<PAGE> 1
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Vanguard/Morgan Growth Fund turned in a stunning total return of +21.0% during
the six months ended June 30, the first half of our 1995 fiscal year. We not
only participated in the strongest bull market for common stocks in recent
memory, but we were among the mutual fund industry's performance leaders.
The market leadership was provided by the large blue-chip stocks that, in
general, comprise the Standard & Poor's 500 Composite Stock Price Index, whose
total return (capital change plus income) proved once again to be a demanding
standard for portfolio managers to match. We were among a relatively small
number of mutual funds to succeed in doing so, albeit by a modest margin. Much
more impressive was our margin of three and one-half percentage points over the
average growth stock mutual fund, as shown in this table:
<TABLE>
<CAPTION>
- --------------------------------------------------------
Total Return
----------------
Six Months Ended
June 30, 1995
- --------------------------------------------------------
<S> <C>
MORGAN GROWTH FUND +21.0%
- --------------------------------------------------------
STANDARD & POOR'S 500 STOCK INDEX +20.2%
AVERAGE GROWTH MUTUAL FUND +17.5
- --------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $11.36 per share on
December 31, 1994, and $13.65 on June 30, 1995, with the latter figure adjusted
to take into account the reinvestment of a carry-over distribution of $.08 per
share from net capital gains realized during 1994 and paid in March 1995.
THE PERIOD IN REVIEW
After a moderately disappointing 1994, the stock market sprung to life as 1995
began. During the past six months, the market moved upward, week after week, in
virtually straight-line fashion, delighting the bulls and astonishing the
bears. On balance, the Dow Jones Industrial Average rose from 3834 as the year
began to 4556 on June 30.
As usual, there were many opinions as to the source of the market's
surprising strength. In my view, it resulted from a combination of: (1) the
sharp decline in interest rates (the yield on the long-term U.S. Treasury bond
fell from 7.8% to 6.6% during the period, a dip of 120 basis points); (2) the
diminishing threat of additional increases in short-term interest rates by the
Federal Reserve Board; (3) a slight softening in U.S. economic growth,
resulting in continued optimism about the outlook for inflation; (4)
record-breaking corporate profits; and (5) a hint of speculative fever in the
marketplace. Whatever the cause, the strong market, led as it was by the
blue-chip stocks, resulted in a solid gain of +20.2% for the Standard & Poor's
500 Index.
Our advantage over the Standard & Poor's Index-modest though it may have
been-was a nice improvement over 1994, and therefore was especially welcome. It
was derived in part from the differences you would expect between an index
investing in large cap stocks and a portfolio focusing on growth stocks with a
wide range of market caps. On the positive side, the major contributions arose
from: (1) our out-sized position in the high-performing technology group (28%
of Fund net assets versus 10% for the Index); and (2) our underweighting in the
utility group (2% of Fund assets versus 13% for the Index), which proved to be
one of the market's weaker sectors. Our sole major negative was accounted for
by several selections in the health care group that lagged the market.
Our positive performance relative to the average growth fund-we earned a
premium of fully 3.5 percentage points during the six months-had a similar
derivation. Our peer group's position in technology stocks was 19% of assets.
The group also held larger positions in utilities, energy, and consumer
staples, each of which lagged the market. Some of these differences in
weighting reflect the fact that many growth funds, rather than focusing on
stocks with above-average prospects for long-term earnings growth, have
broadened their focus to include "value" stocks, defined as those with
above-average yields and below-average price-to-earnings ratios. While we too
seek to capture value, we do so with our prime focus on stocks with long-term
growth potential.
(continued)
1
<PAGE> 2
I am especially pleased to report that each of the four investment
advisers we use under our multi-manager strategy outpaced the average growth
mutual fund, and in each case by a solid margin. Husic Capital Management,
retained by the Fund less than two years ago, and Franklin Portfolio
Associates, to which a substantial reallocation of assets was made as 1993
began, both did a particularly outstanding job. At present, these two firms are
responsible for about 50% of the Fund's assets, with approximately 40% assigned
to Wellington Management Company; Vanguard's Core Management Group manages the
remaining portion.
These results reaffirm my conviction that our multi-manager strategy is
appropriate for Morgan Growth Fund. While "one swallow does not a summer make,"
during the first half of 1995 we have nicely enhanced the margin of advantage
we have achieved in our ten-year annualized return relative to other growth
funds, which now stands at +13.3% versus +12.2%. As acceptable (and as
difficult to achieve) as this margin may be, we shall continue to strive to
enhance it in the remainder of 1995 and beyond.
SUMMING UP
Our prospects relative to other growth funds are only part of the game; the
more important part is the absolute returns that are provided by stocks. I
emphasize that the bull market of the past six months has been so strong and so
swift that caution should be the order of the day. What this means is that
long-term investors should continue to balance their stock holdings with
holdings of bonds and reserves, and not attempt to outguess the market by
making major, precipitate reallocations among these three basic classes of
financial assets. In our 1994 Annual Report six months ago, we urged you to
"stay the course." That proved fine advice then; we reiterate it now.
We, too, intend to stay the course with the consistent objectives and
broad 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 do all investments, Morgan Growth
Fund involves both risk and reward potential. Simply understanding that
principle is important as you implement the investment course you have chosen
to follow.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
July 11, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS-THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED JUNE 30, 1995) 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 +27.99% +11.05% +13.33% +11.21% +2.12%
</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.
2
<PAGE> 3
REPORT FROM WELLINGTON MANAGEMENT COMPANY
The U.S. equity market showed strong upward movement in the first half of 1995
as long-term bonds rallied sharply in the face of an abrupt slowdown in the
domestic economy. In turn, we are now looking for a more precipitous slowing in
the domestic economy than we had been expecting earlier in the year. We are
forecasting growth in real gross domestic product in both the second and third
quarters of about one-half of one percent as the economy passes through an
inventory correction. Historically, these types of corrections last six months
on average.
At this time, few of our key leading indicators, such as jobs, consumer
confidence, or inflationary patterns, are presaging a recession. Therefore, we
expect a reacceleration of the economy late this year and extending into 1996.
At the same time, the almost synchronized slowing in the economies of the G-7
countries does portend a greater likelihood of earnings disappointments over
the next couple of quarters. We now are expecting only a small gain in
corporate profits this year, followed by a 10% bounce in 1996.
Financial markets have been hoping for, indeed counting on, monetary
policy relief. In fact, the Federal Reserve has just reacted by easing
short-term rates for the first time in three years. This change in posture is
apt to aid the stocks of cyclical companies, which have not fully participated
in the market upswing over the past seven months. At the same time, the slowing
in the economy will probably cause some companies to report profits below
expectations, which might produce "air pockets" for some stocks.
During the first half of the year, stock market performance was paced
primarily by very strong technology and financial services results with
relatively weaker performance in the consumer discretionary sector. The
portfolio has been well represented in technology. In this sector we have tried
to position ourselves with limited exposure to the PC hardware cycle, which,
indeed, has been much stronger than we had anticipated. Rather, we have had a
heavy commitment to the software and services sector and the networking and
telecom equipment businesses. The recent move in Washington toward deregulation
of telecommunications has been a nice plus for our holdings in this area.
Recent additions to the portfolio in technology include: Compuware, a computer
software vendor selling mainframe and client/server data management tools;
Sensormatic, the world's leader in electronic article surveillance used to
prevent the theft of merchandise and inventory; AMP, number one in connectors;
and Shiva, a small company, but the leader in remote access servers for
computer networking. Although not officially in the technology sector but
rather an information/entertainment company, Uunet was another addition. The
company, a top Internet access provider, will run Microsoft's Internet network
scheduled for start-up in August with Windows 95.
While health care stocks overall performed fairly well, managed health
care (health care services) turned in a disappointing performance. When several
HMOs reported shortfalls from earnings expectations and governmental policy
makers threatened Medicare/Medicaid reimbursement cuts, the stocks suffered.
Our slight overweighting in the managed health care names hurt overall
performance within the health care sector. Our health care weighting has
dropped, partially as a result of lagging performance, but mainly from
sales/trims in a number of successful drug, biotech, medical device, and
nursing home companies. In addition, we eliminated Value Health, not because of
specific company problems, but more due to the stock's high valuation in a
sector that is becoming less highly valued. We did add one new name to this
sector, Rhone-Poulenc Rorer, a mid-sized pharmaceutical company with excellent
new drug potential.
Over the past year, the consumer discretionary sector, including
retailing, has been one of the weakest groups in the marketplace. During this
period even the stocks of high-quality companies with strong finances and
dominant positions in specialty niches were hard hit. We took advantage of this
inefficiency to build up a nice stable of specialty retail purveyors, namely
AutoZone in auto parts; Baby Superstore in baby supplies; Bed Bath & Beyond in
linens and home goods; and Gymboree in children's apparel.
Other additions to the portfolio included: MGIC Investment, the leading
mortgage insurer; and a couple of small broadcasters, American Radio and
3
<PAGE> 4
Sinclair Broadcasting. We subsequently sold our small holding in Sinclair. We
also participated in the initial public offering of MobileMedia, the country's
second-largest provider of paging services with 35% internal unit growth. Its
operating systems and back office are fully built. With the acquisition of Dial
Page's paging division, MobileMedia will have almost nationwide coverage. The
stock is priced at a significant discount to other paging stocks.
We sold Comcast Cable UK because we prefer International Cabletel, where
the addition of an Irish franchise boosted the firm's value. We sold Republic
NY due to the poor quality of the first quarter's earnings report. We also sold
four stocks where company fundamentals had deteriorated and our conviction
level on long-term prospects had faded, albeit along with the stock prices:
Home Shopping Network, International Game Technology, MTS Systems, and Waste
Management International.
While we do not anticipate the stock market's meteoric rise of the first
half of the year to be repeated, we continue to find good values and to search
assiduously for companies with the potential to outperform the market.
Respectfully,
Robert D. Rands, Senior Vice President
Portfolio Manager
Wellington Management Company
July 11, 1995
4
<PAGE> 5
REPORT FROM FRANKLIN PORTFOLIO ASSOCIATES
During the first six months of the fiscal year, the economy has shown
substantial signs of slowing, and the outlook for interest rates has seemingly
improved because of the slowdown. Administration officials show no signs of
trying to protect the dollar, other than by appropriate gestures. The trade
negotiations between the U.S. and Japan underscore some of the frailties in the
current economy.
The Republican Congress seems able to push the economic agenda toward the
right, although the pace and duration of this move are subject to significant
debate. The political consensus on the deficit seems to be moving in the
direction of significant spending cuts and lower deficits, marred only by
politically motivated tax cuts. Additionally, the dollar has stabilized after
considerable weakness earlier in the year.
Against this backdrop, U.S. financial markets rose strongly in the first
half of 1995. Particular strength was shown by technology-related issues.
Economically sensitive issues, such as transportation (excluding airlines,
which appreciated nicely over the six-month period), had less positive
performance than the general market. Energy, utilities, and autos also lagged
the broad averages. Larger issues outperformed smaller issues. Most
measurements of year-to-date performance indicated that growth stocks had a
slight performance edge over value issues.
We claim modest bragging rights for the somewhat optimistic outlook for
equities expressed in our last letter. If pinned down today, we would say that
equities look fairly valued. We would also point out that market timing is not,
in our view, an ingredient of most successful investment strategies. "Staying
the course" with a well-chosen investment mix suits most investors' needs and
temperaments. Looking forward, uncertainties continue to block our view of the
far horizon; uncertainty however leads to investment opportunity. With our
long-term view, we are not alarmed at the current state of the world.
We have been managers of part of the Vanguard/Morgan Growth Fund for just
over five years. During this period, the performance of our subportfolio versus
the entire Morningstar universe of growth funds has been favorable.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Franklin/Morgan Subportfolio versus Morningstar Growth Funds
Through 6/30/95
- ---------------------------------------------------------------
<S> <C>
LAST 5 YEARS 65TH OUT OF 291
LAST 3 YEARS 49TH OUT OF 389
LAST 12 MONTHS 92ND OUT OF 694
YEAR TO DATE 80TH OUT OF 797
- ---------------------------------------------------------------
</TABLE>
Source: Morningstar.
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. This
strategy leads to our being fully invested at all times. Therefore, 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 the remainder of this year with considerable optimism.
Respectfully,
John Nagorniak
Franklin Portfolio Associates
July 6, 1995
5
<PAGE> 6
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 June 30, 1995. 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>
1971 $ 8.06 - $ .10 $ 8.18 +26.3% +1.9% +28.2% +14.2%
- --------------------------------------------------------------------------------------------------------------
1972 9.18 $ .48 .07 9.96 +20.7 +1.1 +21.8 +19.0
- --------------------------------------------------------------------------------------------------------------
1973 7.11 .27 .09 8.05 -20.0 +0.8 -19.2 -14.7
- --------------------------------------------------------------------------------------------------------------
1974 4.74 - .11 5.45 -33.4 +1.1 -32.3 -26.3
- --------------------------------------------------------------------------------------------------------------
1975 6.62 - .13 7.81 +39.7 +3.4 +43.1 +37.1
- --------------------------------------------------------------------------------------------------------------
1976 7.77 - .11 9.30 +17.4 +1.7 +19.1 +23.8
- --------------------------------------------------------------------------------------------------------------
1977 8.18 - .15 9.99 + 5.2 +2.2 + 7.4 - 7.2
- --------------------------------------------------------------------------------------------------------------
1978 9.35 .11 .21 11.92 +16.1 +3.2 +19.3 + 6.5
- --------------------------------------------------------------------------------------------------------------
1979 9.47 1.13 .29 14.16 +15.3 +3.5 +18.8 +18.4
- --------------------------------------------------------------------------------------------------------------
1980 12.36 - .31 19.08 +30.5 +4.2 +34.7 +32.4
- --------------------------------------------------------------------------------------------------------------
1981 11.05 .45 .29 18.16 - 7.1 +2.3 - 4.8 - 4.9
- --------------------------------------------------------------------------------------------------------------
1982 12.01 1.31 .30 23.19 +24.1 +3.6 +27.7 +21.5
- --------------------------------------------------------------------------------------------------------------
1983 13.84 1.04 .25 29.77 +25.8 +2.6 +28.4 +22.5
- --------------------------------------------------------------------------------------------------------------
1984 11.45 1.39 .31 27.96 - 8.1 +2.0 - 6.1 + 6.2
- --------------------------------------------------------------------------------------------------------------
1985 13.82 .60 .25 36.43 +27.5 +2.8 +30.3 +31.6
- --------------------------------------------------------------------------------------------------------------
1986 11.50 2.88 .43 39.29 + 4.2 +3.6 + 7.8 +18.6
- --------------------------------------------------------------------------------------------------------------
1987 9.39 2.45 .20 41.26 + 3.3 +1.7 + 5.0 + 5.2
- --------------------------------------------------------------------------------------------------------------
1988 10.27 .98 .24 50.48 +19.8 +2.5 +22.3 +16.5
- --------------------------------------------------------------------------------------------------------------
1989 11.72 .59 .28 61.91 +19.9 +2.8 +22.7 +31.6
- --------------------------------------------------------------------------------------------------------------
1990 10.40 .80 .34 60.98 - 4.4 +2.9 - 1.5 - 3.1
- --------------------------------------------------------------------------------------------------------------
1991 12.20 .86 .29 78.87 +26.3 +3.0 +29.3 +30.4
- --------------------------------------------------------------------------------------------------------------
1992 12.65 .52 .18 86.39 + 8.1 +1.4 + 9.5 + 7.6
- --------------------------------------------------------------------------------------------------------------
1993 12.01 1.35 .18 92.71 + 5.9 +1.4 + 7.3 +10.1
- --------------------------------------------------------------------------------------------------------------
1994 11.36 .31 .14 91.16 - 2.9 +1.2 - 1.7 + 1.3
- --------------------------------------------------------------------------------------------------------------
1995 (6/30) 13.65 .08 - 110.27 +21.0 0.0 +21.0 +20.2
- --------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL +1,628.6% +1,451.6%
- --------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +12.3% +11.8%
- ----------------------- --------------------------------------------------------------------------------------
</TABLE>
* Adjusted for the 3-for-2 stock split, February 3, 1979.
**Includes reinvestment of income dividends and any capital gains distributions
for both the Fund and the Index.
Note: The initial net asset value was $6.38 on December 31, 1970, the beginning
of the period illustrated. No adjustment has been made for income taxes
payable by shareholders on reinvested income dividends and capital gains
distributions.
6
<PAGE> 7
FINANCIAL STATEMENTS
(unaudited)
June 30, 1995
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (93.7%)
- ----------------------------------------------------------------------------------
BASIC MATERIALS (9.8%)
Air Products &
Chemicals, Inc. 373,900 $ 20,845
Alcan Aluminium Ltd. 99,100 2,998
ASARCO, Inc. 114,400 3,489
Blount, Inc. 10,000 446
British Steel PLC ADR 18,700 519
Cabot Corp. 143,700 7,580
Champion International
Corp. 6,900 360
Commercial Metals Co. 12,900 348
* Cytec Industries, Inc. 14,500 593
Dow Chemical Co. 4,400 316
E.I. du Pont de Nemours
& Co. 21,100 1,451
Engelhard Corp. 168,700 7,233
Federal Paper Board
Co., Inc. 45,200 1,599
First Mississippi Corp. 59,600 2,034
Georgia Gulf Corp. 127,200 4,150
Georgia-Pacific Corp. 8,400 729
Inland Steel Industries,
Inc. 10,200 311
International Paper Co. 10,000 857
Kimberly-Clark Corp. 105,000 6,287
* LTV Corp. 24,600 360
Lyondell Petrochemical Co. 7,700 197
* Magma Copper Co. Class B 92,000 1,495
Monsanto Co. 37,000 3,335
Morton International, Inc. 396,300 11,592
* National Steel Corp.
Class B 23,500 364
Norsk Hydro AS ADR 160,600 6,705
PPG Industries, Inc. 12,100 520
Phelps Dodge Corp. 55,700 3,286
Placer Dome Group, Inc. 12,600 329
Potash Corp. of 4,800 268
Saskatchewan,Inc. 152,000 3,800
Praxair, Inc. 136,800 6,772
Scott Paper Co. 73,000 1,551
* Stone Container Corp. 77,700 3,700
Temple-Inland Inc. 312,000 3,783
Terra Industries, Inc. 178,000 5,941
Union Carbide Corp. 26,100 307
* WHX Corp. 104,600 2,863
Wellman, Inc. 17,200 811
Weyerhaeuser Co.
Willamette Industries,
Inc. 7,800 429
Worthington Industries,
Inc. 60,100 1,225
-----------
GROUP TOTAL 121,778
-----------
- ----------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (4.7%)
AGCO Corp. 61,050 2,289
Caterpillar, Inc. 18,800 1,208
Cummins Engine Co., Inc. 37,300 1,627
Deere & Co. 42,100 3,605
Dover Corp. 3,400 247
General Electric Co. 308,900 17,414
* General Instrument 316,700 12,153
W.W. Grainger, Inc. 8,400 494
* International Rectifier
Corp. 75,500 2,454
McDonnell Douglas Corp. 13,200 1,013
NACCO Industries, Inc.
Class A 9,400 563
Northrop Grumman Corp. 5,300 276
* Owens-Corning Fiberglas
Corp. 15,500 572
Parker Hannifin Corp. 8,250 299
Raytheon Co. 5,500 427
Standard Pacific Corp. 448,000 3,080
The Timkin Co. 11,100 512
The Toro Co. 37,500 1,050
* Varity Corp. 72,500 3,190
WMX Technologies Inc. 18,300 519
York International Corp. 125,000 5,625
---------
GROUP TOTAL 58,617
---------
- ----------------------------------------------------------------------------------
CONSUMER CYCLICALS (14.8%)
Arctco Inc. 91,000 1,024
Armstrong World Industries
Inc. 5,600 281
* AutoZone, Inc. 135,000 3,392
* Baby Superstore, Inc. 38,300 1,800
* Bed Bath & Beyond Inc. 70,000 1,698
* Bon-Ton Stores, Inc. 51,700 536
* Broderbund Software 55,800 3,543
Brunswick Corp. 252,600 4,294
CBS, Inc. 75,000 5,025
* Caldor Corp. 18,500 331
Callaway Golf Co. 24,200 363
Capital Cities/ABC, Inc. 84,700 9,148
* Champion Enterprises, Inc. 26,200 416
Chrysler Corp. 62,500 2,992
Circuit City Stores, Inc. 192,200 6,078
* Consolidated Stores, Inc. 38,500 804
* Detroit Diesel Corp. 80,000 1,690
The Walt Disney Co. 128,800 7,164
Echlin, Inc. 107,200 3,725
* Electronic Arts 150,000 4,069
* Fieldcrest Cannon, Inc. 14,400 311
Fleetwood Enterprises,
Inc. 128,200 2,532
Ford Motor Co. 112,700 3,353
Gannett Co., Inc. 12,300 667
Gaylord Entertainment
Class A 227,955 5,756
General Motors Corp. 10,600 497
The Goodyear Tire &
Rubber Co. 21,200 874
* Gymboree Inc. 125,000 3,625
Harman International
Industries, Inc. 11,800 478
* Heritage Media Corp.
Class A 23,000 664
* Tommy Hilfiger Corp. 131,500 3,682
Hilton Hotels Corp. 44,300 3,112
* Infinity Broadcasting
Corp. 29,700 991
Knight-Ridder, Inc. 8,600 489
</TABLE>
7
<PAGE> 8
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------------------
<S> <C> <C>
Leggett & Platt, Inc. 3,100 $ 136
* Lin Broadcasting Corp. 8,000 1,012
Magna International, Inc.
Class A 45,300 1,999
May Department Stores Co. 391,400 16,292
Maytag Corp. 16,200 259
McDonald's Corp. 300,000 11,737
* Mirage Resorts, Inc. 70,200 2,150
* Multimedia, Inc. 65,600 2,534
National Service
Industries, Inc. 13,900 401
Newell Co. 108,700 2,663
News Corp. Ltd. ADR 144,400 3,267
News Corp. Ltd. Pfd. ADR 475,000 9,441
* Office Depot, Inc. 126,300 3,552
Omnicom Group Inc. 10,000 606
* Players International,
Inc. 30,000 600
* Prime Hospitality Corp. 26,300 260
Ross Stores, Inc. 23,300 268
St. John Knits, Inc. 13,500 606
* Scholastic Corp. 118,600 6,434
E.W. Scripps Co. 36,800 1,187
Sears, Roebuck & Co. 15,500 928
* Spelling Entertainment 104,900 1,023
* The Sports Authority, Inc. 260,700 5,312
Springs Industries Inc. Class A 11,100 413
Sunbeam Corp. 7,000 97
Tandy Corp. 14,800 768
* Viacom International Class A 20,000 930
* Viacom International Class B 303,647 14,082
* Waban, Inc. 253,200 3,766
Wal-Mart Stores, Inc. 26,600 712
Wendy's International, Inc. 198,300 3,545
Wolverine World Wide, Inc. 107,400 2,229
----------
GROUP TOTAL 184,613
----------
- ----------------------------------------------------------------------------------
CONSUMER STAPLES (5.7%)
American Stores Co. 157,000 4,416
Archer-Daniels-Midland Co. 273,551 5,095
Campbell Soup Co. 12,800 627
Clorox Co. 4,200 274
ConAgra, Inc. 12,600 439
Embotelladora Andina ADR 70,000 2,459
Gillette Co. 100,000 4,463
Hormel Foods Corp. 82,000 2,142
Hudson Foods Inc. Class A 10,500 146
IBP, Inc. 162,500 7,069
* The Kroger Co. 187,900 5,050
PepsiCo, Inc. 433,700 19,788
Philip Morris Cos., Inc. 65,000 4,834
Procter & Gamble Co. 9,100 654
RJR Nabisco Holdings Corp. 39,100 1,090
Ralston-Purina Group 105,000 5,355
* Safeway, Inc. 110,100 4,115
Sara Lee Corp. 50,400 1,436
* Smithfield Foods, Inc. 55,600 1,181
* Stop & Shop Cos. Inc. 16,200 415
Sysco Corp. 15,000 443
Unilever NV ADR 1,100 143
--------
GROUP TOTAL 71,634
--------
- ----------------------------------------------------------------------------------
ENERGY (3.6%)
Amoco Corp. 12,800 853
British Petroleum Co. PLC ADR 99,100 8,485
Burlington Resources, Inc. 130,000 4,794
* California Energy Co. 75,500 1,236
* Devon Group, Inc. 17,000 493
Enron Corp. 48,500 1,704
Exxon Corp. 11,900 840
Halliburton Co. 19,900 711
Panhandle Eastern Corp. 118,700 2,893
Royal Dutch Petroleum Co. ADR 5,700 695
Schlumberger Ltd. 80,000 4,970
* Smith International, Inc. 114,900 1,925
Union Texas Petroleum
Holdings Inc. 26,300 556
Unocal Corp. 240,000 6,630
Vastar Resources, Inc. 260,000 8,027
---------
GROUP TOTAL 44,812
---------
- ----------------------------------------------------------------------------------
FINANCIAL (10.8%)
ACE, Ltd. 250,000 7,250
AFLAC, Inc. 149,900 6,558
Advanta Corp. Class A 7,000 291
Alex Brown, Inc. 12,000 498
Allstate Corp. 24,100 714
American Express Co. 25,800 906
American General Corp. 17,200 581
American International Group, Inc. 50,688 5,778
American Re Corp. 280,000 10,430
Aon Corp. 17,100 637
Bank of Boston Corp. 19,349 726
The Bank of New York Co., Inc. 213,500 8,620
BankAmerica Corp. 107,600 5,662
Barnett Banks, Inc. 44,000 2,255
BayBanks, Inc. 6,800 539
CIGNA Corp. 30,000 2,329
CMAC Investment Corp. 14,600 633
The Chase Manhattan Corp. 17,078 803
Chemical Banking Corp. 96,700 4,569
Citicorp 125,500 7,263
Dean Witter Discover & Co. 8,000 376
A.G. Edwards & Sons, Inc. 21,400 482
Equifax, Inc. 9,500 317
Federal Home Loan Mortgage Corp. 87,800 6,036
Federal National Mortgage Assn. 79,800 7,531
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------------------
<S> <C> <C>
Finova Group, Inc. 69,300 $ 2,426
First Bank System, Inc. 119,484 4,899
First Chicago Corp. 6,400 383
First Union Corp. 62,700 2,837
First USA Inc. 64,000 2,840
Great Western Financial Corp. 198,000 4,084
Green Tree Financial Corp. 58,600 2,600
Household International, Inc. 69,900 3,460
Leucadia National Corp. 10,100 510
MBNA Corp. 45,900 1,549
MGIC Investment Corp. 94,200 4,416
Midlantic Corp. 18,000 715
Morgan Stanley Group, Inc. 50,000 4,050
NationsBank, Inc. 12,514 671
Norwest Corp. 130,700 3,758
Old Republic International Corp. 26,500 692
Orion Capital Corp. 16,900 659
PaineWebber Group, Inc. 30,800 581
PartnerRe Ltd. 2,800 73
T. Rowe Price 5,500 212
St. Paul Cos., Inc. 4,700 231
Salomon, Inc. 89,000 3,571
Charles Schwab Corp. 21,300 924
Transamerica Corp. 54,100 3,151
Travelers Group Inc. 47,300 2,069
USF&G Corp. 33,600 546
United Cos. Finance Corp. 7,700 345
USLIFE Corp. 6,700 270
---------
GROUP TOTAL 134,306
---------
- ----------------------------------------------------------------------------------
HEALTH CARE (10.1%)
Allergan, Inc. 13,100 355
American Home Products Corp. 12,200 944
* Amgen, Inc. 14,500 1,164
Baxter International, Inc. 16,200 589
Becton, Dickinson & Co. 11,400 664
* Beverly Enterprises Inc. 450,000 5,569
* Biogen, Inc. 150,000 6,675
Bristol-Myers Squibb Co. 12,000 817
Cardinal Health, Inc. 149,800 7,078
Columbia/HCA Healthcare Corp. 114,900 4,969
* Coram Healthcare Corp. 106,400 1,503
* FHP International Corp. 341,300 7,850
* Forest Laboratories, Inc. 58,900 2,614
* FoxMeyer Health Corp. 72,400 1,294
Hafslund Nycomed ADR Class B 365,000 8,441
* HealthCare Compare Corp. 41,500 1,240
* Healthcare & Retirement Corp. 23,900 699
* Health Management
Associates Class A 78,500 2,296
* Hillhaven Corp. 113,300 3,201
* Horizon Healthcare Corp. 290,100 5,185
* Humana, Inc. 23,600 416
Integrated Health Services, Inc. 155,300 4,659
Johnson & Johnson 130,000 8,791
* Medaphis Corp. 21,300 453
Medtronic, Inc. 140,600 10,844
Mylan Laboratories, Inc. 18,900 581
* Perrigo Co. 93,100 1,012
Pfizer, Inc. 153,200 14,152
* Physician Corp. of America 197,100 2,661
Rh#ne-Poulenc Rorer, Inc. 114,100 4,664
Schering-Plough Corp. 83,000 3,662
United Healthcare Corp. 56,800 2,350
U.S. Healthcare, Inc. 15,600 478
* Wellcare Management Group, Inc. 175,450 4,299
Zeneca Group ADR 69,781 3,576
---------
GROUP TOTAL 125,745
---------
- ----------------------------------------------------------------------------------
TECHNOLOGY (28.2%)
* ALC Communications 15,400 695
* Adaptec, Inc. 150,800 5,542
Adobe Systems, Inc. 110,000 6,380
* Advanced Micro Devices, Inc. 146,600 5,333
Amdahl Corp. 16,000 178
* American Radio Systems Corp. 37,600 855
AMP, Inc. 40,000 1,690
* Analog Devices, Inc. 7,300 248
Apple Computer, Inc. 13,600 631
* Applied Materials, Inc. 148,300 12,791
* Ascend Communications, Inc. 100,000 5,050
* Atmel Corp. 12,100 670
Augat, Inc. 26,400 541
Avnet, Inc. 160,300 7,755
* BISYS Group, Inc. 188,850 4,155
* BMC Software, Inc. 99,300 7,621
* Banctec, Inc. 32,700 511
* Cabletron Systems, Inc. 72,100 3,839
* Cadence Design Systems, Inc. 22,000 712
* Cellular Communications Series A 11,900 536
* Cheyenne Software, Inc. 235,000 4,347
* Cidco, Inc. 98,600 3,094
* Cisco Systems, Inc. 375,000 18,937
* COMPAQ Computer Corp. 59,300 2,691
* Compression Labs, Inc. 322,100 3,100
Computer Associates
International, Inc. 52,600 3,564
* Computer Sciences Corp. 200,000 11,375
* Compuware Corp. 120,000 3,690
* Cypress Semiconductor Corp. 272,200 11,024
* DSC Communications Corp. 19,700 916
* Dell Computer 99,100 5,958
* Digital Equipment Corp. 21,700 884
* Dynatech Corp. 28,400 532
</TABLE>
9
<PAGE> 10
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------------------
<S> <C> <C>
* EMC Corp. 108,200 $ 2,624
L. M. Ericsson Telephone Co.
ADR Class B 140,000 2,800
* Esterline Technologies Corp. 28,200 638
* Exabyte Corp. 116,600 1,603
* FileNet Corp. 19,500 785
First Data Corp. 61,000 3,469
* Gateway 2000 Inc. 5,800 132
* Hadco Corp. 31,800 783
Hewlett-Packard Co. 386,600 28,802
* Informix Corp. 280,000 7,070
Intel Corp. 156,400 9,892
International Business
Machines Corp. 62,700 6,019
* International Cabletel, Inc. 135,000 4,320
* Komag, Inc. 15,800 822
* LSI Logic Corp. 220,800 8,639
Micron Technology Inc. 239,800 13,159
* Microsoft Corp. 110,000 9,941
* MobileMedia Corp. 158,600 3,251
Moore Corp. 44,800 991
Motorola, Inc. 174,600 11,720
* National Semiconductor Corp. 154,000 4,273
* Network Equipment Technologies 96,500 2,292
Nokia Corp. Pfd. ADR 220,000 13,118
* Novellus Systems, Inc. 3,800 256
* Parametric Technology Corp. 110,000 5,445
Philips Electronics NV 95,500 4,083
* Platinum Technology, Inc. 48,000 852
* Policy Management Systems Corp. 100,000 4,600
* Read-Right Corp. 48,000 1,278
Scientific-Atlanta, Inc. 78,800 1,734
* Seagate Technology 118,300 4,643
Sensormatic Electronics Corp. 179,700 6,379
* Shiva Corp. 30,000 1,283
* Silicon Graphics, Inc. 17,100 682
* Sterling Software, Inc. 51,600 1,987
* Sun Microsystems, Inc. 113,300 5,495
* Tandem Computers, Inc. 113,400 1,829
Texas Instruments, Inc. 63,400 8,488
* U.S. Robotics Corp. 70,000 7,595
* Uunet Technologies, Inc. 50,000 1,363
Varian Associates, Inc. 143,500 7,928
Vodafone Group PLC ADR 300,000 11,363
Wallace Computer Services, Inc. 16,300 626
* Western Digital Corp. 30,400 528
Xerox Corp. 5,700 668
----------
GROUP TOTAL 352,093
----------
- ----------------------------------------------------------------------------------
TRANSPORT & SERVICES (2.4%)
* AMR Corp. 19,800 1,478
Burlington Northern, Inc. 11,300 716
CSX Corp. 9,800 736
Canadian Pacific Ltd. 236,200 4,062
* Federal Express Corp. 62,500 3,797
Norfolk Southern Corp. 3,000 202
* Northwest Airlines Corp. Class A 157,800 5,543
Pittston Services Group 155,100 3,722
Ryder System, Inc. 83,100 1,984
* Swift Transportation Co., Inc. 120,500 2,018
* UAL Corp. 7,000 982
Werner Enterprises, Inc. 261,000 5,090
---------
GROUP TOTAL 30,330
---------
- ----------------------------------------------------------------------------------
UTILITIES (2.1%)
AT&T Corp. 13,900 738
Ameritech Corp. 18,000 792
BellSouth Corp. 8,000 508
Centerior Energy Corp. 43,600 420
Consolidated Edison Co.
of New York, Inc. 4,800 142
GTE Corp. 18,100 618
General Public Utilities Corp. 4,300 128
MCI Communications Corp. 509,300 11,141
Ohio Edison Co. 5,800 131
Pacific Gas & Electric Co. 20,500 595
Pacific Telesis Group 20,200 540
* Public Service Co. of New Mexico 65,300 931
SCEcorp 7,400 127
Southern New England
Telecom Corp. 10,300 363
Sprint Corp. 161,700 5,437
Telefonica de Espana ADR 68,500 2,654
Unicom Corp. 15,600 415
---------
GROUP TOTAL 25,680
---------
- ----------------------------------------------------------------------------------
MISCELLANEOUS (1.5%)
* ADT Ltd. 128,600 1,511
Allied-Signal, Inc. 13,400 596
American Financial Group, Inc. 96,800 2,517
* CDI Corp. 66,200 1,357
* GMIS, Inc. 35,000 796
Interpublic Group of Cos., Inc. 12,500 469
* Itel Corp. 60,800 2,371
Manpower Inc. 124,600 3,177
Olsten Corp. 68,800 2,253
PHH Corp. 52,100 2,318
* Robert Half International, Inc. 8,300 213
Service Corp. International 16,000 506
---------
GROUP TOTAL 18,084
---------
- ----------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $878,828) 1,167,692
- ----------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (7.5%)
- ----------------------------------------------------------------------------------
U.S. TREASURY BILL-Note E
5.68%, 9/21/95 $ 300 $ 296
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 6.13%, 7/3/95 93,555 93,555
- ----------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $93,851) 93,851
- ----------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.2%)
(Cost $972,679) 1,261,543
- ----------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.2%)
- ----------------------------------------------------------------------------------
Other Assets-Notes C and F 47,536
Liabilities-Note F (62,666)
---------
(15,130)
- ----------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------
Applicable to 91,310,844 outstanding
$.10 par value shares
(authorized 150,000,000 shares) $1,246,413
- ----------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $13.65
==================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
AT JUNE 30, 1995, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------
Amount Per
(000) Share
------------ -----
<S> <C> <C>
Paid in Capital $ 921,658 $10.10
Undistributed Net
Investment Income 6,561 .07
Accumulated Net Realized Gains 29,320 .32
Unrealized Appreciation of
Investments-Note E 288,874 3.16
- ----------------------------------------------------------------------------------
NET ASSETS $1,246,413 $13.65
- ----------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1995
(000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends.................................................. $ 7,126
Interest................................................... 2,125
- --------------------------------------------------------------------------------------------------
Total Income........................................ 9,251
- --------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees-Note B
Basic Fees.............................................. $1,108
Performance Adjustments................................. (351) 757
------
The Vanguard Group-Note C
Management and Administrative........................... 1,673
Marketing and Distribution.............................. 92 1,765
------
Taxes (other than income taxes)............................ 45
Custodian's Fees........................................... 42
Auditing Fees.............................................. 11
Shareholders' Reports...................................... 32
Annual Meeting and Proxy Costs............................. 9
Directors' Fees and Expenses............................... 3
- --------------------------------------------------------------------------------------------------
Total Expenses...................................... 2,664
- --------------------------------------------------------------------------------------------------
Net Investment Income............................ 6,587
- --------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold................................. 29,839
Futures Contracts.......................................... 64
- --------------------------------------------------------------------------------------------------
Realized Net Gain................................ 29,903
- --------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities...................................... 184,074
Futures Contracts.......................................... 13
- --------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation)................................. 184,087
- --------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations...................... $ 220,577
==================================================================================================
</TABLE>
12
<PAGE> 13
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
JUNE 30, 1995 December 31, 1994
(000) (000)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income........................................ $ 6,587 $ 12,724
Realized Net Gain............................................ 29,903 26,841
Change in Unrealized Appreciation
(Depreciation) ............................................ 184,087 (57,609)
- ----------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations............................. 220,577 (18,044)
- ----------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income........................................ - (12,947)
Realized Net Gain............................................ (7,453) (28,776)
- ----------------------------------------------------------------------------------------------------
Total Distributions..................................... (7,453) (41,723)
- ----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -Regular............................................ 43,784 96,403
-In Lieu of Cash Distributions...................... 6,392 36,605
-Exchange........................................... 17,669 30,934
-Exchange for Net Assets of Vanguard Specialized
Portfolios-Service Economy Portfolio-Note G....... - 29,513
Redeemed -Regular............................................ (65,918) (109,146)
-Exchange........................................... (43,441) (84,894)
- ----------------------------------------------------------------------------------------------------
Net Decrease from
Capital Share Transactions............................ (41,514) (585)
- ----------------------------------------------------------------------------------------------------
Total Increase (Decrease)............................... 171,610 (60,352)
- ----------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period.......................................... 1,074,803 1,135,155
- ----------------------------------------------------------------------------------------------------
End of Period (3)............................................ $1,246,413 $1,074,803
====================================================================================================
(1) Distributions Per Share
Net Investment Income................................. - $.14
Realized Net Gain..................................... $.08 $.31
- ----------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued................................................... 4,997 11,123
Issued in Lieu of Cash Distributions..................... 530 3,196
Issued in Exchange for Net Assets of Vanguard Specialized
Portfolios-Service Economy Portfolio-Note G............ - 2,556
Redeemed................................................. (8,824) (16,801)
- ----------------------------------------------------------------------------------------------------
(3,297) 74
- ----------------------------------------------------------------------------------------------------
(3) Undistributed (Overdistributed) Net Investment Income $ 6,561 $ (26)
- ----------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
SIX MONTHS ENDED -------------------------------------------
For a Share Outstanding Throughout Each Period JUNE 30, 1995 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ....... $11.36 $12.01 $12.65 $12.20 $10.40 $11.72
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.................... .07 .14 .18 .18 .29 .32
Net Realized and Unrealized Gain
(Loss) on Investments.................. 2.30 (.34) .71 .97 2.66 (.50)
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS ... 2.37 (.20) .89 1.15 2.95 (.18)
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income..... - (.14) (.18) (.18) (.29) (.34)
Distributions from Realized Capital Gains (.08) (.31) (1.35) (.52) (.86) (.80)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS ................ (.08) (.45) (1.53) (.70) (1.15) (1.14)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ............. $13.65 $11.36 $12.01 $12.65 $12.20 $10.40
=============================================================================================================
TOTAL RETURN ............................... +20.96% -1.67% +7.32% +9.54% +29.33% -1.51%
- -------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions)........ $1,246 $1,075 $1,135 $1,116 $957 $697
Ratio of Expenses to Average Net Assets..... .47%* .50% .49% .48% .46% .55%
Ratio of Net Investment Income
to Average Net Assets.................... 1.15%* 1.15% 1.36% 1.51% 2.36% 2.77%
Portfolio Turnover Rate..................... 72%* 84% 72% 64% 52% 73%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
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
require 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.
14
<PAGE> 15
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 six months ended June 30, 1995, the aggregate investment advisory fee
represented an effective annual base rate of .19 of 1% of average net assets,
before a decrease of $351,000 (an annual rate of .06 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 June 30, 1995, the Fund had contributed capital of $162,000 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.
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 six months ended June 30, 1995, directed
brokerage arrangements reduced the Fund's expenses by $99,000 (an annual rate
of .02 of 1% of average net assets).
D. During the six months ended June 30, 1995, the Fund made purchases of
$387,080,000 and sales of $440,802,000 of investment securities other than U.S.
Government securities and temporary cash investments.
E. At June 30, 1995, unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes aggregated $288,864,000, of
which $306,795,000 related to appreciated securities and $17,931,000 related to
depreciated securities. At June 30, 1995, the aggregate settlement value of
open Standard & Poor's 500 Index futures contracts expiring in September 1995,
the related unrealized appreciation, and the market value of securities
deposited as initial margin for those contracts were $1,368,000, $10,000, and
$296,000, respectively.
F. The market value of securities on loan to broker/dealers at June 30, 1995,
was $22,507,000 for which the Fund had received cash collateral of $23,185,000.
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.
15
<PAGE> 16
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 LifeStrategy Funds
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Portfolio
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
[VANGUARD GROUP LOGO]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1-(800) 662-7447 1-(800) 662-2739
This Report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus. All Funds in
the Vanguard Family are offered by prospectus only.
Q262-6/95
VANGUARD
MORGAN
GROWTH FUND
Semi-Annual Report
June 30, 1995
