
Marriott International 11,100 312
Mattel, Inc. 46,375 1,165
May Department Stores Co. 391,400 13,210
McDonald's Corp. 300,000 8,775
* Merisel, Inc. 280,000 2,240
* Multimedia, Inc. 158,100 4,506
* Musicland Stores Corp. 355,000 3,195
* National Gaming Corp. 3,610 43
National Service Industries, Inc. 13,900 356
Newell Co. Ltd. 132,100 2,774
* News Corp. Pfd. ADR 348,100 4,786
News Corp. Ltd. ADR 240,900 3,764
* Office Depot, Inc. 148,600 3,566
* Oshman's Sporting Goods, Inc. 38,800 310
* Payless Cashways, Inc. 63,200 585
* Players International, Inc. 20,000 445
J.C. Penney Co., Inc. 73,000 3,258
* Prime Hospitality Corp. 26,300 197
* Promus Co. Inc. 22,800 707
Reader's Digest Assn., Inc. Class A 22,500 1,105
Reebok International Ltd. 12,800 506
* Revco Drug Stores, Inc. 61,149 1,445
Ross Stores, Inc. 23,300 259
St. John Knits, Inc. 13,500 386
* Scholastic Corp. 118,600 6,019
E.W. Scripps Co. 36,800 1,113
Sears, Roebuck & Co. 15,500 713
Shaw Industries, Inc. 75,400 1,122
* Spelling Entertainment 104,900 1,128
The Sports Authority, Inc. 200,000 4,200
Springs Industries Inc. Class A 11,100 411
Time Warner, Inc. 14,400 506
VF Corp. 9,900 481
* Viacom International Class A 20,000 833
* Viacom International Class B 180,147 7,319
* Viacom Variable Rate Rights
Class B Exp. 9/29/95 297,200 334
* Waban, Inc. 76,600 1,360
Wal-Mart Stores, Inc. 219,200 4,658
Wendy's International, Inc. 198,300 2,851
Wolverine World Wide, Inc. 67,900 1,748
----------
GROUP TOTAL 195,236
----------
- ----------------------------------------------------------------------
CONSUMER STAPLES (6.0%)
Albertson's, Inc. 18,400 534
American Stores Co. 97,900 2,631
Archer-Daniels-Midland Co. 121,650 2,509
Buenos Aires Embotellado, SA ADR 150,000 4,837
Colgate-Palmolive Co. 26,100 1,654
ConAgra, Inc. 12,600 394
Embotelladora Andina ADR 250,000 6,531
Gillette Co. 69,000 5,158
Herbalife International Inc. 18,500 305
Hudson Foods Inc. Class A 17,100 430
IBP, Inc. 141,400 4,277
* The Kroger Co. 196,300 4,736
Michael Foods, Inc. 34,100 332
PepsiCo, Inc. 418,700 15,178
Philip Morris Cos., Inc. 51,300 2,950
Procter & Gamble Co. 4,300 267
* RJR Nabisco Holdings, Inc. 269,200 1,481
Ralston-Purina Group 75,000 3,347
* Safeway, Inc. 72,100 2,298
Sara Lee Corp. 80,200 2,025
* Stop & Shop Cos. Inc. 16,200 413
Supervalu, Inc. 68,800 1,686
Sysco Corp. 15,000 386
Windmere Corp. 48,500 382
----------
GROUP TOTAL 64,741
----------
- ----------------------------------------------------------------------
ENERGY (4.5%)
Amoco Corp. 9,800 579
Ashland Oil, Inc. 122,900 4,240
Atlantic Richfield Co. 3,200 326
British Petroleum Co. PLC ADR 76,400 6,102
Burlington Resources, Inc. 130,000 4,550
Coastal Corp. 15,400 397
* Devon Group, Inc. 17,000 484
Enron Corp. 173,800 5,301
Exxon Corp. 16,900 1,027
Mobil Corp. 10,700 901
Norsk Hydro AS ADR 128,400 5,024
Royal Dutch Petroleum Co. ADR 7,200 774
Schlumberger Ltd. 115,000 5,793
* Smith International, Inc. 94,500 1,181
Unocal Corp. 240,000 6,540
Vastar Resources, Inc. 175,000 4,353
Westcoast Energy, Inc. 26,500 420
----------
GROUP TOTAL 47,992
----------
- ----------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
FINANCIAL (11.3%)
* Ace, Ltd. 250,000 $ 5,844
Aflac, Inc. 147,700 4,726
Asa Ltd. 7,800 350
Alex Brown, Inc. 8,300 252
American General Corp. 17,200 486
American International Group, Inc. 56,438 5,531
American Premier Underwriter 96,800 2,505
American Re Corp. 330,800 10,668
* Anchor Bancorp Inc. 15,000 199
Andover Bancorp, Inc. 17,300 247
Bank of Boston Corp. 19,200 497
The Bank of New York Co., Inc. 213,500 6,191
BankAmerica Corp. 23,500 928
Barnett Banks of Florida, Inc. 90,900 3,488
BayBanks, Inc. 6,800 355
CIGNA Corp. 6,200 392
The Chase Manhattan Corp. 16,900 581
Chemical Banking Corp. 90,800 3,257
Citicorp 97,600 4,038
Conseco, Inc. 12,200 526
Crestar Financial Corp. 17,700 666
A.G. Edwards & Sons, Inc. 21,400 385
Exel Ltd. 9,700 383
Federal Home Loan Mortgage Corp. 117,800 5,949
Federal National Mortgage Assn. 107,600 7,841
First Bank System, Inc. 19,484 648
First Chicago Corp. 4,800 229
First Union Corp. 80,000 3,310
First USA Inc. 64,000 2,104
Firstar Corp. 190,000 5,106
Fremont General Corp. 16,800 393
GFC Financial Corp. 81,200 2,578
Green Tree Financial Corp. 66,800 2,029
Jefferson-Pilot Corp. 7,400 384
Legg Mason Inc. 18,800 400
MBIA, Inc. 37,400 2,099
MBNA Corp. 56,300 1,316
Mercury Finance Co. 84,700 1,101
Meridian Bancorp, Inc. 8,700 232
Merrill Lynch & Co., Inc. 27,400 980
Midland Financial Group, Inc. 16,200 239
Midlantic Corp. 18,000 477
Morgan Stanley Group, Inc. 8,000 472
NationsBank, Inc. 24,105 1,088
North American Mortgage 14,000 207
Norwest Corp. 151,700 3,546
Orion Capital Corp. 16,900 596
PNC Bank Corp. 116,300 2,457
PaineWebber Group, Inc. 30,800 462
PartnerRe Holdings, Ltd. 21,400 441
Raymond James Financial, Inc. 15,600 218
Republic New York Corp. 210,500 9,525
Rouse Co. 21,000 399
Charles Schwab Corp. 14,200 495
SunAmerica Inc. 38,500 1,396
Transamerica Corp. 54,100 2,691
Travelers Inc. 136,600 4,440
UNUM Corp. 44,300 1,672
USLIFE Corp. 31,400 1,095
Wells Fargo & Co. 4,500 653
----------
GROUP TOTAL 121,763
----------
- ----------------------------------------------------------------------
HEALTH CARE (10.1%)
* Beverly Enterprises Inc. 400,000 5,750
* Biogen, Inc. 185,000 7,631
Bristol-Myers Squibb Co. 12,000 694
* Columbia/HCA Healthcare Corp. 127,100 4,639
* Coventry Corp. 9,000 217
* FHP International Corp. 435,400 10,994
* Forest Laboratories, Inc. 58,900 2,746
* FoxMeyer Health Corp. 86,000 1,279
* Future Healthcare, Inc. 176,000 3,564
* Genentech Inc. 8,700 395
* Genesis Health Ventures 15,000 474
Hafslund Nycomed ADR Class B 280,600 5,787
* Health Management Associates Class A 37,000 925
* Healthtrust Inc. 15,000 476
* Hillhaven Corp. 350,000 7,437
* Horizon Healthcare Corp. 124,100 3,475
* IDEXX Laboratories 24,100 856
Integrated Health Services, Inc. 94,300 3,725
Johnson & Johnson 130,000 7,117
Medtronic, Inc. 155,000 8,622
Mentor Corp. 24,000 414
Omnicare, Inc. 10,800 474
* Perrigo Co. 93,100 1,152
Pfizer, Inc. 178,200 13,766
* Rehabcare Corp. 27,400 349
Schering-Plough Corp. 58,600 4,336
* Somatix Therapy Corp. 74,100 213
U.S. Healthcare, Inc. 28,800 1,181
* Universal Health Services Class B 4,700 115
Upjohn Co. 60,000 1,845
* Vencor, Inc. 38,550 1,075
Warner-Lambert Co. 8,100 624
* WellCare Management Group, Inc. 126,000 3,087
Zeneca Group ADR 69,781 2,870
----------
GROUP TOTAL 108,304
----------
- ----------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY (22.8%)
* ALC Communications 15,400 $ 479
AMP, Inc. 4,900 356
Adobe Systems, Inc. 95,000 2,826
* Applied Materials, Inc. 174,300 7,277
* Arrow Electronics, Inc. 12,700 456
Augat, Inc. 113,500 2,142
Automatic Data Processing, Inc. 42,100 2,463
Avnet, Inc. 292,400 10,819
* BMC Software, Inc. 50,000 2,838
* Bisys Group, Inc. 20,000 435
* Cabletron Systems, Inc. 68,000 3,162
* Cadence Design Systems, Inc. 22,000 454
* Cisco Systems, Inc. 291,200 10,192
* COMPAQ Computer Corp. 251,100 9,918
Computer Associates
International, Inc. 61,200 2,968
* Computer Sciences Corp. 320,000 16,320
* CyCare Systems, Inc. 28,100 418
* Cypress Semiconductor Corp. 85,800 1,984
* DSC Communications Corp. 140,000 5,040
* Dell Computer 89,000 3,638
ECI Telecom Ltd. 85,200 1,140
* EMC Corp. 108,200 2,340
L.M. Ericsson Telephone Co.
ADR Class B 65,000 3,583
* Esterline Technologies Corp. 5,800 80
* Exabyte Corp. 100,800 2,155
* FileNet Corp. 19,500 522
First Data Corp. 16,800 796
* FIserv, Inc. 31,725 682
* Frame Technology 26,000 423
General Motors Corp. Class E 56,300 2,168
Hewlett-Packard Co. 207,000 20,674
* Informix Corp. 115,000 3,680
Intel Corp. 114,800 7,304
International Business
Machines Corp. 6,800 500
* International Cabletel, Inc. 210,000 5,670
* Komag, Inc. 10,700 280
* LDDS Communications, Inc. 123,700 2,397
* LSI Logic Corp. 142,000 5,733
* Microsoft Corp. 226,500 13,845
Micron Technology Inc. 59,200 2,612
Motorola, Inc. 437,000 25,291
* Nextel Communications 140,000 2,013
Nokia Corp. Pfd. ADR 110,000 8,236
* Oracle Systems Corp. 73,000 3,221
Philips Electronics N.V. 89,200 2,620
* Policy Management Systems Corp. 10,000 420
Scientific-Atlanta, Inc. 93,800 1,970
* Seagate Technology 168,300 4,039
* Silicon Graphics, Inc. 28,500 884
* Solectron Corp. 20,400 561
* Sterling Software, Inc. 63,500 2,334
* StrataCom, Inc. 77,000 2,695
* Symbol Technologies, Inc. 15,300 472
* Systems & Computer
Technology Corp. 251,500 5,187
Tektronix, Inc. 10,400 356
Texas Instruments, Inc. 64,800 4,852
* United Video Satellite Group, Inc. 129,100 3,098
Varian Associates, Inc. 132,000 4,620
Vodafone Group PLC ADR 316,400 10,639
* Western Digital Corp. 30,400 509
Xerox Corp. 5,700 564
-----------
GROUP TOTAL 245,350
-----------
- ----------------------------------------------------------------------
TRANSPORT & SERVICES (2.1%)
* AMR Corp. 19,800 1,054
Air Express International Corp. 46,500 907
British Airways PLC 7,000 396
Burlington Northern, Inc. 11,300 544
CSX Corp. 9,800 682
Canadian Pacific Ltd. 198,200 2,950
* Federal Express Corp. 59,300 3,573
* Landstar System 8,000 258
Pittston Services Group 155,100 4,110
Sea Containers, Ltd. 24,400 332
* Swift Transportation Co., Inc. 60,000 1,230
Union Pacific Corp. 7,000 319
Werner Enterprises, Inc. 261,000 6,134
-----------
GROUP TOTAL 22,489
-----------
- ----------------------------------------------------------------------
UTILITIES (2.8%)
AT&T Corp. 6,700 337
BCE, Inc. 12,000 386
Century Telephone
Enterprises, Inc. 3,000 89
* Columbia Gas Systems, Inc. 15,500 364
DPL, Inc. 20,000 410
DQE Inc. 6,500 193
Empresa Nacional Electric ADR 9,000 365
MCI Communications Corp. 754,700 13,868
NIPSCO Industries, Inc. 14,000 417
Pacific Telesis Group 18,100 516
Sonat, Inc. 47,800 1,338
Sprint Corp. 325,600 8,995
Telefonica de Espana ADR 34,300 1,205
Telefonos de Mexico SA ADR 14,900 611
Williams Cos., Inc. 25,000 628
----------
GROUP TOTAL 29,722
----------
- ----------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS (1.1%)
Allied-Signal, Inc. 13,400 $ 456
* Corrections Corp. of America 27,700 436
* GMIS, Inc. 168,000 3,234
GenCorp, Inc. 24,000 285
* Manpower Inc. 109,400 3,077
* National Education Corp. 79,400 328
Olsten Corp. 52,200 1,657
Omnicom Group, Inc. 10,000 517
PHH Corp. 52,100 1,810
Service Corp. International 16,000 444
----------
GROUP TOTAL 12,244
----------
- ----------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $902,500) 1,007,220
- ----------------------------------------------------------------------
CONVERTIBLE BOND
- ----------------------------------------------------------------------
<CAPTION>
Face
Amount
(000)
----------
<S> <C> <C>
Hillhaven Corp.
7.75%, 11/1/02 (Cost $314) $ 300 384
- ----------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (6.8%)
- ----------------------------------------------------------------------
U.S. TREASURY BILL--Note E
5.395%, 3/23/95 300 296
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.90%, 1/3/95 72,418 72,418
- ----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $72,714) 72,714
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (100.5%)
(Cost $975,528) 1,080,318
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.5%)
- ----------------------------------------------------------------------
Other Assets--Notes C and F 50,462
Liabilities--Note F (55,977)
----------
(5,515)
- ----------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------
Applicable to 94,608,088 outstanding
$.10 par value shares
(authorized 150,000,000 shares) $1,074,803
- ----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $11.36
======================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
AT DECEMBER 31, 1994, NET ASSETS
CONSISTED OF:
- ----------------------------------------------------------------------
Amount Per
(000) Share
--------- ---------
<S> <C> <C>
Paid in Capital $963,172 $10.18
Overdistributed Net
Investment Income (26) --
Accumulated Net
Realized Gains 6,870 .07
Unrealized Appreciation
of Investments--Note E 104,787 1.11
- ----------------------------------------------------------------------
NET ASSETS $1,074,803 $11.36
- ----------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1994
(000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,018
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,239
- ---------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . 18,257
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,121
Performance Adjustments . . . . . . . . . . . . . . . . . . . . . (534) 1,587
-------
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . . . 3,524
Marketing and Distribution . . . . . . . . . . . . . . . . . . . 180 3,704
-------
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . 90
Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . . . . 67
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . 10
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . 44
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . 24
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . 7
- ---------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . 5,533
- ---------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . 12,724
- ---------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . 26,911
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . (70)
- ---------------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . . 26,841
- ---------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . . . . (57,603)
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . (6)
- ---------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . . . . (57,609)
- ---------------------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations . . . . . . . . . . . . $(18,044)
===========================================================================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
DECEMBER 31, 1994 December 31, 1993
(000) (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,724 $ 15,570
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,841 112,423
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . (57,609) (48,008)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . . . (18,044) 79,985
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . (12,947) (15,505)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . (28,776) (116,769)
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . (41,723) (132,274)
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . . . . . . . . 143,900 136,946
-- In Lieu of Cash Distributions . . . . . . . . . . . 36,605 114,458
-- Exchange . . . . . . . . . . . . . . . . . . . . . 30,934 44,345
-- Exchange for Net Assets of Vanguard Specialized
Portfolios-Service Economy Portfolio--Note G . . . 29,513 --
Redeemed -- Regular . . . . . . . . . . . . . . . . . . . . . . (156,643) (105,094)
-- Exchange . . . . . . . . . . . . . . . . . . . . . (84,894) (119,543)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions . . . . . . . . . . . . . . (585) 71,112
- ---------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . . . . (60,352) 18,823
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,135,155 1,116,332
- ---------------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,074,803 $1,135,155
===========================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . $ .14 $ .18
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . $ .31 $ 1.35
- ---------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,178 14,199
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . . 3,196 9,636
Issued in Exchange for Net Assets of Vanguard Specialized
Portfolios-Service Economy Portfolio--Note G . . . . . . . . . . 2,556 --
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,856) (17,544)
- ---------------------------------------------------------------------------------------------------------------------------
74 6,291
- ---------------------------------------------------------------------------------------------------------------------------
(3) Undistributed (Overdistributed) Net Investment Income . . . . . . $ (26) $ 197
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
For a Share Outstanding Throughout Each Year 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . $12.01 $12.65 $12.20 $10.40 $11.72
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . .14 .18 .18 .29 .32
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . . . . (.34) .71 .97 2.66 (.50)
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . (.20) .89 1.15 2.95 (.18)
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . (.14) (.18) (.18) (.29) (.34)
Distributions from Realized Capital Gains . . . . . . . (.31) (1.35) (.52) (.86) (.80)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (.45) (1.53) (.70) (1.15) (1.14)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . $11.36 $12.01 $12.65 $12.20 $10.40
==================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . -1.67% +7.32% +9.54% +29.33% -1.51%
- ------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . . . $1,075 $1,135 $1,116 $957 $697
Ratio of Expenses to Average Net Assets . . . . . . . . . . .50% .49% .48% .46% .55%
Ratio of Net Investment Income
to Average Net Assets . . . . . . . . . . . . . . . . . 1.15% 1.36% 1.51% 2.36% 2.77%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . 84% 72% 64% 52% 73%
- ------------------------------------------------------------------------------------------------------------------
</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 the close of the New York Stock Exchange
(generally 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 Standard & Poor's 500 Index futures contracts to
a limited extent, to increase its exposure to the stock market. The primary
risks associated with the use of futures contracts are imperfect correlation
between changes in market values of stocks 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 values 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 are subject to
quarterly adjustments based on performance relative to the Growth Fund Stock
Index. For the year ended December 31, 1994, the aggregate investment advisory
fee represented an effective annual base rate of .19 of 1% of average net
assets, before a decrease of $534,000 (.05 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.
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 December 31, 1994, the Fund had contributed capital of $166,000
to Vanguard (included in Other Assets), representing .8% of Vanguard's
capitalization. The Fund's directors and officers are also directors and
officers of Vanguard.
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (continued)
Vanguard has requested the Fund's investment advisers to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate or credit to the Fund a portion of the commissions
generated. Such rebates or credits are used solely to reduce the Fund's
administrative expenses. For the year ended December 31, 1994, directed
brokerage arrangements reduced the Fund's expenses by $359,000 (.03 of 1% of
average net assets).
D. During the year ended December 31, 1994, the Fund made purchases of
$868,145,000 and sales of $917,867,000 of investment securities other than U.S.
Government securities and temporary cash investments.
E. At December 31, 1994, unrealized appreciation of investment securities
for financial reporting and Federal income tax purposes aggregated
$104,790,000, of which $150,863,000 related to appreciated securities and
$46,073,000 related to depreciated securities.
At December 31, 1994, the aggregate settlement value of open Standard & Poor's
500 Index futures contracts expiring in March, 1995, the related unrealized
depreciation, and the market value of securities deposited as initial margin
for those contracts were $461,000, $3,000, and $296,000, respectively.
F. The market value of securities on loan to broker/dealers at December 31,
1994, was $23,476,000 for which the Fund had received cash collateral of
$24,503,000.
G. In accordance with the terms of an agreement approved by the shareholders
of Vanguard Specialized Portfolios-Service Economy Portfolio (the "Portfolio"),
on June 2, 1994, the Fund issued 2,556,000 of its capital shares in exchange
for the net assets of the 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 the Portfolio received 1.877 shares of the Fund
for each share of the Portfolio. This tax-free exchange has been accounted for
by combining the assets and liabilities of the Fund and the Portfolio at their
values on the date of the merger. The identified cost of investments were
similarly combined.
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, 1994, 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 LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 8, 1995
SPECIAL TAX INFORMATION
SPECIAL 1994 TAX INFORMATION (UNAUDITED)
FOR VANGUARD/MORGAN GROWTH FUND, INC.
Corporate shareholders should note that for the fiscal year ended December 31,
1994, 100% of the Fund's dividend income qualifies for the intercorporate
dividends received deduction.
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 of Rhone-Poulenc
Rorer, Inc.; Director of Sun Company, Inc.
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 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., The Jeffrey Co.,
and Southern New England Communications Company.
ALFRED M. RANKIN, JR., Chairman, President, and
Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich
Company, Reliance Electric 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.
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 VINCENT S. MCCORMACK
Senior Vice President Senior Vice President
Planning & Development Operations
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Institutional Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
20
<PAGE> 23
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and
principles.
* We adhere to the highest standards of investment quality, consistent with
each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure of risk)
to prospective investors, and in our description to shareholders of each
Fund's success (or, sometimes, lack of the same).
These principles make at least as much sense today as they did in 1929, perhaps
even more. For we live in an era when many fund organizations have become
asset-gathering machines, capitalizing on past performance that is unrepeatable
and investment fads that today, as yesterday, will come and go. The new
marketing policy is too often "if investors want it, we'll sell it to them."
But our principle remains "if it makes sound investment sense, we'll offer it,
even if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values was
brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of
the benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for
its low costs, which we believe are just as essential a consideration in
investing in mutual funds as risk potential and total return. We call this
relationship between risk, return, and cost the "eternal triangle" of mutual
fund investing.
We take special pride in our position as (by far) the lowest-cost
provider of financial services in the world. Under our "no-load" offering
structure, shareholders begin their Vanguard investment program with $1,000 of
assets (not, say, $950) for each $1,000 investment. Then, under our "at-cost"
operating structure, each $1,000 is managed for only about $3 per year; our
competitors may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with
sound and durable goals to investors with long-term time horizons, and doing so
at the fairest financial terms available. We believe that the unique Vanguard
structure "promotes a healthy and viable mutual fund complex within which each
Fund can better prosper; enables the Funds to realize substantial savings from
advisory fee reductions; promotes savings from economies of scale; and provides
the Funds with direct and conflict-free control over distribution functions."
We are not alone in this belief. Indeed, the quotation is taken verbatim from
the unanimous decision of the U.S. Securities and Exchange Commission when, in
1981, it approved our application for the structure under which we operate
today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The
Vanguard Group have come to represent, and we are grateful for the success and
growth with which we have been blessed. We are an industry leader, and, as a
competitor observed a few years ago, we are "the standard by which all fund
organizations are judged."
In battle terms, "the vanguard" is the first wave of troops or ships,
and Vanguard surely is in the first wave of the battle for investment survival.
As we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
<PAGE> 24
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money Market Portfolio
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 Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
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 Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
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.
Q260-12/94
<PAGE> 25
EDGAR APPENDIX
This appendix describes the components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The front cover of the printed version of this report features the
Vanguard ship in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through
the sea appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through five.
A photograph of John C. Bogle appears at the lower-right of page one.
A line chart depicting Cumulative Performance of the Growth Stocks
versus Value Stocks. Standard & Poor's Growth Index and the Standard & Poor's
Value Index for the period 1990-1994 is at the top of page two.
A line chart depicting Cumulative Performance of the Standard & Poor's
500 Index, Morgan Growth Fund & the Average Growth Fund for the period
December 31, 1984 to December 31, 1994 at the top of page four.
A running head featuring a map & telescope appears on pages six and
seven.
A running head featuring a lantern appears on page eight.
A running head featuring a log book and pen appears on pages nine
through nineteen.
A running head featuring a compass appears on page twenty.
At the bottom of the inside back cover appears a triangle with the
sides labeled "Risk," "Cost," and "Return".
A seagull in flight is featured at the top of the outside back cover of
the report.
