<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-29601) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. /X/
POST-EFFECTIVE AMENDMENT NO. 47 /X/
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 49 /X/
VANGUARD/MORGAN GROWTH FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, MALVERN, PA 19355-0741
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
It is hereby requested that this amendment become effective on April 26, 1995,
pursuant to paragraph (b) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24F-2 NOTICE FOR THE PERIOD ENDED DECEMBER 31, 1994 ON FEBRUARY 15, 1995.
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<PAGE> 2
VANGUARD/MORGAN INCOME FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Highlights
Item 3. Condensed Financial Information............... Financial Highlights
Item 4. General Description of Registrant............. Investment Objective; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Fund........................ Management of the Fund; Investment
Adviser
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; The
Share Price of the Fund; Dividends,
Capital Gains, and Taxes; General
Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment Objective and Policies
Item 13. Investment Objective and Policies............. Investment Objective and Policies;
Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund
Item 16. Investment Advisory and Other Services........ Management of the Fund; Investment
Advisory Services
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ Financial Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3
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[VANGUARD
MORGAN GROWTH
FUND LOGO] A Member of The Vanguard Group
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PROSPECTUS--APRIL 26, 1995
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
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INVESTMENT
OBJECTIVE
AND POLICIES Vanguard/Morgan Growth Fund, Inc. (the "Fund") is an
open-end diversified investment company that seeks to
provide long-term growth of capital. The Fund invests
primarily in common stocks. Dividend income is incidental
to this objective. There is no assurance that the Fund
will achieve its stated objective. Shares of the Fund are
neither insured nor guaranteed by any agency of the U.S.
Government, including the FDIC.
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OPENING AN
ACCOUNT To open a regular (non-retirement) account, please
complete and return the Account Registration Form. If you
need assistance in completing this Form, please call our
Investor Information Department. To open an Individual
Retirement Account (IRA), please use a Vanguard IRA
Adoption Agreement. To obtain a copy of this form, call
1-800-662-7447, Monday through Friday, from 8:00 a.m. to
9:00 p.m. and Saturday, from 9:00 a.m. to 4:00 p.m.
(Eastern time). The minimum initial investment is $3,000
or $500 for Uniform Gifts/Transfers to Minors Act
accounts). The Fund is offered on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees). However,
the Fund incurs expenses for investment advisory,
management, administrative, and distribution services.
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ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Fund has been filed with
the Securities and Exchange Commission. This Statement is
dated April 26, 1995 and has been incorporated by
reference into this Prospectus. A copy may be obtained
without charge by writing to the Fund or by calling the
Investor Information Department.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Fund Expenses ......................2 Investment Limitations ............ 8 SHAREHOLDER GUIDE
Financial Highlights ...............2 Management of the Fund ........... 8 Opening an Account and
Yield and Total Return .............3 Investment Advisers ............... 9 Purchasing Shares ............... 16
FUND INFORMATION Performance Record ............... 12 When Your Account Will
Investment Objective .............. 4 Dividends, Capital Gains Be Credited ..................... 19
Investment Policies ................4 and Taxes ......................13 Selling Your Shares ............... 19
Investment Risks ...................5 The Share Price of the Exchanging Your Shares ............ 21
Who Should Invest ..................5 Fund .......................... 14 Important Information About
Implementation of Policies .........6 General Information .............. 15 Telephone Transactions .......... 23
Transferring
Registration ................... 23
Other Vanguard Services ........... 24
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE> 4
FUND EXPENSES The following table illustrates all expenses and fees that
you would incur as a shareholder of the Fund. The expenses
and fees set forth in the table are for the 1994 fiscal
year.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
-----------------------------------------------------------------------
Sales Load Imposed on Purchases................................ None
Sales Load Imposed on Reinvested Dividends..................... None
Redemption Fees................................................ None
Exchange Fees.................................................. None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
<S> <C> <C>
-----------------------------------------------------------------------
Management & Administrative Expenses........................... 0.32%
Investment Advisory Fees....................................... 0.14
12b-1 Fees..................................................... None
Other Expenses
Distribution Costs.................................... 0.02%
Miscellaneous Expenses................................ 0.02
-----
Total Other Expenses........................................... 0.04
-----
TOTAL OPERATING EXPENSES.............................. 0.50%
-----
-----
</TABLE>
The purpose of this table is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Fund.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period. As noted in the table above,
the Fund charges no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
<S> <C> <C> <C>
$5 $16 $28 $63
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
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FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each period, insofar as they relate to each of
the five years in the period ended December 31, 1994, have
been audited by Price Waterhouse LLP, independent
accountants, whose report thereon was unqualified. This
information should be read in conjunction with the Fund's
financial statements and notes thereto which are
incorporated by reference in the Statement of Additional
Information and in this Prospectus, and which appear,
along with the report of Price Waterhouse LLP, in the
Fund's 1994 Annual Report to the Shareholders. For a more
complete discussion of the Fund's performance, please see
the Fund's 1994 Annual Report to Shareholders which may be
obtained without charge by writing to the Fund or by
calling our Investor Information Department at
1-800-662-7447.
2
<PAGE> 5
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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NET ASSET VALUE, BEGINNING
OF
YEAR..................... $12.01 $12.65 $12.20 $10.40 $11.72 $10.27 $ 9.39 $11.50 $13.82 $11.45
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.... .14 .18 .18 .29 .32 .28 .25 .23 .21 .23
Net Realized and
Unrealized
Gain (Loss) on
Investments............ (.34) .71 .97 2.66 (.50) 2.04 1.85 .31 .78 2.99
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... (.20) .89 1.15 2.95 (.18) 2.32 2.10 .54 .99 3.22
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DISTRIBUTIONS
Dividends from Net
Investment Income...... (.14) (.18) (.18) (.29) (.34) (.28) (.24) (.20) (.43) (.25)
Distributions from
Realized Capital
Gains.................. (.31) (1.35) (.52) (.86) (.80) (.59) (.98) (2.45) (2.88) (.60)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS.... (.45) (1.53) (.70) (1.15) (1.14) (.87) (1.22) (2.65) (3.31) (.85)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR............... $11.36 $12.01 $12.65 $12.20 $10.40 $11.72 $10.27 $ 9.39 $11.50 $13.82
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN............... (1.67)% 7.32% 9.54% 29.33% (1.51)% 22.66% 22.34% 5.02% 7.83% 30.29%
- -----------------------------------------------------------------------------------------------------------------------------------
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RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)............... $1,075 $1,135 $1,116 $957 $697 $733 $622 $538 $594 $665
Ratio of Expenses to
Average
Net Assets............... .50% .49% .48% .46% .55% .51% .55% .46% .54% .60%
Ratio of Net Investment
Income to Average Net
Assets................... 1.15% 1.36% 1.51% 2.36% 2.77% 2.38% 2.20% 1.52% 1.49% 1.96%
Portfolio Turnover Rate.... 84% 72% 64% 52% 73% 27% 32% 43% 31% 42%
</TABLE>
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YIELD AND
TOTAL RETURN From time to time the Fund may advertise its yield and
total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of the
Fund refers to the average annual compounded rates of
return over one-, five- and ten-year periods or for the
life of the Fund (as stated in the advertisement) that
would equate an initial amount invested at the beginning
of a stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend and
capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of the Fund is calculated by dividing net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on the Fund's securities; it is net
of all expenses and all recurring and nonrecurring charges
that have been applied to all shareholder accounts. The
yield calculation assumes that net investment income
earned over 30 days is compounded monthly for six months
and then annualized. Methods used to calculate advertised
yields are standardized for all stock and bond mutual
funds. However, these methods differ from the accounting
methods used by the Fund to maintain its books and
records, and so the advertised 30-day yield may not fully
reflect the income paid to your own account.
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3
<PAGE> 6
INVESTMENT
OBJECTIVE The Fund is an open-end diversified investment company.
The objective of the Fund is to provide long-term growth
of capital by investing primarily in common stocks.
Dividend income is incidental to this objective. There is
no assurance that the Fund will achieve its stated
objective.
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INVESTMENT
POLICIES
THE FUND INVESTS
PRIMARILY IN
"GROWTH STOCKS" The Fund invests primarily in the equity securities of
growth companies. Under normal circumstances, at least 65%
of the Fund's assets will be invested in such securities.
The Fund is managed without regard to tax ramifications.
The Fund will generally invest in a diversified portfolio
of common stocks but may also, from time to time, hold
securities that are convertible into common stocks.
The Fund is expected to invest a majority of its assets in
"established growth companies" -- i.e., larger
capitalization firms that have generally exhibited above-
average rates of growth in sales and earnings over an
extended period. The Fund may also invest in "emerging
growth companies" -- expanding firms with generally
smaller stock market capitalizations. Finally, the Fund
may hold investments in "cyclical growth and other
companies." These are firms which, while they may not have
a history of stable long-term growth, are nonetheless
expected to represent attractive investments.
The Fund's assets are managed by three unaffiliated
investment advisers and by Vanguard's Core Management
Group. Each adviser independently chooses common stock
investments for the Fund. Wellington Management Company,
which is currently responsible for approximately 40% of
the Fund's investments, utilizes traditional methods of
security selection, including fundamental company research
and relative valuation techniques, in selecting growth
stocks for the Fund. Husic Capital Management, which
manages approximately 13% of the Fund, applies a "classic"
fundamental investment strategy, with an approach that
includes investment themes, candidate universes, and
event-driven hurdles as key elements. In contrast,
Franklin Portfolio Associates Trust ("FPA") and Vanguard's
Core Management Group, which are responsible for
approximately 33% and 10%, respectively, of the Fund's
investments are "quantitative" investment managers. They
utilize computerized techniques designed to track -- and,
if possible, outperform -- the returns of a specific
standard. For the Fund, the standard is the Growth Fund
Stock Index, a benchmark calculated by Morningstar. The
Index is a measure of the composite performance of the
common stock holdings of the 50 largest growth mutual
funds.
In addition to investing in common stocks, the Fund is
also authorized to invest in certain short-term fixed
income securities as cash reserves and to use stock index
futures and options to a limited extent. See
"Implementation of Policies" for a description of these
and other investment practices of the Fund.
The investment objective and policies of the Fund are not
fundamental and so may be changed by the Board of
Directors without shareholder approval. However,
shareholders would be notified prior to a material change
in either.
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4
<PAGE> 7
INVESTMENT
RISKS
THE FUND IS SUBJECT
TO STOCK MARKET RISK As a mutual fund investing primarily in common stocks, the
Fund is subject to market risk -- i.e., the possibility
that common stock prices will decline over short or even
extended periods. The U.S. stock market tends to be
cyclical, with periods when stock prices generally rise
and periods when prices generally decline.
To illustrate the volatility of stock prices, the
following table sets forth the extremes for stock market
returns as well as the average return for the period from
1926 to 1994, as measured by the Standard & Poor's 500
Composite Stock Price Index:
<TABLE>
<CAPTION>
U.S. STOCK MARKET RETURNS (1926-1994)
OVER VARIOUS TIME HORIZONS
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------- ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.2 +10.2 +10.7 +10.7
</TABLE>
As shown, common stocks have provided annual total returns
(capital appreciation plus dividend income) averaging
+10.7% for all 10-year periods from 1926 to 1994. Average
return may not be useful for forecasting future returns in
any particular period, as stock returns are quite volatile
from year to year.
The chart above should not be viewed as a representation
of future investment performance of the stock market or
the Fund. The illustrated returns represent historical
investment performance, which may be a poor guide to
future returns. Also, stock market indexes are based on
unmanaged portfolios of securities before transaction
costs and other expenses. Such costs reduce the relative
performance of the Fund and other "real world" portfolios.
Finally, given its emphasis on "growth stock" investments,
the Fund is likely to differ significantly in terms of
portfolio composition and investment performance from
broad market averages like the S&P 500.
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WHO SHOULD
INVEST
INVESTORS SEEKING
LONG-TERM GROWTH The Fund is designed for investors who have the
perspective, patience and financial ability to assume
above-average interim investment risk in pursuit of
long-term capital growth. Since the Fund will focus on
common stocks that offer below-average levels of current
income, greater-than-average investment risk -- for a
common stock fund -- is likely. The Fund's share price is
expected to be volatile.
No assurance can be given that the Fund will attain its
objective or that shareholders will be protected from the
risk of loss that is inherent in equity investing.
Investors may wish to reduce the potential risk of
investing in the Fund by purchasing shares on a periodic
basis (dollar-cost averaging) rather than making an
investment in one lump sum.
The Fund is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of
speculating on short-term market movements. Investors who
engage in excessive account activity generate additional
costs which are borne by all of the Fund's shareholders.
In order to minimize such costs the Fund has adopted the
following policies. The Fund reserves the right to reject
any
5
<PAGE> 8
purchase request (including exchange purchases from other
Vanguard portfolios) that is reasonably deemed to be
disruptive to efficient portfolio management, either
because of the timing of the investment or previous
excessive trading by the investor. Additionally, the Fund
has adopted exchange privilege limitations as described in
the section "Exchange Privilege Limitations." Finally, the
Fund reserves the right to suspend the offering of its
shares.
Investors should not consider the Fund a complete
investment program, but should also maintain holdings in
investments with different risk characteristics, such as
bonds and money market instruments. Investors may also
wish to complement an investment in the Fund with other
types of common stock investments.
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IMPLEMENTATION
OF POLICIES
A PORTION OF THE
FUND'S ASSETS ARE
MANAGED USING
QUANTITATIVE
TECHNIQUES The Fund follows a number of distinctive investment
practices in an effort to achieve its investment
objective.
Two of the Fund's investment advisers, Franklin Portfolio
Associates Trust ("FPA") and Vanguard's Core Management
Group, use quantitative investment techniques in managing
their respective portions of the Fund's common stock
investments. For the portfolio of securities they manage,
FPA and Vanguard's Core Management Group independently
seek to track and, if possible, outperform the investment
returns of the Growth Fund Stock Index.
The Growth Fund Stock Index (the "Index") represents the
composite common stock portfolio of the 50 largest growth
mutual funds, as calculated by Morningstar, Inc.
("Morningstar"), an independent company which provides
mutual fund statistics. The 50 mutual funds included in
that Index are determined annually (as of December 31) by
Morningstar. For the two quantitative investment managers
(FPA and Vanguard's Core Management Group), the Index is
an essential tool in developing portfolios that will be
designed to track and, hopefully, outperform the Index.
For Wellington Management Company, the composition of the
Index serves as a guideline for setting portfolio policy.
Additionally, for the Fund's unaffiliated investment
advisers, the Index is utilized as a benchmark for
determining incentive/penalty investment advisory fees.
See "Investment Advisers" and the Statement of Additional
Information for further information on the Index and its
use as a benchmark for incentive/penalty fees.
THE FUND MAY INVEST
IN SHORT-TERM FIXED
INCOME SECURITIES Although it normally seeks to remain substantially fully
invested in equity securities, the Fund may invest
temporarily in certain short-term fixed income securities.
Such securities may be used to invest uncommitted cash
balances, to maintain liquidity to meet shareholder
redemptions, or to take a temporarily defensive position
against potential stock market declines. These securities
include: obligations of the United States Government and
its agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and
repurchase agreements collateralized by these securities.
Approximately 5% of the Fund's net assets are expected to
be held as cash reserves, which will be managed by The
Vanguard Group, Inc. at no charge to the Fund.
6
<PAGE> 9
THE FUND MAY INVEST
IN SECURITIES OF
FOREIGN ISSUERS
The Fund may hold securities of foreign issuers, but all
such securities must be denominated in U.S. dollars.
Securities of foreign issuers may trade in U.S. or foreign
securities markets. Securities of foreign issuers may
involve investment risks that are different from those of
domestic issuers. Such risks include the effect of foreign
economic policies and conditions, future political and
economic developments, and the possible imposition of
exchange controls or other foreign governmental
restrictions on foreign debt issuers. There may also be
less publicly available information about a foreign issuer
than a domestic issuer of securities. Foreign issuers are
generally not subject to the uniform accounting, auditing
and financial reporting standards that apply to domestic
issuers. Also, foreign debt markets may be characterized
by lower liquidity, greater price volatility, and higher
transactions costs. Additionally, it may be difficult to
obtain or enforce a legal judgment in a foreign court.
THE FUND MAY USE
FUTURES CONTRACTS
AND OPTIONS The Fund may utilize stock futures contracts and options
to a limited extent. Specifically, the Fund may enter into
futures contracts provided that not more than 5% of its
assets are required as a futures contract deposit. In
addition, the Fund may enter into futures contracts and
options transactions only to the extent that obligations
under such contracts or transactions represent not more
than 20% of the Fund's assets.
FUTURES CONTRACTS AND
OPTIONS POSE CERTAIN
RISKS The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between the change in market value of the stocks held by
the Fund and the prices of futures contracts and options;
and (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing only
in those contracts whose behavior is expected to resemble
that of the Fund's underlying securities. The risk that
the Fund will be unable to close out a futures position
will be minimized by entering into such transactions on a
national exchange with an active and liquid secondary
market.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss (or gain) to the
investor. When investing in futures contracts, the Fund
will segregate cash or cash equivalents in the amount of
the underlying obligation.
Futures contracts and options may be used for several
reasons: to maintain cash reserves while simulating full
investment, to facilitate trading, to reduce transaction
costs, or to seek higher investment returns when a futures
contract is priced more attractively than the underlying
equity security or index. While futures contracts and
options can be used as leveraged investments, the Fund may
not use futures contracts or options transactions to
leverage its net assets.
THE FUND MAY LEND
ITS SECURITIES The Fund may lend its investment securities on a
short-term or long-term basis to qualified institutional
investors for the purpose of realizing additional income.
Loans of securities by the Fund will be collateralized by
cash, letters
7
<PAGE> 10
of credit, or securities issued or guaranteed by the U.S.
Government or its agencies. The collateral will equal at
least 100% of the current market value of the loaned
securities.
BORROWING The Fund may borrow money, subject to the limits set forth
in the section "Investment Limitations," for temporary or
emergency purposes, including the meeting of redemption
requests which might otherwise require the untimely
disposition of securities.
PORTFOLIO TURNOVER IS
NOT EXPECTED TO
EXCEED 100% Although it generally seeks to invest for the long term,
the Fund retains the right to sell securities irrespective
of how long they have been held. It is anticipated that
the annual portfolio turnover of the Fund will not exceed
100%. A turnover rate of 100% would occur, for example, if
all of the securities of the Fund were replaced within one
year.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS The Fund has adopted certain limitations on its investment
practices. Specifically, the Fund will not:
(a) with respect to 75% of the value of its total assets,
invest more than 5% of its assets in the securities
of any single company;
(b) with respect to 75% of the value of its total assets,
purchase more than 10% of the voting securities of
any issuer;
(c) invest more than 25% of its assets in any one
industry; and
(d) borrow money, except from banks (or through
repurchase agreements) for temporary or emergency
(not leveraging) purposes, and then not in an amount
exceeding 10% of the value of the Fund's net assets
at the time the borrowing is made. Whenever borrowing
exceeds 5% of the value of the Fund's net assets, the
Fund will not make any additional investments.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information may be changed only with the approval of a
majority of the Fund's shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT
OF THE FUND
VANGUARD ADMINISTERS
AND DISTRIBUTES THE
FUND The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 80 distinct mutual fund portfolios and
total assets in excess of $130 billion. Through their
jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other funds in the Group
obtain at cost virtually all of their corporate
management, administrative and distribution services.
Vanguard also provides investment advisory services on an
at-cost basis to certain Vanguard funds. As a result of
Vanguard's unique corporate structure, the Vanguard funds
have costs substantially lower than those of most
competing mutual funds. In 1994, the average expense ratio
(annual costs including advisory fees divided by total net
assets) for the Vanguard funds amounted to approximately
.30% compared to an average of 1.05% for the mutual fund
industry (data provided by Lipper Analytical Services).
8
<PAGE> 11
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's net expenses, which are
allocated among the funds under methods approved by the
Board of Directors (Trustees) of each fund. In addition,
each fund bears its own direct expenses, such as legal,
auditing and custodian fees.
Vanguard provides distribution and marketing services to
the funds. The funds are available on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its share of the Group's
distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISERS
THE FUND'S
ASSETS ARE
MANAGED BY
FOUR ADVISERS The Fund currently has four investment advisers:
Wellington Management Company ("WMC"), 75 State Street,
Boston, MA 02109; Franklin Portfolio Associates Trust
("FPA"), One Post Office Square 3660, Boston, MA 02109;
Husic Capital Management ("Husic"), 555 California Street,
Suite 2900, San Francisco, California 94104, and
Vanguard's Core Management Group. Prior to April 24, 1990,
WMC was the sole investment adviser to the Fund (then
known as W.L. Morgan Growth Fund). FPA was added as an
adviser in 1990, while Husic and Core Management were
added in 1993.
The proportion of the net assets of the Fund managed by
each adviser is established by the Board of Directors, and
may be changed in the future as circumstances warrant.
Presently, WMC is responsible for approximately 40% of the
Fund's investments; FPA, Husic and Vanguard's Core
Management Group are responsible for approximately 33%,
13% and 10%, respectively. (The cash portion of the Fund's
net assets is managed by The Vanguard Group, Inc. at no
charge to the Fund.)
The Fund has entered into investment advisory agreements
with WMC, FPA, and Husic which provide that the advisers
manage the investment and reinvestment of the Fund's
assets and continuously review, supervise and administer
the Fund's investment program. The advisers discharge
their responsibilities subject to the control of the
Officers and Directors of the Fund.
. . .WELLINGTON
MANAGEMENT
COMPANY (WMC) WMC is a professional investment advisory firm which
globally provides services to investment companies,
institutions, and individuals. Among the clients of WMC
are more than 10 of the investment companies of The
Vanguard Group. As of December 31, 1994, WMC held
discretionary management authority with respect to more
than $80 billion of assets. WMC and its predecessor
organizations have provided advisory services to
investment companies since 1933 and to investment
counseling clients since 1960.
9
<PAGE> 12
Robert D. Rands, Senior Vice President of WMC, serves as
portfolio manager of the assets of the Fund assigned to
WMC. Mr. Rands has been employed by WMC for 16 years and
has served as portfolio manager for the Fund since
February of 1994. In managing the assets of the Fund
assigned to WMC Mr. Rands is supported by research and
other investment services provided by the professional
staff of WMC.
The Fund pays WMC a basic advisory fee calculated by
applying varying percentage rates to the average net
assets of the Fund managed by WMC. The basic fee schedule
is as follows:
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------ -------
<S> <C>
First $50 million 0.325%
Next $100 million 0.225%
Over $150 million 0.150%
</TABLE>
This basic advisory fee may be increased or decreased by
applying an adjustment formula ("incentive/penalty fee")
based on WMC's investment performance relative to the
investment record of Growth Fund Stock Index. Under the
incentive/penalty fee schedule, the basic fee payable to
WMC may be increased or decreased by as much as .075%
depending on the investment performance of the equity
investments managed by WMC.
To assess the performance of its advisers relative to
comparable "growth stock" investments, the Fund has
adopted as a benchmark for incentive/penalty fees the
Growth Fund Stock Index, an index of the equity holdings
of the 50 largest growth stock mutual funds.
. . .FRANKLIN PORTFOLIO
ASSOCIATES (FPA) FPA is a professional investment advisory firm which
specializes in the management of common stock portfolios
through the use of quantitative investment models. Founded
in 1982, FPA, a Massachusetts business trust, is a
wholly-owned subsidiary of Mellon Financial Services
Corporation #1, which itself is a wholly-owned subsidiary
of Mellon Bank Corporation. As of December 31, 1994, FPA
provided investment advisory services with respect to
approximately $6.64 billion of client assets, including
$5.9 million in assets for Vanguard Quantitative
Portfolios, Inc., another mutual fund member of The
Vanguard Group.
FPA employs proprietary computer models in selecting
individual equity securities and in structuring investment
portfolios for its clients, including the Fund. John J.
Nagorniak, President of FPA, has been designated as the
portfolio manager of the assets of the Fund assigned to
FPA; he is responsible for overseeing the application of
FPA's quantitative techniques to those assets. Mr.
Nagorniak and the other investment principals of FPA are
responsible for the ongoing development and enhancement of
FPA's quantitative investment techniques.
10
<PAGE> 13
The Fund pays FPA a basic advisory fee calculated by
applying varying percentage rates to the average net
assets of the Fund managed by FPA. The basic fee schedule
is as follows:
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------ ------
<S> <C>
First $100 million 0.25%
Next $200 million 0.20%
Over $300 million 0.15%
</TABLE>
This basic advisory fee may be increased or decreased by
applying an incentive/ penalty fee based on FPA's
investment performance relative to the investment record
of the Growth Fund Stock Index. Under the
incentive/penalty fee schedule, the basic fee payable to
FPA may be increased or decreased by as much as .10%
depending on the investment performance of the equity
investments managed by FPA.
. . .AND HUSIC CAPITAL
MANAGEMENT (HUSIC) Vanguard/Morgan Growth Fund also employs Husic Capital
Management ("Husic"), 555 California Street, Suite 2900,
San Francisco, California 94104 as an investment adviser
for approximately 13% of its investments.
For the services provided by Husic under the investment
advisory agreement the Fund will pay Husic a basic fee at
the end of each fiscal quarter, calculated by applying a
quarterly rate, based on the following annual percentage
rates, to the average month-end net assets of the Husic
Portfolio for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------ ------
<S> <C>
First $25 million 0.40%
Next $125 million 0.35%
Next $350 million 0.25%
Next $500 million 0.20%
Over $1 billion 0.15%
</TABLE>
Effective with the quarter ending September 30, 1994, the
basic fee paid to Husic, as provided above, may be
increased or decreased by applying an incentive/penalty
fee based on the investment performance of the Husic
Portfolio relative to the investment record of the Growth
Fund Stock Index. Under the incentive/penalty fee
schedule, the basic fee payable to Husic may be increased
or decreased by as much as 75% of the basic fee depending
on the investment performance of the equity investment
managed by Husic.
Under rules of the Securities and Exchange Commission, the
incentive/penalty fee structure will not be fully operable
until the quarter ending September 30, 1996, and, until
that date, will be calculated according to certain
transition rules. See the Statement of Additional
Information for a detailed description of the incentive/
penalty fee schedule for Husic and the applicable
transition rules.
For the fiscal year ended December 31, 1994, the aggregate
investment advisory fees paid by Vanguard/Morgan Growth
Fund represented an effective annual rate of .19 of 1% of
average net assets, before a net decrease of .05 of 1%
based on
11
<PAGE> 14
performance. The investment advisory fees paid by the Fund
for this period to WMC, FPA and Husic represented an
effective annual rate of .12, .19 and .23 of 1%,
respectively, of the average net assets managed by WMC,
FPA and Husic.
VANGUARD MANAGES
A PORTION OF THE
FUND'S ASSETS ON
AN AT-COST BASIS Vanguard's Core Management Group provides investment
advisory services on an at-cost basis with respect to a
portion of the Fund's assets (currently approximately
10%). The Core Management Group also provides investment
advisory services to several Vanguard Funds and to several
indexed separate accounts. Total assets under management
by the Core Management Group were approximately $18
billion as of December 31, 1994. The portion of the Fund
allocated to the Core Management Group is managed using
computerized, quantitative techniques based on a value
index constructed to approximate the aggregate fundamental
characteristics of a typical broadly diversified growth
fund such as Vanguard/Morgan Growth Fund. For further
information concerning the index, please refer to the
Statement of Additional Information. The Core Management
Group is supervised by the Officers of the Fund.
WMC, FPA, Husic and Vanguard's Core Management Group are
authorized to select brokers or dealers to execute the
purchase and sale of the Fund's portfolio securities, and
direct the advisers to use their best efforts to obtain
the best available price and most favorable execution with
respect to all transactions. The full range and quality of
brokerage services available are considered in making
their determinations.
The Fund has authorized WMC, FPA, Husic and Vanguard's
Core Management Group to pay higher commissions in
recognition of brokerage services felt necessary for the
achievement of better execution, provided the advisers
believe this to be in the best interests of the Fund.
Although the Fund does not market its shares through
intermediary brokers or dealers, the Fund's advisers may
place orders with qualified broker-dealers who recommend
the Fund to clients if the Officers of the Fund believe
that the quality of the transaction and the commission are
comparable to what they would be with other qualified
brokerage firms.
The Fund's Board of Directors may, without the approval of
shareholders, provide for: (a) the employment of a new
investment adviser pursuant to the terms of a new advisory
agreement either as a replacement for an existing adviser
or as an additional adviser; (b) a change in the terms of
an advisory agreement; and (c) the continued employment of
an existing adviser on the same advisory contract terms
where a contract has been assigned because of a change in
control of the adviser. Any such change will only be made
upon not less than 30 days' prior written notice to
shareholders of the Fund which shall include substantially
the information concerning the adviser that would have
normally been included in a proxy statement.
- --------------------------------------------------------------------------------
PERFORMANCE
RECORD The table on page 13 provides investment results for the
Fund for several periods throughout the Fund's lifetime.
The results shown represent "total return" investment
performance, which assumes the reinvestment of all capital
gains and income dividends for the indicated periods. Also
included is comparative information with respect to the
unmanaged Standard & Poor's 500 Composite Stock Price
12
<PAGE> 15
Index, a widely-used barometer of stock market activity,
and the Consumer Price Index, a statistical measure of
changes in the prices of goods and services. The table
does not make any allowance for federal, state or local
income taxes, which shareholders must pay on a current
basis.
The results should not be considered a representation of
the total return from an investment made in the Fund
today. This information is provided to help investors
better understand the Fund and may not provide a basis for
comparison with other investments or mutual funds which
use a different method to calculate performance.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURN FOR
VANGUARD/MORGAN GROWTH FUND
-------------------------------------------
FISCAL PERIODS VANGUARD/MORGAN S&P 500 CONSUMER
ENDED 12/31/94 GROWTH FUND INDEX PRICE INDEX
-------------- --------------- ------- -----------
<S> <C> <C> <C>
1 Year - 1.7% + 1.3% +2.7%
5 Years + 8.0 + 8.7 +3.5
10 Years +12.5 +14.3 +3.6
Lifetime* +10.7 +10.1 +5.7
* December 31, 1968 to December 31, 1994.
</TABLE>
- --------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
THE FUND PAYS
DIVIDENDS AND ANY
CAPITAL GAINS
ANNUALLY The Fund expects to pay dividends annually from ordinary
income. Net capital gains distributions, if any, will also
be made annually. The Fund is managed without regard to
tax ramifications.
Dividend and capital gains distributions may be
automatically reinvested or received in cash. See
"Choosing a Distribution Option" for a description of
these distribution methods.
In order to satisfy certain requirements of the Tax Reform
Act of 1986, the Fund may declare special year-end
dividend and capital gains distributions during December.
Such distributions, if received by shareholders by January
31, are deemed to have been paid by the Fund and received
by shareholders on December 31 of the prior year.
The Fund intends to continue to qualify for taxation as a
"regulated investment company" under the Internal Revenue
Code so that it will not be subject to federal income tax
to the extent its income is distributed to shareholders.
Dividends paid by the Fund from net investment income and
net short-term capital gains, whether received in cash or
reinvested in additional shares, will be taxable to
shareholders as ordinary income. For corporate investors,
dividends from net investment income will generally
qualify in part for the intercorporate dividends-received
deduction. However, the portion of the dividends so
qualified depends on the aggregate taxable qualifying
dividend income received by the Fund from domestic (U.S.)
sources.
Distributions paid by the Fund from long-term capital
gains, whether received in cash or reinvested in
additional shares, are taxable as long-term capital gains,
regardless of the length of time you have owned shares in
the Fund. Capital gains distributions are made when the
Fund realizes net capital gains on sales of portfolio
13
<PAGE> 16
securities during the year. The Fund does not seek to
realize any particular amount of capital gains during a
year; rather, realized gains are a by-product of portfolio
management activities. Consequently, capital gains
distributions may be expected to vary considerably from
year to year. There will be no capital gains distributions
in years when the Fund realizes net capital losses.
Note that if you accept capital gains distributions in
cash, instead of reinvesting them in additional shares,
you are in effect reducing the capital at work for you in
the Fund. Also, keep in mind that if you purchase shares
in the Fund shortly before the record date for a dividend
or capital gains distribution, a portion of your
investment will be returned to you as a taxable
distribution, regardless of whether you are reinvesting
your distributions or receiving them in cash.
The Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by the Fund.
A CAPITAL GAIN OR
LOSS MAY BE REALIZED
UPON EXCHANGE OR
REDEMPTION A sale of shares of the Fund is a taxable event, and may
result in a capital gain or loss. A capital gain or loss
may be realized from an ordinary redemption of shares or
an exchange of shares between two mutual funds (or two
portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.
The Fund is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer
identification regulations. You may avoid this withholding
requirement by certifying on your Account Registration
Form your proper Social Security or Employer
Identification number and by certifying that you are not
subject to backup withholding.
The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and does
business and maintains an office in that state. In the
opinion of counsel, the shares of the Fund are exempt from
Pennsylvania personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of
an investment in the Fund.
- --------------------------------------------------------------------------------
THE SHARE PRICE
OF THE FUND The Fund's share price or "net asset value" per share is
determined by dividing the total market value of the
Fund's investments and other assets, less any liabilities,
by the number of outstanding shares of the Fund. Net asset
value per share is determined once daily at the close of
regular trading on the New York Stock Exchange (generally
4:00 p.m. Eastern time) on each day that the Exchange is
open for business. Portfolio securities that are listed on
a securities exchange are valued at the last quoted sales
price on the day the valuation is made. Price information
on listed securities is taken from the exchange where the
security is primarily traded. Securities which are listed
on an exchange and which are not traded on the valuation
14
<PAGE> 17
date are valued at the mean between the latest quoted bid
and ask prices. Unlisted securities for which market
quotations are readily available are valued at the latest
quoted bid price. Other assets and securities for which no
quotations are readily available are valued at fair value
as determined in good faith by the Directors. Securities
may be valued on the basis of prices provided by a pricing
service when such prices are believed to reflect the fair
market value of such securities.
The Fund's share price can be found daily in the mutual
fund listings of most major newspapers under the heading
of The Vanguard Group.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION The Fund is a Maryland corporation. The Articles of
Incorporation permit the Directors to issue 150,000,000
shares of common stock, with a $.10 par value. The Board
of Directors has the power to designate one or more
classes ("series") of shares of common stock and to
classify or reclassify any unissued shares with respect to
such series. Currently the Fund is offering one class of
shares.
The shares of the Fund are fully paid and non-assessable;
have no preference as to conversion, exchange, dividends,
retirement or other features; and have no pre-emptive
rights. Such shares have non-cumulative voting rights,
meaning that the holders of more than 50% of the shares
voting for the election of Directors can elect 100% of the
Directors if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
All securities and cash are held by State Street Bank and
Trust Company, Boston, MA. The Vanguard Group, Inc.,
Valley Forge, PA, serves as the Fund's Transfer and
Dividend Disbursing Agent. Price Waterhouse LLP serves as
independent accountants for the Fund and will audit its
financial statements annually. The Fund is not involved in
any litigation.
- --------------------------------------------------------------------------------
15
<PAGE> 18
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either by
mail or wire. Simply complete and return an Account
Registration Form and any required legal documentation,
indicating the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum
initial investment requirement ($500 for Uniform
Gifts/Transfers to Minors Act accounts). You must open a
new Individual Retirement Account by mail (IRAs may not be
opened by wire) using a Vanguard IRA Adoption Agreement.
Your purchase must be equal to or greater than the $500
minimum initial investment requirement, but no more than
$2,000 if you are making a regular IRA contribution.
Rollover contributions are generally limited to the amount
withdrawn within the past 60 days from an IRA or other
qualified Retirement Plan. If you need assistance with the
forms or have any questions about the Fund, please call
our Investor Information Department (1-800-662-7447).
Note: For other types of account registrations (e.g.,
corporations, associations, other organizations, trusts or
powers of attorney), please call us to determine which
additional forms you may need.
Because of the risks associated with common stock
investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term market
movements. Consequently, the Fund reserves the right to
reject any specific purchase (and exchange purchase)
request. The Fund also reserves the right to suspend the
offering of shares for a period of time.
The Fund's shares are purchased at the next-determined net
asset value after your investment has been received. The
Fund is offered on a no-load basis (i.e., there are no
sales commissions or 12b-1 fees).
ADDITIONAL
INVESTMENTS Subsequent investments to regular accounts may be made by
mail ($100 minimum), wire ($1,000 minimum), exchange from
another Vanguard Fund account ($100 minimum), or Vanguard
Fund Express. Subsequent investments to Individual
Retirement Accounts may be made by mail ($100 minimum) or
exchange from another Vanguard Fund account. In some
instances, contributions may be made by wire or Vanguard
Fund Express. Please call us for more information on these
options.
- --------------------------------------------------------------------------------
16
<PAGE> 19
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
PURCHASING BY MAIL NEW ACCOUNT TO EXISTING ACCOUNTS
Complete and sign the Please include the amount of Additional investments should
enclosed Account your initial investment on the include the Invest-by-Mail
Registration Form registration form, make your remittance form attached to your
check payable to The Vanguard Fund confirmation statements.
Group-26, and mail to: Please make your check payable
to The Vanguard Group-26, write
VANGUARD FINANCIAL CENTER your account number on your
P.O. BOX 2600 check, and, using the return
VALLEY FORGE, PA 19482 envelope provided, mail to the
address indicated on the
Invest-by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
--------------------------------------------------------------------------
</TABLE>
PURCHASING BY WIRE
Money should be
wired to:
BEFORE WIRING
Please contact
Client Services
(1-800-662-2739) CORESTATES BANK, N.A.
ABA 031000011
CORESTATES NO. 0101 9897
ATTN VANGUARD
VANGUARD/MORGAN GROWTH FUND
ACCOUNT NUMBER
ACCOUNT REGISTRATION
To assure proper receipt, please be sure your bank
includes the name of the Fund, the account number Vanguard
has assigned to you and the eight digit CoreStates number.
If you are opening a new account, please complete the
Account Registration Form and mail it to the "New Account"
address above after completing your wire arrangement.
Note: Federal Funds wire purchase orders will be accepted
only when the Fund and Custodian Bank are open for
business.
- --------------------------------------------------------------------------------
PURCHASING BY
EXCHANGE (from a
Vanguard account) You may open an account or purchase additional shares by
making an exchange from another Vanguard Fund account.
However, the Fund reserves the right to refuse any
exchange purchase request. Call our Client Services
Department (1-800-662-2739) for assistance. The new
account will have the same registration as the existing
account.
- --------------------------------------------------------------------------------
PURCHASING BY
FUND EXPRESS
Special Purchase and
Automatic Investment The Fund Express Special Purchase option lets you move
money from your bank account to your Vanguard account on
an "as needed" basis. Or if you choose the Automatic
Investment option, money will be moved automatically from
your bank account to your Vanguard account on the schedule
(monthly, bimonthly [every other month], quarterly or
yearly) you select. To establish these Fund Express
options, please provide the appropriate information on the
Account Registration
17
<PAGE> 20
Form. We will send you a confirmation of your Fund Express
enrollment; please wait three weeks before using the
service.
- --------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional Fund shares. This option will be selected
for you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid in
cash and your capital gains will be reinvested in
additional Fund shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client Services
Department (1-800-662-2739) for information. You may also
elect Vanguard Dividend Express which allows you to
transfer your cash dividends and/or capital gains
distributions automatically to your bank account. Please
see "Other Vanguard Services" for more information.
- --------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING
OF CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING Under Federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund
shareholders. These distributions are made to all
shareholders who own Fund shares as of the distribution's
record date, regardless of how long the shares have been
owned. Purchasing shares just prior to the record date
could have a significant impact on your tax liability for
the year. For example, if you purchase shares immediately
prior to the record date of a sizable capital gain or
income dividend distribution, you will be assessed taxes
on the amount of the capital gain and/or dividend
distribution later paid even though you owned the Fund
shares for just a short period of time. (Taxes are due on
the distributions even if the dividend or gain is
reinvested in additional Fund shares.) While the total
value of your investment will be the same after the
distribution -- the amount of the distribution will offset
the drop in the net asset value of the shares -- you
should be aware of the tax implications the timing of your
purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The Fund's
annual dividend and capital gains distributions normally
occur in December. For additional information on
distributions and taxes, see the section titled
"Dividends, Capital Gains, and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ESTABLISHING OPTIONAL
SERVICES The easiest way to establish optional Vanguard services on
your account is to select the options you desire when you
complete your Account Registration Form. If you wish to
add options later, you may need to provide Vanguard with
additional information and a signature guarantee. Please
call our Client Services Department (1-800-662-2739) for
further assistance.
18
<PAGE> 21
SIGNATURE GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and any
other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will be issued upon request. If a
certificate is lost, you may incur an expense to replace
it.
BROKER-DEALER
PURCHASES If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING TRADES The Fund will not cancel any trade (e.g., a purchase,
exchange or redemption) believed to be authentic, received
in writing or by telephone, once the trade request has
been received.
ELECTRONIC
PROSPECTUS
DELIVERY If you would prefer to receive a prospectus for the Fund
or any of the Vanguard Funds in an electronic format,
please call 1-800-231-7870 for additional information. If
you elect to do so, you may also receive a paper copy of
the prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL
BE CREDITED Your trade date is the date on which your account is
credited. If your purchase is made by check, Federal Funds
wire or exchange, and is received by the close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time),
your trade date is the day of receipt. If your purchase is
received after the close of the Exchange, your trade date
is the next business day. Your shares are purchased at the
net asset value determined on your trade date. Vanguard
will not accept third-party checks to open an account.
Please be sure your purchase check is made payable to the
Vanguard Group.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only accept
a foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S.
correspondent bank. The name of the U.S. correspondent
bank must be printed on the face of the foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your account
by redeeming shares at any time. You may initiate a
request by writing or by telephoning. Your redemption
proceeds are normally mailed within two business days
after the receipt of the request in Good Order.
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD/MORGAN GROWTH FUND, P.O. BOX 1120, VALLEY FORGE,
PA 19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard/Morgan
Growth Fund, 455 Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Fund's net
asset value next determined after Vanguard has received
all required documents in Good Order.
- --------------------------------------------------------------------------------
19
<PAGE> 22
DEFINITION OF
GOOD ORDER GOOD ORDER means that the request includes the following:
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or
shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required in the case of estates, corporations, trusts,
and certain other accounts.
6. Any certificates that you are holding for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS
TO YOUR ACCOUNT, PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT (1-800-662-2739).
- --------------------------------------------------------------------------------
SELLING BY
TELEPHONE To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at
1-800-662-2739. The proceeds will be sent to you by mail.
Please see "Important Information About Telephone
Transactions."
- --------------------------------------------------------------------------------
SELLING BY FUND
EXPRESS
Automatic Withdrawal
& Special Redemption If you select the Fund Express Automatic Withdrawal
option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
the schedule you have selected. The Special Redemption
option lets you move money from your Vanguard account to
your bank account on an "as needed" basis. To establish
these Fund Express options, please provide the appropriate
information on the Account Registration Form. We will send
you a confirmation of your Fund Express service; please
wait three weeks before using the service.
- --------------------------------------------------------------------------------
SELLING BY
EXCHANGE You may sell shares by making an exchange into another
Vanguard Fund account. Please see "Exchanging Your Shares"
for details.
- --------------------------------------------------------------------------------
IMPORTANT REDEMPTION
INFORMATION Shares purchased by check may be redeemed at any time.
However, your redemption proceeds will not be paid until
payment for the purchase is collected, which may take up
to ten calendar days.
- --------------------------------------------------------------------------------
DELIVERY OF
REDEMPTION
PROCEEDS Redemption requests received by telephone prior to the
close of the New York Stock Exchange (generally 4:00 p.m.
Eastern time) are processed on the day of receipt and the
redemption proceeds are normally sent on the following
business day.
Redemption requests received by telephone after the close
of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
Redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order.
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset
value next determined after your request has been received
by Vanguard in Good Order. The Fund reserves the right to
revise or terminate the telephone redemption privilege at
any time.
20
<PAGE> 23
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as determined
by the United States Securities and Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay
redemption proceeds in whole or in part by a distribution
in kind of readily marketable securities.
- --------------------------------------------------------------------------------
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Other Vanguard Services" for
additional information.
- --------------------------------------------------------------------------------
MINIMUM ACCOUNT
BALANCE
REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, the Fund reserves the right to redeem shares in
any account that is below the minimum initial investment
amount of $3,000. If at any time your total investment
does not have a value of at least $3,000, you may be
notified that your account is below the Fund's minimum
account balance requirement. You would then be allowed 60
days to make an additional investment before the account
is liquidated. Proceeds would be promptly paid to the
registered shareholder. (This minimum does not apply to
IRAs, other retirement accounts, and Uniform
Gifts/Transfers to Minors Act accounts.)
The Fund's minimum account balance requirement will not
apply if your account falls below $3,000 solely at a
result of declining markets (i.e., a decline in a Fund's
net asset value).
- --------------------------------------------------------------------------------
EXCHANGING YOUR
SHARES Should your investment goals change, you may exchange your
shares of Vanguard/ Morgan Growth Fund for those of other
available Vanguard Funds.
EXCHANGING BY
TELEPHONE
Call Client Services
(1-800-662-2739) When exchanging shares by telephone, please have ready the
Fund name, account number, Social Security Number or
Employer Identification number listed on the account, and
exact name and address in which the account is registered.
Only the registered shareholder may complete such an
exchange. Requests for telephone exchanges received prior
to the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) are processed at the
close of business that same day. Requests received after
the close of the Exchange are processed the next business
day. TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO OR FROM
VANGUARD BALANCED INDEX FUND, VANGUARD INDEX TRUST,
VANGUARD INTERNATIONAL EQUITY INDEX FUND, AND VANGUARD
QUANTITATIVE PORTFOLIOS. If you experience difficulty in
making a telephone exchange, your exchange request may be
made by regular or express mail, and it will be
implemented at the closing net asset value on the date
received by Vanguard, provided the request is received in
Good Order.
- --------------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Fund, the name of
the Fund you wish to exchange into, the amount you wish to
exchange, and the signatures of all registered account
holders. Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD/MORGAN GROWTH FUND, P.O. BOX 1120, VALLEY FORGE,
PA 19482. (For express or registered mail, send your
request to
21
<PAGE> 24
Vanguard Financial Center, Vanguard/Morgan Growth Fund,
455 Devon Park Drive, Wayne, PA 19087.)
- --------------------------------------------------------------------------------
IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions
you may have, call our Investor Information Department
(1-800-662-7447).
- An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on
the transaction.
- Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
- The shares to be exchanged must be on deposit and not
held in certificate form.
- New accounts are not currently accepted in
Vanguard/Windsor Fund or Vanguard/ PRIMECAP Fund.
- The redemption price of shares redeemed by exchange is
the net asset value next determined after Vanguard has
received all required documentation in Good Order.
- When opening a new account by exchange, you must meet
the minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to revise
or terminate its provisions, limit the amount of or reject
any exchange, as deemed necessary, at any time.
The exchange privilege is only available in states in
which the shares of the Fund are registered for sale. The
Fund's shares are currently registered for sale in all 50
states and the Fund intends to maintain such registration.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive
exchange activity.
Exchange activity generally will not be deemed excessive
if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from the Fund during any twelve month
period. Notwithstanding these limitations, the Fund
reserves the right to reject any purchase request
(including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management.
- --------------------------------------------------------------------------------
22
<PAGE> 25
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges by telephone is automatically
established on your account unless you request in writing
that telephone transactions on your account not be
permitted.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio; (ii)
the 10-digit account number; (iii) the exact name and
address used in the registration; and (iv) the Social
Security or Employer Identification number listed on the
account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the registered
shareowner and mailed to the address of record, only.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund
shares to another person by completing a transfer form and
sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110,
VALLEY FORGE, PA 19482, ATTENTION: TRANSFER DEPARTMENT.
The request must be in Good Order. To obtain a transfer
form and complete instructions, please call our Client
Services Department (1-800-662-2739).
- --------------------------------------------------------------------------------
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each time
you initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market
accounts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account using
the average cost single category method. This service is
available for most taxable accounts opened since January
1, 1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their
Average Cost Statement in February of the following year.
Please call our Client Services Department
(1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
23
<PAGE> 26
OTHER VANGUARD
SERVICES For more information about any of these services, please
call our Investor Information Department at
1-800-662-7447.
VANGUARD DIRECT
DEPOSIT SERVICE With Vanguard's Direct Deposit Service, most U.S.
Government checks (including Social Security and military
pension checks) and private payroll checks may be
automatically deposited into your Vanguard Fund account.
Separate brochures and forms are available for direct
deposit of U.S. Government and private payroll checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or
to contribute to an IRA or other retirement plan. Please
contact our Client Services Department at 1-800-662-2739
for additional information.
VANGUARD FUND
EXPRESS Vanguard's Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is a
member of the Automated Clearing House (ACH) system. You
may elect this service on the Account Registration Form or
call our Investor Information Department (1-800-662-7447)
for a Fund Express application.
The minimum amount that can be transferred by telephone is
$100. However, if you have established one of the
automatic options, the minimum amount is $50. The maximum
amount that can be transferred using any of the options is
$100,000.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
VANGUARD DIVIDEND
EXPRESS Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.
VANGUARD
TELE-ACCOUNT Vanguard's Tele-Account is a convenient, automated service
that provides share price, price change and yield
quotations on Vanguard Funds through any TouchToneTM
telephone. This service also lets you obtain information
about your account balance, your last transaction, and
your most recent dividend
or capital gains payment. To contact Vanguard's
Tele-Account service,
dial 1-800-ON-BOARD (1-800-662-6273). A brochure offering
detailed
operating instructions is available from our Investor
Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
24
<PAGE> 27
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 28
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 29
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 30
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
[VANGUARD
MORGAN GROWTH
FUND LOGO] [VANGUARD
--------------------------- MORGAN GROWTH
THE VANGUARD GROUP FUND LOGO]
OF INVESTMENT
COMPANIES P R O S P E C T U S
Vanguard Financial Center
P.O. Box 2600 APRIL 26, 1995
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
P026 [THE VANGUARD GROUP LOGO]
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 31
===============================================================================
[VANGUARD MORGAN GROWTH FUND LOGO]
A Member of The Vanguard Group
===============================================================================
PROSPECTUS--APRIL 26, 1995
- --------------------------------------------------------------------------------
FUND INFORMATION: PARTICIPANT SERVICES--1-800-523-1188
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE
AND POLICIES Vanguard/Morgan Growth Fund, Inc. (the "Fund") is an
open-end diversified investment company that seeks to
provide long-term growth of capital. The Fund invests
primarily in common stocks. Dividend income is incidental
to this objective. There is no assurance that the Fund
will achieve its stated objective. Shares of the Fund are
neither insured nor guaranteed by any agency of the U.S.
Government, including the FDIC.
- --------------------------------------------------------------------------------
IMPORTANT NOTE This Prospectus is intended exclusively for participants
in employer-sponsored retirement or savings plans, such as
tax-qualified pension and profit-sharing plans and 401(k)
thrift plans, as well as 403(b) custodial accounts for
non-profit educational and charitable organizations.
Another version of this Prospectus, containing information
on how to open a personal investment account with the
Fund, is available for individual investors. To obtain a
copy of that version of the Prospectus, please call
1-800-662-7447.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT The Fund is an investment option under a retirement or
savings program sponsored by your employer. The
administrator of your retirement plan or your employee
benefits office can provide you with detailed information
on how to participate in your plan and how to elect the
Fund as an investment option.
If you have any questions about the Fund, please contact
Participant Services at 1-800-523-1188. If you have any
questions about your plan account, contact your plan
administrator or the organization that provides
recordkeeping services for your plan.
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Fund has been filed with
the Securities and Exchange Commission. This Statement is
dated April 26, 1995 and has been incorporated by
reference into this Prospectus. A copy may be obtained
without charge by writing to the Fund or by calling the
Investor Information Department.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page Page
<S> <C> <C>
Fund Expenses ...................... 2 Who Should Invest ................. 5 Dividends, Capital Gains
Financial Highlights ............... 2 Implementation of Policies ........ 6 and Taxes ................... 13
Yield and Total Return ............. 3 Investment Limitations ............ 8 The Share Price of the Fund ... 13
Investment Objective ............... 4 Management of the Fund ............ 8 General Information ........... 14
Investment Policies ................ 4 Investment Advisers ............... 9 SERVICE GUIDE
Investment Risks ................... 5 Performance Record ................ 12 Participating in Your Plan .... 15
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
<PAGE> 32
FUND EXPENSES The following table illustrates all expenses and fees that
as a shareholder of the Fund would incur. The expenses and
fees set forth in the table are for the 1994 fiscal year.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
----------------------------------------------------------------------
Sales Load Imposed on Purchases............................... None
Sales Load Imposed on Reinvested Dividends.................... None
Redemption Fees............................................... None
Exchange Fees................................................. None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
<S> <C> <C>
----------------------------------------------------------------------
Management & Administrative Expenses.......................... 0.32%
Investment Advisory Fees...................................... 0.14
12b-1 Fees.................................................... None
Other Expenses
Distribution Costs.................................. 0.02%
Miscellaneous Expenses.............................. 0.02
-----
Total Other Expenses.......................................... 0.04
-----
TOTAL OPERATING EXPENSES............................. 0.50%
-----
-----
</TABLE>
The purpose of this table is to assist you in
understanding the various costs and expenses that an
investor would bear directly or indirectly as a
shareholder in the Fund.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period. As noted in the table above,
the Fund charges no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
<S> <C> <C> <C>
$5 $16 $28 $63
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS The following financial highlights, for a share
outstanding throughout each period, insofar as they relate
to each of the five years in the period ended December 31,
1994, have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was
unqualified. This information should be read in
conjunction with the Fund's financial statements and notes
thereto which are incorporated by reference in the
Statement of Additional Information and in this
Prospectus, and which appear, along with the report of
Price Waterhouse LLP, in the Fund's 1994 Annual Report to
the Shareholders. For a more complete discussion of the
Fund's performance, please see the Fund's 1994 Annual
Report to Shareholders which may be obtained without
charge by writing to the Fund or by calling Participant
Services at 1-800-523-1188.
2
<PAGE> 33
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF YEAR.................. $12.01 $12.65 $12.20 $10.40 $11.72 $10.27 $ 9.39 $11.50 $13.82 $11.45
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.... .14 .18 .18 .29 .32 .28 .25 .23 .21 .23
Net Realized and
Unrealized
Gain (Loss) on
Investments.......... (.34) .71 .97 2.66 (.50) 2.04 1.85 .31 .78 2.99
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... (.20) .89 1.15 2.95 (.18) 2.32 2.10 .54 .99 3.22
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income...... (.14) (.18) (.18) (.29) (.34) (.28) (.24) (.20) (.43) (.25)
Distributions from
Realized Capital
Gains.................. (.31) (1.35) (.52) (.86) (.80) (.59) (.98) (2.45) (2.88) (.60)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS.... (.45) (1.53) (.70) (1.15) (1.14) (.87) (1.22) (2.65) (3.31) (.85)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR..................... $11.36 $12.01 $12.65 $12.20 $10.40 $11.72 $10.27 $ 9.39 $11.50 $13.82
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN............... (1.67)% 7.32% 9.54% 29.33% (1.51)% 22.66% 22.34% 5.02% 7.83% 30.29%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)............... $1,075 $1,135 $1,116 $957 $697 $733 $622 $538 $594 $665
Ratio of Expenses to
Average Net Assets....... .50% .49% .48% .46% .55% .51% .55% .46% .54% .60%
Ratio of Net Investment
Income to Average Net
Assets................... 1.15% 1.36% 1.51% 2.36% 2.77% 2.38% 2.20% 1.52% 1.49% 1.96%
Portfolio Turnover Rate.... 84% 72% 64% 52% 73% 27% 32% 43% 31% 42%
</TABLE>
- --------------------------------------------------------------------------------
YIELD AND
TOTAL RETURN From time to time the Fund may advertise its yield and
total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of the
Fund refers to the average annual compounded rates of
return over one-, five- and ten-year periods or for the
life of the Fund (as stated in the advertisement) that
would equate an initial amount invested at the beginning
of a stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend and
capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of the Fund is calculated by dividing net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on the Fund's securities; it is net
of all expenses and all recurring and nonrecurring charges
that have been applied to all shareholder accounts. The
yield calculation assumes that net investment income
earned over 30 days is compounded monthly for six months
and then annualized. Methods used to calculate advertised
yields are standardized for all stock and bond mutual
funds. However, these methods differ from the accounting
methods used by the Fund to maintain its books and
records, and so the advertised 30-day yield may not fully
reflect the income paid to your own account.
- --------------------------------------------------------------------------------
3
<PAGE> 34
INVESTMENT
OBJECTIVE The Fund is an open-end diversified investment company.
The objective of the Fund is to provide long-term growth
of capital by investing primarily in common stocks.
Dividend income is incidental to this objective. There is
no assurance that the Fund will achieve its stated
objective.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
THE FUND INVESTS
PRIMARILY IN
"GROWTH STOCKS" The Fund invests primarily in the equity securities of
growth companies. Under normal circumstances, at least 65%
of the Fund's assets will be invested in such securities.
The Fund is managed without regard to tax ramifications.
The Fund will generally invest in a diversified portfolio
of common stocks but may also, from time to time, hold
securities that are convertible into common stocks.
The Fund is expected to invest a majority of its assets in
"established growth companies" -- i.e., larger
capitalization firms that have generally exhibited
above-average rates of growth in sales and earnings over
an extended period. The Fund may also invest in "emerging
growth companies" -- expanding firms with generally
smaller stock market capitalizations. Finally, the Fund
may hold investments in "cyclical growth and other
companies." These are firms which, while they may not have
a history of stable long-term growth, are nonetheless
expected to represent attractive investments.
The Fund's assets are managed by three unaffiliated
investment advisers and by Vanguard's Core Management
Group on an at-cost basis. Each adviser independently
chooses common stock investments for the Fund. Wellington
Management Company, which is currently responsible for
approximately 40% of the Fund's investments, utilizes
traditional methods of security selection, including
fundamental company research and relative valuation
techniques, in selecting growth stocks for the Fund. Husic
Capital Management, which manages approximately 13% of the
Fund, applies a "classic" fundamental investment strategy,
with an approach that includes investment themes,
candidate universes, and event-driven hurdles as key
elements. In contrast, Franklin Portfolio Associates Trust
("FPA") and Vanguard's Core Management Group, which are
responsible for approximately 33% and 10%, respectively,
of the Fund's investments are "quantitative" investment
managers. They utilize computerized techniques designed to
track -- and, if possible, outperform -- the returns of a
specific standard. For the Fund, the standard is the
Growth Fund Stock Index, a benchmark calculated by
Morningstar. The Index is a measure of the composite
performance of the common stock holdings of the 50 largest
growth mutual funds.
In addition to investing in common stocks, the Fund is
also authorized to invest in certain short-term fixed
income securities as cash reserves and to use stock index
futures and options to a limited extent. See
"Implementation of Policies" for a description of these
and other investment practices of the Fund.
The investment objective and policies of the Fund are not
fundamental and so may be changed by the Board of
Directors without shareholder approval. However,
shareholders would be notified prior to a material change
in either.
- --------------------------------------------------------------------------------
4
<PAGE> 35
INVESTMENT
RISKS
THE FUND IS SUBJECT
TO STOCK MARKET RISK As a mutual fund investing primarily in common stocks, the
Fund is subject to market risk -- i.e., the possibility
that common stock prices will decline over short or even
extended periods. The U.S. stock market tends to be
cyclical, with periods when stock prices generally rise
and periods when prices generally decline.
To illustrate the volatility of stock prices, the
following table sets forth the extremes for stock market
returns as well as the average return for the period from
1926 to 1994, as measured by the Standard & Poor's 500
Composite Stock Price Index:
U.S. STOCK MARKET RETURNS (1926-1994)
OVER VARIOUS TIME HORIZONS
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9 % +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.2 +10.2 +10.7 +10.7
</TABLE>
As shown, common stocks have provided annual total returns
(capital appreciation plus dividend income) averaging
+10.7% for all 10-year periods from 1926 to 1994. Average
return may not be useful for forecasting future returns in
any particular period, as stock returns are quite volatile
from year to year.
The chart above should not be viewed as a representation
of future investment performance of the stock market or
the Fund. The illustrated returns represent historical
investment performance, which may be a poor guide to
future returns. Also, stock market indexes are based on
unmanaged portfolios of securities before transaction
costs and other expenses. Such costs reduce the relative
performance of the Fund and other "real world" portfolios.
Finally, given its emphasis on "growth stock" investments,
the Fund is likely to differ significantly in terms of
portfolio composition and investment performance from
broad market averages like the S&P 500.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST
INVESTORS SEEKING
LONG-TERM GROWTH The Fund is designed for investors who have the
perspective, patience and financial ability to assume
above-average interim investment risk in pursuit of
long-term capital growth. Because of the risks associated
with common stock investments, the Fund is intended to be
a long-term investment vehicle and is not designed to
provide investors with a means of speculating on
short-term stock market movements. Investors who engage in
excessive account activity generate additional costs which
are borne by all of the Fund's shareholders. In order to
minimize such costs the Fund has adopted the following
policies. The Fund reserves the right to reject any
purchase request (including exchange purchases from other
Vanguard portfolios) that is reasonably deemed to be
disruptive to efficient portfolio management, either
because of the timing of the investment or previous
excessive trading by the investor. Additionally, the Fund
reserves the right to suspend the offering of its shares.
Since the Fund will focus on common stocks that offer
below-average levels of current income,
greater-than-average investment risk -- for a common stock
fund -- is likely. The Fund's share price is expected to
be volatile.
5
<PAGE> 36
No assurance can be given that the Fund will attain its
objective or that shareholders will be protected from the
risk of loss that is inherent in equity investing.
Investors may wish to reduce the potential risk of
investing in the Fund by purchasing shares on a periodic
basis (dollar-cost averaging) rather than making an
investment in one lump sum.
Investors should not consider the Fund a complete
investment program, but should also maintain holdings in
investments with different risk characteristics, such as
bonds and money market instruments. Investors may also
wish to complement an investment in the Fund with other
types of common stock investments.
- --------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES The Fund follows a number of distinctive investment
practices in an effort to achieve its investment
objective.
A PORTION OF THE
FUND'S ASSETS ARE
MANAGED USING
QUANTITATIVE
TECHNIQUES Two of the Fund's investment advisers, Franklin Portfolio
Associates Trust and Vanguard's Core Management Group, use
quantitative investment techniques in managing their
respective portions of the Fund's common stock
investments. For the portfolio of securities they manage,
FPA and Vanguard's Core Management Group independently
seek to track and, if possible, outperform the investment
returns of the Growth Fund Stock Index.
The Growth Fund Stock Index (the "Index") represents the
composite common stock portfolio of the 50 largest growth
mutual funds, as calculated by Morningstar, Inc.
("Morningstar"), an independent company which provides
mutual fund statistics. The 50 mutual funds included in
that Index are determined annually (as of December 31) by
Morningstar. For the two quantitative investment managers
(FPA and Vanguard's Core Management Group), the Index is
an essential tool in developing portfolios that will be
designed to track and, hopefully, outperform the Index.
For Wellington Management Company, the composition of the
Index serves as a guideline for setting portfolio policy.
Additionally, for the Fund's unaffiliated investment
advisers, the Index is utilized as a benchmark for
determining incentive/penalty investment advisory fees.
See "Investment Advisers" and the Statement of Additional
Information for further information on the Index and its
use as a benchmark for incentive/penalty fees.
THE FUND MAY INVEST
IN SHORT-TERM FIXED
INCOME SECURITIES Although it normally seeks to remain substantially fully
invested in equity securities, the Fund may invest
temporarily in certain short-term fixed income securities.
Such securities may be used to invest uncommitted cash
balances, to maintain liquidity to meet shareholder
redemptions, or to take a temporarily defensive position
against potential stock market declines. These securities
include: obligations of the United States Government and
its agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and
repurchase agreements collateralized by these securities.
Approximately 5% of the Fund's net assets are expected to
be held as cash reserves, which will be managed by The
Vanguard Group, Inc. at no charge to the Fund.
6
<PAGE> 37
THE FUND MAY INVEST
IN SECURITIES OF
FOREIGN ISSUERS The Fund may hold securities of foreign issuers, but all
such securities must be denominated in U.S. dollars.
Securities of foreign issuers may trade in U.S. or foreign
securities markets. Securities of foreign issuers may
involve investment risks that are different from those of
domestic issuers. Such risks include the effect of foreign
economic policies and conditions, future political and
economic developments, and the possible imposition of
exchange controls or other foreign governmental
restrictions on foreign debt issuers. There may also be
less publicly available information about a foreign issuer
than a domestic issuer of securities. Foreign issuers are
generally not subject to the uniform accounting, auditing
and financial reporting standards that apply to domestic
issuers. Also, foreign debt markets may be characterized
by lower liquidity, greater price volatility, and higher
transactions costs. Additionally, it may be difficult to
obtain or enforce a legal judgment in a foreign court.
THE FUND MAY USE
FUTURES CONTRACTS
AND OPTIONS The Fund may utilize stock futures contracts and options
to a limited extent. Specifically, the Fund may enter into
futures contracts provided that not more than 5% of its
assets are required as a futures contract deposit. In
addition, the Fund may enter into futures contracts and
options transactions only to the extent that obligations
under such contracts or transactions represent not more
than 20% of the Fund's assets.
FUTURES CONTRACTS AND
OPTIONS POSE CERTAIN
RISKS
The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between the change in market value of the stocks held by
the Fund and the prices of futures contracts and options;
and (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing only
in those contracts whose behavior is expected to resemble
that of the Fund's underlying securities. The risk that
the Fund will be unable to close out a futures position
will be minimized by entering into such transactions on a
national exchange with an active and liquid secondary
market.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss (or gain) to the
investor. When investing in futures contracts, the Fund
will segregate cash or cash equivalents in the amount of
the underlying obligation.
Futures contracts and options may be used for several
reasons: to maintain cash reserves while simulating full
investment, to facilitate trading, to reduce transaction
costs, or to seek higher investment returns when a futures
contract is priced more attractively than the underlying
equity security or index. While futures contracts and
options can be used as leveraged investments, the Fund may
not use futures contracts or options transactions to
leverage its net assets.
THE FUND MAY LEND
ITS SECURITIES
The Fund may lend its investment securities on a
short-term or long-term basis to qualified institutional
investors for the purpose of realizing additional income.
Loans of securities by the Fund will be collateralized by
cash, letters of credit,
7
<PAGE> 38
or securities issued or guaranteed by the U.S. Government
or its agencies. The collateral will equal at least 100%
of the current market value of the loaned securities.
BORROWING The Fund may borrow money, subject to the limits set forth
in the section "Investment Limitations," for temporary or
emergency purposes, including the meeting of redemption
requests which might otherwise require the untimely
disposition of securities.
PORTFOLIO TURNOVER
IS NOT EXPECTED TO
EXCEED 100% Although it generally seeks to invest for the long term,
the Fund retains the right to sell securities irrespective
of how long they have been held. It is anticipated that
the annual portfolio turnover of the Fund will not exceed
100%. A turnover rate of 100% would occur, for example, if
all of the securities of the Fund were replaced within one
year.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS The Fund has adopted certain limitations on its investment
practices. Specifically, the Fund will not:
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS
(a) with respect to 75% of the value of its total assets,
invest more than 5% of its assets in the securities
of any single company;
(b) with respect to 75% of the value of its total assets,
purchase more than 10% of the voting securities of
any issuer;
(c) invest more than 25% of its assets in any one
industry; and
(d) borrow money, except from banks (or through reverse
repurchase agreements) for temporary or emergency
(not leveraging) purposes, and then not in an amount
exceeding 10% of the value of the Fund's net assets
at the time the borrowing is made. Whenever borrowing
exceeds 5% of the value of the Fund's net assets, the
Fund will not make any additional investments.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information may be changed only with the approval of a
majority of the Fund's shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT
OF THE FUND
VANGUARD ADMINISTERS
AND DISTRIBUTES
THE FUND The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 80 distinct mutual fund portfolios and
total assets in excess of $130 billion. Through their
jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other funds in the Group
obtain at cost virtually all of their corporate
management, administrative and distribution services.
Vanguard also provides investment advisory services on an
at-cost basis to certain Vanguard funds. As a result of
Vanguard's unique corporate structure, the Vanguard funds
have costs substantially lower than those of most
competing mutual funds. In 1994, the average expense ratio
(annual costs including advisory fees divided by total net
assets) for the Vanguard funds amounted to approximately
.30% compared to an average of 1.05% for the mutual fund
industry (data provided by Lipper Analytical Services).
8
<PAGE> 39
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's net expenses, which are
allocated among the funds under methods approved by the
Board of Directors (Trustees) of each fund. In addition,
each fund bears its own direct expenses, such as legal,
auditing and custodian fees.
Vanguard provides distribution and marketing services to
the funds. The funds are available on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
- --------------------------------------------------------------------------------
INVESTMENT
ADVISERS
THE FUND'S ASSETS
ARE MANAGED BY
FOUR ADVISERS The Fund currently has four investment advisers:
Wellington Management Company ("WMC"), 75 State Street,
Boston, MA 02109; Franklin Portfolio Associates Trust
("FPA"), One Post Office Square 3660, Boston, MA 02109;
Husic Capital Management ("Husic"), 555 California Street,
Suite 2900, San Francisco, California 94104, and
Vanguard's Core Management Group. Prior to April 24, 1990,
WMC was the sole investment adviser to the Fund (then
known as W.L. Morgan Growth Fund). FPA was added as an
adviser in 1990, while Husic and Core Management were
added in 1993.
The proportion of the net assets of the Fund managed by
each adviser is established by the Board of Directors, and
may be changed in the future as circumstances warrant.
Presently, WMC is responsible for approximately 40% of the
Fund's investments; FPA, Husic and Vanguard's Core
Management Group are responsible for approximately 33%,
13% and 10%, respectively. (The cash portion of the Fund's
net assets is managed by The Vanguard Group, Inc. at no
charge to the Fund.)
The Fund has entered into investment advisory agreements
with WMC, FPA, and Husic which provide that the advisers
manage the investment and reinvestment of the Fund's
assets and continuously review, supervise and administer
the Fund's investment program. The advisers discharge
their responsibilities subject to the control of the
Officers and Directors of the Fund.
. . . WELLINGTON
MANAGEMENT
COMPANY (WMC) WMC is a professional investment advisory firm which
globally provides services to investment companies,
institutions, and individuals. Among the clients of WMC
are more than 10 of the investment companies of The
Vanguard Group. As of December 31, 1994, WMC held
discretionary management authority with respect to more
than $80 billion of assets. WMC and its predecessor
organizations have provided advisory services to
investment companies since 1933 and to investment
counseling clients since 1960.
Robert D. Rands, Senior Vice President of WMC, serves as
portfolio manager of the assets of the Fund assigned to
WMC. Mr. Rands has been employed by WMC for
9
<PAGE> 40
16 years and has served as portfolio manager for the Fund
since February of 1994. In managing the assets of the Fund
assigned to WMC, Mr. Rands is supported by research and
other investment services provided by the professional
staff of WMC.
The Fund pays WMC a basic advisory fee calculated by
applying varying percentage rates to the average net
assets of the Fund managed by WMC. The basic fee schedule
is as follows:
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------ -------
<S> <C>
First $50 million 0.325%
Next $100 million 0.225%
Over $150 million 0.150%
</TABLE>
This basic advisory fee may be increased or decreased by
applying an adjustment formula ("incentive/penalty fee")
based on WMC's investment performance relative to the
investment record of Growth Fund Stock Index. Under the
incentive/ penalty fee schedule, the basic fee payable to
WMC may be increased or decreased by as much as .075%
depending on the investment performance of the equity
investments managed by WMC.
To assess the performance of its advisers relative to
comparable "growth stock" investments, the Fund has
adopted as a benchmark for incentive/penalty fees the
Growth Fund Stock Index, an index of the equity holdings
of the 50 largest growth stock mutual funds.
. . . FRANKLIN
PORTFOLIO
ASSOCIATES (FPA) FPA is a professional investment advisory firm which
specializes in the management of common stock portfolios
through the use of quantitative investment models. Founded
in 1982, FPA, a Massachusetts business trust, is a
wholly-owned subsidiary of Mellon Financial Services
Corporation #1, which itself is a wholly-owned subsidiary
of Mellon Bank Corporation. As of December 31, 1994, FPA
provided investment advisory services with respect to
approximately $6.64 billion of client assets, including
$5.9 million in assets for Vanguard Quantitative
Portfolios, Inc., another mutual fund member of The
Vanguard Group.
FPA employs proprietary computer models in selecting
individual equity securities and in structuring investment
portfolios for its clients, including the Fund. John J.
Nagorniak, President of FPA, has been designated as the
portfolio manager of the assets of the Fund assigned to
FPA; he is responsible for overseeing the application of
FPA's quantitative techniques to those assets. Mr.
Nagorniak and the other investment principals of FPA are
responsible for the ongoing development and enhancement of
FPA's quantitative investment techniques.
10
<PAGE> 41
The Fund pays FPA a basic advisory fee calculated by
applying varying percentage rates to the average net
assets of the Fund managed by FPA. The basic fee schedule
is as follows:
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------ ------
<S> <C>
First $100 million 0.25%
Next $200 million 0.20%
Over $300 million 0.15%
</TABLE>
This basic advisory fee may be increased or decreased by
applying an incentive/ penalty fee based on FPA's
investment performance relative to the investment record
of the Growth Fund Stock Index. Under the
incentive/penalty fee schedule, the basic fee payable to
FPA may be increased or decreased by as much as .10%
depending on the investment performance of the equity
investments managed by FPA.
... AND HUSIC CAPITAL
MANAGEMENT (HUSIC) Vanguard/Morgan Growth Fund also employs Husic Capital
Management ("Husic"), 555 California Street, Suite 2900,
San Francisco, California 94104 as an investment adviser
for approximately 13% of its investments.
For the services provided by Husic under the investment
advisory agreement the Fund will pay Husic a basic fee at
the end of each fiscal quarter, calculated by applying a
quarterly rate, based on the following annual percentage
rates, to the average month-end net assets of the Husic
Portfolio for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
------------------ ------
<S> <C>
First $25 million 0.40%
Next $125 million 0.35%
Next $350 million 0.25%
Next $500 million 0.20%
Over $1 billion 0.15%
</TABLE>
Effective with the quarter ending September 30, 1994, the
basic fee paid to Husic, as provided above, may be
increased or decreased by applying an incentive/penalty
fee based on the investment performance of the Husic
Portfolio relative to the investment record of the Growth
Fund Stock Index. Under the incentive/penalty fee
schedule, the basic fee payable to Husic may be increased
or decreased by as much as 75% of the basic fee depending
on the investment performance of the equity investment
managed by Husic.
Under rules of the Securities and Exchange Commission, the
incentive/penalty fee structure will not be fully operable
until the quarter ending September 30, 1996, and, until
that date, will be calculated according to certain
transition rules. See the Statement of Additional
Information for a detailed description of the incentive/
penalty fee schedule for Husic and the applicable
transition rules.
For the fiscal year ended December 31, 1994, the aggregate
investment advisory fees paid by Vanguard/Morgan Growth
Fund represented an effective annual rate of .19 of 1% of
average net assets, before a net decrease of .05 of 1%
based on
11
<PAGE> 42
performance. The investment advisory fees paid by the Fund
for this period to WMC, FPA and Husic represented an
effective annual rate of .12, .19 and .23 of 1%,
respectively, of the average net assets managed by WMC,
FPA and Husic.
VANGUARD MANAGES
A PORTION OF THE
FUND'S ASSETS ON
AN AT-COST BASIS Vanguard's Core Management Group provides investment
advisory services on an at-cost basis with respect to a
portion of the Fund's assets (currently approximately
10%). The Core Management Group also provides investment
advisory services to several Vanguard Funds and to several
indexed separate accounts. Total assets under management
by the Core Management Group were approximately $18
billion as of December 31, 1994. The portion of the Fund
allocated to the Core Management Group is managed using
computerized, quantitative techniques based on a value
index constructed to approximate the aggregate fundamental
characteristics of a typical broadly diversified growth
fund such as Vanguard/Morgan Growth Fund. For further
information concerning the index, please refer to the
Statement of Additional Information. The Core Management
Group is supervised by the Officers of the Fund.
WMC, FPA, Husic and Vanguard's Core Management Group are
authorized to select brokers or dealers to execute the
purchase and sale of the Fund's portfolio securities, and
direct the advisers to use their best efforts to obtain
the best available price and most favorable execution with
respect to all transactions. The full range and quality of
brokerage services available are considered in making
their determinations.
The Fund has authorized WMC, FPA, Husic and Vanguard's
Core Management Group to pay higher commissions in
recognition of brokerage services felt necessary for the
achievement of better execution, provided the advisers
believe this to be in the best interests of the Fund.
Although the Fund does not market its shares through
intermediary brokers or dealers, the Fund's advisers may
place orders with qualified broker-dealers who recommend
the Fund to clients if the Officers of the Fund believe
that the quality of the transaction and the commission are
comparable to what they would be with other qualified
brokerage firms.
The Fund's Board of Directors may, without the approval of
shareholders, provide for: (a) the employment of a new
investment adviser pursuant to the terms of a new advisory
agreement either as a replacement for an existing adviser
or as an additional adviser; (b) a change in the terms of
an advisory agreement; and (c) the continued employment of
an existing adviser on the same advisory contract terms
where a contract has been assigned because of a change in
control of the adviser. Any such change will only be made
upon not less than 30 days' prior written notice to
shareholders of the Fund which shall include substantially
the information concerning the adviser that would have
normally been included in a proxy statement.
- --------------------------------------------------------------------------------
PERFORMANCE
RECORD The table on page 13 provides investment results for the
Fund for several periods throughout the Fund's lifetime.
The results shown represent "total return" investment
performance, which assumes the reinvestment of all capital
gains and income dividends for the indicated periods. Also
included is comparative information with respect to the
unmanaged Standard & Poor's 500 Composite Stock Price
12
<PAGE> 43
Index, a widely-used barometer of stock market activity,
and the Consumer Price Index, a statistical measure of
changes in the prices of goods and services. The table
does not make any allowance for federal, state or local
income taxes, which shareholders must pay on a current
basis.
The results should not be considered a representation of
the total return from an investment made in the Fund
today. This information is provided to help investors
better understand the Fund and may not provide a basis for
comparison with other investments or mutual funds which
use a different method to calculate performance.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURN FOR
VANGUARD/MORGAN GROWTH FUND
-------------------------------------------
FISCAL PERIODS VANGUARD/MORGAN S&P 500 CONSUMER
ENDED 12/31/94 GROWTH FUND INDEX PRICE INDEX
-------------- --------------- ------- -----------
<S> <C> <C> <C>
1 Year - 1.7% + 1.3% +2.7%
5 Years + 8.0 + 8.7 +3.5
10 Years +12.5 +14.3 +3.6
Lifetime* +10.7 +10.1 +5.7
* December 31, 1968 to December 31, 1994.
</TABLE>
- --------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
THE FUND PAYS
DIVIDENDS AND ANY
CAPITAL GAINS
ANNUALLY The Fund expects to pay dividends annually from ordinary
income. Net capital gains distributions, if any, will also
be made annually. Dividend and capital gains distributions
may be automatically reinvested in additional shares. The
Fund is managed without regard to tax ramifications. The
Fund intends to continue to qualify for taxation as a
"regulated investment company" under the Internal Revenue
Code so that it will not be subject to federal income tax
to the extent its income is distributed to shareholders.
If you utilize the Fund as an investment option in an
employer-sponsored retirement savings plan, dividend and
capital gains distributions from the Fund ordinarily will
not be subject to current taxation, but will accumulate on
a tax-deferred basis. In general, employer-sponsored
retirement and savings plans are governed by complex tax
rules. If you participate in such a plan, consult your
plan administrator, your plan's Summary Plan Description,
or a professional tax adviser regarding the tax
consequences of your participation in the plan and of any
plan contributions or withdrawals.
- --------------------------------------------------------------------------------
THE SHARE PRICE
OF THE FUND The Fund's share price or "net asset value" per share is
determined by dividing the total market value of the
Fund's investments and other assets, less any liabilities,
by the number of outstanding shares of the Fund. Net asset
value per share is determined once daily at the close of
regular trading on the New York Stock Exchange (generally
4:00 p.m. Eastern time) on each day that the Exchange is
open for business. Portfolio securities that are listed on
a securities exchange are valued at the last quoted sales
price on the day the valuation is made. Price information
on listed securities is taken from the exchange where the
security is primarily traded. Securities which are listed
on an exchange and which are not traded on the valuation
date are valued at the mean between the latest quoted bid
13
<PAGE> 44
and ask prices. Unlisted securities for which market
quotations are readily available are valued at the latest
quoted bid price. Other assets and securities for which no
quotations are readily available are valued at fair value
as determined in good faith by the Directors. Securities
may be valued on the basis of prices provided by a pricing
service when such prices are believed to reflect the fair
market value of such securities.
The Fund's share price can be found daily in the mutual
fund listings of most major newspapers under the heading
of The Vanguard Group.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION The Fund is a Maryland corporation. The Articles of
Incorporation permit the Directors to issue 150,000,000
shares of common stock, with a $.10 par value. The Board
of Directors has the power to designate one or more
classes ("series") of shares of common stock and to
classify or reclassify any unissued shares with respect to
such series. Currently the Fund is offering one class of
shares.
The shares of the Fund are fully paid and non-assessable;
have no preference as to conversion, exchange, dividends,
retirement or other features; and have no pre-emptive
rights. Such shares have non-cumulative voting rights,
meaning that the holders of more than 50% of the shares
voting for the election of Directors can elect 100% of the
Directors if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
All securities and cash are held by State Street Bank and
Trust Company, Boston, MA. The Vanguard Group, Inc.,
Valley Forge, PA, serves as the Fund's Transfer and
Dividend Disbursing Agent. Price Waterhouse LLP, serves as
independent accountants for the Fund and will audit its
financial statements annually. The Fund is not involved in
any litigation.
- --------------------------------------------------------------------------------
14
<PAGE> 45
SERVICE GUIDE
PARTICIPATING IN
YOUR PLAN The Fund is available as an investment option in your
retirement or savings plan. The administrator of your plan
or your employee benefits office can provide you with
detailed information on how to participate in your plan
and how to elect the Fund as an investment option.
If you have any questions about the Fund, including the
Fund's investment objective, policies, risk
characteristics or historical performance, please contact
Participant Services (1-800-523-1188).
If you have questions about your account, contact your
plan administrator or the organization which provides
recordkeeping services for your plan.
- --------------------------------------------------------------------------------
INVESTMENT OPTIONS
AND ALLOCATIONS You may be permitted to elect different investment
options, alter the amounts contributed to your plan, or
change how contributions are allocated among your
investment options in accordance with your plan's specific
provisions. See your plan administrator or employee
benefits office for more details.
- --------------------------------------------------------------------------------
TRANSACTIONS IN
FUND SHARES Contributions, exchanges or redemptions of the Fund's
shares are effective when received in "good order" by
Vanguard. "Good order" means that complete information on
the contribution, exchange or redemption and the
appropriate monies have been received by Vanguard.
- --------------------------------------------------------------------------------
MAKING EXCHANGES Your plan may allow you to exchange monies from one
investment option to another. However, the Fund reserves
the right to refuse any exchange purchase request. Check
with your plan administrator for details on the rules
governing exchanges in your plan. Certain investment
options, particularly company stock or investment
contracts, may be subject to unique restrictions.
Before making an exchange, you should consider the
following:
- If you are making an exchange to another Vanguard Fund
option, please read the Fund's prospectus. Contact
Participant Services (1-800-523-1188) for a copy.
- Exchanges are accepted by Vanguard only as permitted by
your plan. Your plan administrator can explain how
frequently exchanges are allowed.
- --------------------------------------------------------------------------------
15
<PAGE> 46
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<PAGE> 47
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<PAGE> 48
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 49
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<PAGE> 50
- --------------------------------------------------------------------------------
[VANGUARD [VANGUARD
MORGAN MORGAN
GROWTH FUND GROWTH FUND
LOGO] LOGO]
--------------------------- I N S T I T U T I O N A L
THE VANGUARD GROUP P R O S P E C T U S
OF INVESTMENT
COMPANIES APRIL 26, 1995
Vanguard Financial Center
P.O. Box 2900
Valley Forge, PA 19482
INSTITUTIONAL PARTICIPANT
SERVICES DEPARTMENT:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
I026 [VANGUARD GROUP LOGO]
- --------------------------------------------------------------------------------
<PAGE> 51
PART B
VANGUARD/MORGAN GROWTH FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
APRIL 26, 1995
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated April 26, 1995). To obtain the Prospectus
please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................................... 1
Investment Limitations.................................................................... 5
Purchase of Shares........................................................................ 6
Redemption of Shares...................................................................... 6
Management of the Fund.................................................................... 7
Investment Advisory Services.............................................................. 10
Portfolio Transactions.................................................................... 16
Yield and Total Return.................................................................... 17
Performance Measures...................................................................... 17
Financial Statements...................................................................... 20
Appendix -- Description of Securities..................................................... 20
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
PORTFOLIO TURNOVER While the rate of portfolio turnover is not a limiting
factor when management deems changes appropriate, it is anticipated that the
Fund's annual portfolio turnover rate will not normally exceed 100%. A rate of
turnover of 100% could occur, for example, if all of the securities in the
Fund's portfolio are replaced within a period of one year. The Fund's portfolio
turnover rate for each of its last ten fiscal years is set forth under
"Financial Highlights," in the Fund's Prospectus.
REPURCHASE AGREEMENTS The Fund may invest in repurchase agreements with
commercial banks, brokers or dealers either for defensive purposes due to market
conditions or to generate income from its excess cash balances. A repurchase
agreement is an agreement under which the Fund acquires a money market
instrument (generally a security issued by the U.S. Government or an agency
thereof, a banker's acceptance or a certificate of deposit) from a commercial
bank, broker or dealer, subject to resale to the seller at an agreed upon price
and date (normally, the next business day). A repurchase agreement may be
considered a loan collateralized by securities. The resale price reflects an
agreed upon interest rate effective for the period the instrument is held by the
Fund and is unrelated to the interest rate on the underlying instrument. In
these transactions, the securities acquired by the Fund (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by the Fund's custodian bank until
repurchased. In addition, the Fund's Board of Directors will monitor the Fund's
repurchase agreement transactions generally and will establish guidelines and
standards for review by the investment adviser of the creditworthiness of any
bank, broker or dealer party to a repurchase agreement with the Fund. No more
than an aggregate of 15% of the Fund's assets, at the time of investment, will
be invested in repurchase agreements having maturities longer than seven days
and securities subject to legal or contractual restrictions on resale, or for
which there are no readily available market quotations.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying instrument at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may
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<PAGE> 52
determine that the underlying security is collateral for a loan by the Fund not
within the control of the Fund and therefore the realization by the Fund on such
collateral may be automatically stayed. Finally, it is possible that the Fund
may not be able to substantiate its interest in the underlying security and may
be deemed an unsecured creditor of the other party to the agreement. While the
Fund's management acknowledges these risks, it is expected that they can be
controlled through careful monitoring procedures.
LENDING OF SECURITIES The Fund may lend its securities on a short-term or
long-term basis to qualified institutional investors who need to borrow
securities in order to complete certain transactions, such as covering short
sales, avoiding failures to deliver securities or completing arbitrage
operations. By lending its portfolio securities, the Fund attempts to increase
its net investment income through the receipt of interest on the loan. Any gain
or loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the Fund. The Fund may lend its
portfolio securities to qualified brokers, dealers, banks or other financial
institutions, so long as the terms, the structure and the aggregate amount of
such loans are not inconsistent with the Investment Company Act of 1940, or the
Rules and Regulations or interpretations of the Securities and Exchange
Commission (the "Commission") thereunder, which currently require that (a) the
borrower pledge and maintain with the Fund collateral consisting of cash, an
irrevocable letter of credit issued by a domestic U.S. bank, or securities
issued or guaranteed by the U.S. Government having a value at all times not less
than 100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e. the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the Fund at any time and (d) the Fund receive reasonable interest
on the loan (which may include the Fund's investing any cash collateral in
interest bearing short-term investments), any distribution on the loaned
securities and any increase in their market value. Loan arrangements made by the
Fund will comply with all other applicable regulatory requirements, including
the rules of the New York Stock Exchange, which rules presently require the
borrower, after notice, to redeliver the securities within the normal settlement
time of five business days. All relevant facts and circumstances, including the
creditworthiness of the broker, dealer or institution, will be considered in
making decisions with respect to the lending of securities, subject to review by
the Fund's Board of Directors.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's directors. In addition, voting rights may
pass with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
FUTURES CONTRACTS The Fund may enter into futures contracts, options, and
options on futures contracts for the purpose of remaining fully invested and
reducing transactions costs. Futures contracts provide for the future sale by
one party and purchase by another party of a specified amount of a specific
security at a specified future time and at a specified price. Futures contracts
which are standardized as to maturity date and underlying financial instrument
are traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"), a U.S. Government Agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin which
may range upward from less than 5% of the value of the contract being traded.
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<PAGE> 53
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Fund intends to use futures contracts
only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions. The Fund will
only sell futures contracts to protect securities it owns against price declines
or purchase contracts to protect against an increase in the price of securities
it intends to purchase. As evidence of this hedging interest, the Fund expects
that approximately 75% of its futures contract purchases will be "completed,"
that is, equivalent amounts of related securities will have been purchased or
are being purchased by the Fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Fund will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS The Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of the Fund's total assets. In addition, the Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the Fund's total assets.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge it.
The Fund will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The principal interest rate futures exchanges in the United States are the Board
of Trade of the City of Chicago and the Chicago Mercantile Exchange.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the
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<PAGE> 54
contract. However, because the futures strategies of the Fund are engaged in
only for hedging purposes, the Adviser does not believe that the Fund is subject
to the risks of loss frequently associated with futures transactions. The Fund
would presumably have sustained comparable losses if, instead of the futures
contract, it had invested in the underlying financial instrument and sold it
after the decline.
Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that the Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option. Additionally, investments in futures contracts and options involve the
risk that the investment advisers will incorrectly predict stock market and
interest rate trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS The Fund is required for
federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In most cases, any gain
or loss recognized with respect to a futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. Furthermore, sales of futures
contracts which are intended to hedge against a change in the value of
securities held by the Fund may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition. A Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies or other income derived with respect to the
Fund's business of investing in securities. In addition, gains realized on the
sale or other disposition of securities held for less than three months must be
limited to less than 30% of the Fund's annual gross income. It is anticipated
that any net gain realized from the closing out of futures contracts will be
considered gain from the sale of securities and therefore be qualifying income
for purposes of the 90% requirement. In order to avoid realizing excessive gains
on securities held less than three months, the Fund may be required to defer the
closing out of futures contracts beyond the time when it would otherwise be
advantageous to do so. It is anticipated that unrealized gains on futures
contracts, which have been open for less than three months as of the end of the
Fund's fiscal year and which are recognized for tax purposes, will not be
considered gains on sales of securities held less than three months for the
purpose of the 30% test.
The Fund will distribute to shareholders annually any net capital gains
which have been recognized for federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised on the nature of
the distributions.
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<PAGE> 55
INVESTMENT LIMITATIONS
The following restrictions and fundamental policies (except for item 10
which is not a "fundamental" policy) cannot be changed without approval of the
holders of a majority of the outstanding shares of the Fund (as defined in the
Investment Company Act of 1940). The Fund may not under any circumstances:
1) Borrow money, except from banks (or through reverse repurchase
agreements), for temporary or emergency (not leveraging) purposes, and
then in an amount not exceeding 10% of the value of the Fund's net
assets (including the amount borrowed and the value of any outstanding
reverse repurchase agreements) at the time the borrowing is made.
Whenever borrowings exceed 5% of the value of the Fund's net assets,
the Fund will not make any additional investments;
2) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the Fund would
hold more than 10% of the outstanding voting securities of the issuer,
or more than 5% of the value of the Fund's total assets would be
invested in the securities of such issuer;
3) Invest for the purpose of exercising control of management of any
company;
4) Will not invest in securities of other investment companies, except as
may be acquired as a part of a merger, consolidation or acquisition of
assets approved by the Fund's shareholders or otherwise to the extent
permitted by Section 12 of the Investment Company Act of 1940. The Fund
will invest only in investment companies which have investment
objectives and investment policies consistent with those of the Fund;
5) Engage in the business of underwriting securities issued by others,
except to the extent that the Fund may technically be deemed to be an
underwriter under the Securities Act of 1933, as amended, in disposing
of portfolio securities;
6) Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(including the Fund's investment in The Vanguard Group, Inc., as
described on page 8);
7) Invest in commodities (except that the Fund may invest in stock futures
contracts and options to the extent that not more than 5% of the Fund's
assets are required as deposit to secure obligations under futures
contracts and not more than 20% of the Fund's assets are invested in
futures and options at any time) or real estate although the Fund may
purchase and sell securities of companies which deal in real estate, or
interests therein;
8) Purchase securities on margin or sell any securities short (except as
specified in 7) above;
9) Invest more than 5% of the assets of the Fund, at the time of
investment, in the securities of any issuers which have (with
predecessors) a record of less than three years' continuous operation;
10) Lend money to any person except (i) by purchasing bonds, debentures or
similar obligations (including repurchase agreements) which are either
publicly distributed or customarily purchased by institutional
investors, and (ii) by lending its portfolio securities as provided
under "Lending of Securities";
11) Pledge, mortgage, or hypothecate any of its assets to an extent greater
than 5% of its total assets; and
12) Invest more than 25% of the value of its total assets in any one
industry.
These investment limitations are considered at the time investment
securities are purchased.
Although not fundamental policies subject to shareholder vote, as long as
the Fund's shares are registered for sale in certain states, it will not (i)
invest in put, call, straddle or spread options, and (ii) invest in interests in
oil, gas or other mineral exploration or development programs.
Each Portfolio may not purchase or retain securities of an issuer if an
officer or director of such issuer is an officer or Director of the Fund or its
investment adviser and one or more of such officers or Directors of the
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<PAGE> 56
Fund or its investment adviser owns beneficially more than 1/2% of the shares
or securities of such issuer and all such directors and officers owning more
than 1/2% of such shares or securities together own more than 5% of such shares
or securities.
Notwithstanding these limitations, the Fund may own all or any portion of
the securities of, or make loans to, or contribute to the costs or other
financial requirements of any company which will be wholly owned by the Fund and
one or more other investment companies and is primarily engaged in the business
of providing, at-cost, management, administrative, distribution or related
services to the Fund and other investment companies. See "Management of the
Fund."
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offerings of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum for initial and subsequent investments for certain
fiduciary accounts or under circumstances where certain economies can be
achieved in sales of the Fund's shares.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not
reasonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in investment securities or in cash, as the Directors
may deem advisable; however, payment will be made wholly in cash unless the
Directors believe that economic or market conditions exist which would make such
a practice detrimental to the best interests of the Fund. If redemptions are
paid in investment securities, such securities will be valued as set forth in
the Prospectus under "The Fund's Share Price" and a redeeming shareholder would
normally incur brokerage expenses if he converted these securities to cash.
No charge is made by the Fund for redemptions. Any redemption may be more
or less than the shareholder's cost depending on the market value of the
securities held by the Fund.
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<PAGE> 57
MANAGEMENT OF THE FUND
OFFICERS AND DIRECTORS
The Fund's officers, under the supervision of the Board of Directors,
manage the day-to-day operations of the Fund. The Directors, who are elected
annually by shareholders, set broad policies for the Fund and choose its
officers. A list of the Directors and officers of the Fund and a brief statement
of their present positions and principal occupations during the past 5 years is
set forth below. The mailing address of the Directors and officers of the Fund
is Post Office Box 876, Valley Forge, PA 19487.
<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman, Chief Executive ALFRED M. RANKIN, JR., Director
Officer and Director* Chairman, President, and Chief Executive
Chairman, Chief Executive Officer, and Officer of NACCO Industries, Inc.; Director of
Director of The Vanguard Group, Inc., and The BFGoodrich Company, The Standard
each of the investment companies in The Products Company and The Reliance Electric
Vanguard Group; Director of The Mead Company.
Corporation, and General Accident Insurance.
JOHN C. SAWHILL,
JOHN J. BRENNAN, President & Director* President and Chief Executive Officer, The
President and Director of The Vanguard Nature Conservancy; formerly, Director and
Group, Inc., and of each of the investment Senior Partner, McKinsey & Co.; President,
companies in The Vanguard Group. New York University; Director of Pacific Gas
and Electric Company and NACCO Industries.
ROBERT E. CAWTHORN, Director
Chairman of Rhone-Poulenc Rorer, Inc.; JAMES O. WELCH, JR., Director
Director of Sun Company, Inc. Retired Chairman of Nabisco Brands, Inc.,
retired Vice Chairman and Director of RJR
BARBARA BARNES HAUPTFUHRER, Director Nabisco; Director of TECO Energy, Inc.
Director of The Great Atlantic and Pacific
Tea Company, ALCO Standard Corp., Raytheon J. LAWRENCE WILSON, Director
Company, Knight-Ridder, Inc., and Chairman and Chief Executive Officer of Rohm &
Massachusetts Mutual Life Insurance Co. and Haas Company; Director of Cummins Engine
Trustee Emerita of Wellesley College. Company; Trustee of Vanderbilt University
and the Culver Educational Foundation.
BRUCE K. MACLAURY, Director
President, The Brookings Institution; RAYMOND J. KLAPINSKY, Secretary*
Director of American Express Bank, Ltd., The Senior Vice President and Secretary of The
St. Paul Companies, Inc. and Scott Paper Vanguard Group, Inc.; Secretary of each of the
Company. investment companies in The Vanguard Group.
BURTON G. MALKIEL, Director RICHARD F. HYLAND, Treasurer*
Chemical Bank Chairman's Professor of Treasurer of The Vanguard Group, Inc. and of
Economics, Princeton University; Director of each of the investment companies in The
Prudential Insurance Co. of America, Amdahl Vanguard Group.
Corporation, Baker Fentress & Co., The
Jeffrey Co., and Southern New England KAREN E. WEST, Controller*
Communications Company. Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies
in The Vanguard Group.
---------------
*Officers of the Fund are "interested persons"
as defined in the Investment Company Act of
1940.
</TABLE>
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<PAGE> 58
THE VANGUARD GROUP
Vanguard/Morgan Growth Fund, Inc. is a member of The Vanguard Group of
Investment Companies.
Through their jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other Funds in the Group obtain at cost virtually
all of their corporate management, administrative and distribution services.
Vanguard also provides investment advisory services on an at-cost basis to
certain Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's net expenses which are allocated among the
Funds under methods approved by the Board of Directors (Trustees) of each Fund.
In addition, each Fund bears its own direct expenses such as legal, auditing and
custodian fees.
The Fund's officers are also officers and employees of Vanguard. No officer
or employee owns, or is permitted to own, any securities of any external adviser
for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. At December 31, 1994, the
Fund had contributed capital of $166,000 to Vanguard, representing .8% of
Vanguard's capitalization. The Fund's Service Agreement provides as follows: (a)
each Vanguard Fund may invest up to .40% of its current assets in Vanguard, and
(b) there is no other limitation on the amount that each Vanguard Fund may
contribute to Vanguard's capitalization.
MANAGEMENT Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended December 31, 1994, the Fund's share of Vanguard's actual net
costs of operation relating to management and administrative services (including
transfer agency) totaled approximately $3,524,000.
DISTRIBUTION Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for the shares of
the Funds in connection with any sales made directly to investors in the states
of Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The directors and
officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon relative net assets. The remaining one
half of those expenses is allocated among the Funds based upon each Fund's sales
for the preceding 24 months relative to the total sales of the Funds as a Group,
provided, however, that no Fund's aggregate quarterly rate of contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
average distribution expense rate for the Group, and that no Fund shall incur
annual distribution expenses in excess of 20/100 of 1% of its average month-end
net assets. During the fiscal year ended December 31, 1994, the Fund paid
approximately $180,000 of the Group's distribution and marketing expenses.
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<PAGE> 59
INVESTMENT ADVISORY SERVICES Vanguard also provides the Fund, Vanguard
Money Market Reserves, Vanguard Municipal Bond Fund, several Portfolios of
Vanguard Fixed Income Securities Fund, Vanguard California Tax-Free Fund,
Vanguard Florida Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund,
Vanguard New York Insured Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard
Pennsylvania Tax-Free Fund, Vanguard Institutional Money Market Portfolio,
Vanguard Admiral Funds, Vanguard Institutional Index Fund, Vanguard Bond Index
Fund, Vanguard Balanced Index Fund, Vanguard Index Trust, Vanguard International
Equity Index Fund, Vanguard Tax-Managed Fund, several Portfolios of Vanguard
Variable Insurance Fund, a portion of Vanguard/Windsor II as well as several
indexed separate accounts with investment advisory services. These services are
provided on an at-cost basis from a money management staff employed directly by
Vanguard. The compensation and other expenses of this staff are paid by the
Funds utilizing these services.
REMUNERATION OF DIRECTORS AND OFFICERS The Fund pays each Director, who is
not also an officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Fund's officers and employees are paid by Vanguard
which, in turn, is reimbursed by the Fund and each other Fund in the Group, for
its proportionate share of officers' and employees' salaries and retirement
benefits.
During the fiscal year ended December 31, 1994, the Fund paid approximately
$7,000 in Directors' fees and expenses to its "non-interested" Directors. The
Fund's proportionate share of remuneration paid by Vanguard (and reimbursed by
the Fund) during the fiscal year to all officers of the Fund, as a group, was
approximately $43,457.
Under its retirement plan, Vanguard contributes annually an amount equal to
10% of each officer's annual compensation plus 5.7% of that part of an eligible
officer's compensation during the year, if any, that exceeds the Social Security
Taxable Wage Base then in effect. Under its thrift plan, all employees are
permitted to make pre-tax basic contributions in an amount up to 4% of total
compensation which Vanguard matches on a 100% basis. Directors who are not
Officers are paid an annual fee based on the number of years of service on the
board, up to fifteen years of service, upon retirement. The fee is equal to
$1,000 for each year of service and each investment company member of The
Vanguard Group contributes a proportionate amount to this fee based on its
relative net assets. This fee is paid, subsequent to a Director's retirement,
for a period of ten years or until the death of a retired Director. The Fund's
proportionate share of retirement benefits paid by Vanguard on behalf of all
eligible officers of the Fund, as a group, during the fiscal year ended December
31, 1994 was approximately $4,800.
The following table provides detailed information with respect to the
amounts paid or accrued for the Directors for the fiscal year ended December 31,
1994.
VANGUARD/MORGAN GROWTH FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF DIRECTORS FROM FUND PART OF FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS(2)
- --------------------------- ------------ --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) -- -- -- --
John J. Brennan(1) -- -- -- --
Barbara Barnes Hauptfuhrer $572 $143 $15,000 $50,000
Robert E. Cawthorn $572 $107 $13,000 $50,000
Bruce K. MacLaury $655 $147 $12,000 $45,000
Burton G. Malkiel $572 $ 70 $15,000 $50,000
Alfred M. Rankin, Jr. $572 $ 39 $15,000 $50,000
John C. Sawhill $572 $ 61 $15,000 $50,000
James O. Welch, Jr. $549 $ 96 $15,000 $48,000
J. Lawrence Wilson $560 $ 47 $15,000 $49,000
</TABLE>
(1) As "Interested Directors," Messrs. Bogle and Brennan receive no
compensation for their service as Directors.
(2) The amounts reported in this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 33 Vanguard Funds
(26 in the case of Mr. MacLaury).
9
<PAGE> 60
INVESTMENT ADVISORY SERVICES
The Fund currently employs three separate investment advisers each of whom
manages the investment and reinvestment of a portion of the Fund's assets. Prior
to April 24, 1990 Wellington Management Company served as the Fund's sole
investment adviser.
WELLINGTON MANAGEMENT COMPANY The Fund employs Wellington Management
Company ("WMC") under an investment advisory agreement dated as of April 24,
1990 to manage the investment and reinvestment of approximately 40% of the
assets of the Fund and to continuously review, supervise and administer the
Fund's investment program. WMC discharges its responsibilities subject to the
control of the officers and Directors of the Fund.
The Fund pays WMC a Basic Fee at the end of each fiscal quarter, calculated
by applying a quarterly rate, based on the following annual percentage rates, to
the Fund's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
--------------------------------------------------- -----
<S> <C>
First $50 million.................................. 0.325%
Next $100 billion.................................. 0.225%
Over $150 billion.................................. 0.150%
</TABLE>
The Basic Fee may be increased or decreased by applying an
incentive/penalty fee based on the investment performance of the assets of the
Fund managed by WMC relative to the investment record of The Growth Fund Stock
Index (the "Index") which is described in detail in the Prospectus.
The following table sets forth the incentive/penalty fee rates payable by
the Fund to WMC under the proposed investment advisory agreement:
<TABLE>
<CAPTION>
CUMULATIVE THREE YEAR INCENTIVE(+)/
PERFORMANCE DIFFERENTIAL PENALTY (-) FEE
VS. THE INDEX RATE
------------------------------------------------------ ---------------
<S> <C>
+12% or more above.................................... +.075%
+6% but less than +12%................................ +.0375%
Between +6% and -6%................................... --0--
-6% but less than -12%................................ -.0375%
-12% or more below.................................... -.075%
</TABLE>
The investment performance or the WMC Portfolio, for any period, expressed
as a percentage of the "WMC Portfolio unit value" at the beginning of such
period, will be the sum of: (i) the change in the WMC Portfolio unit value
during such period; (ii) the unit value of the Fund's cash distributions from
the WMC Portfolio net investment income and realized net capital gains (whether
long-term or short-term) having an ex-dividend date occurring within such
period; and (iii) the unit value of capital gains taxes paid or accrued during
such period by the Fund for undistributed realized long-term capital gains
realized from the WMC Portfolio.
The "WMC Portfolio unit value" will be determined by dividing the total net
assets of the WMC Portfolio by a given number of units. On the initial date of
the agreement, the number of units in the WMC Portfolio will equal the total
shares outstanding of the Fund. After such initial date, as assets are added to
or are withdrawn from the WMC Portfolio, the number of units of the WMC
Portfolio will be adjusted based on the unit value of the WMC Portfolio on the
day such changes are executed.
The investment record of the Index will be calculated quarterly by (i)
multiplying the total return for the quarter (change in market price plus
dividends) of each stock included in the Index by its weighting in the Index at
the beginning of the quarter, and (ii) adding the values discussed in (i). For
any period, therefore, the investment record of the Index will be the compounded
quarterly returns of the Index.
For the purposes of determining the incentive/penalty fee, the net assets
of the WMC Portfolio will be averaged over the same period as the investment
performance of the WMC Portfolio and the investment record of the S&P 500 or the
Index are computed.
10
<PAGE> 61
In April 1972, the Securities and Exchange Commission ("SEC") issued
Release No. 7113 under the Investment Company Act of 1940 to call attention of
directors and investment advisers to certain factors which must be considered in
connection with investment company incentive fee arrangements. One of these
factors is to "avoid basing significant fee adjustments upon random or
insignificant differences" between the investment performance of a fund and that
of the particular index with which it is being compared. The Release provides
that "preliminary studies (of the SEC staff) indicate that as a 'rule of thumb'
the performance difference should be at least 10 percentage points" annually
before the maximum performance adjustment may be made. However, the Release also
states that "because of the preliminary nature of these studies, the Commission
is not recommending, at this time, that any particular performance difference
exist before the maximum fee adjustment may be made." The Release concludes that
the directors of a fund "should satisfy themselves that the maximum performance
adjustment will be made only for performance differences that can reasonably be
considered significant." The Board of Directors of the Fund has fully considered
the SEC Release and believes that the performance adjustments as included in the
proposed agreement are entirely appropriate although not within the 10
percentage points per year range suggested in the Release. Under the Fund's
investment advisory agreement, the maximum performance adjustment is made at a
difference of P12 percentage points from the performance of the index over a
thirty-six month period, which would effectively be the equivalent of
approximately 4 percentage points difference per year. The Fund's investment
advisory agreement provides for no performance adjustment at a difference of
less than 6 percentage points from the performance of the index over a
thirty-six month period, which would be the equivalent of approximately 2
percentage points per year.
DURATION AND TERMINATION. The new agreement with WMC became effective
April 24, 1990. Since April 23, 1992, the agreement has been renewable for
successive one-year periods, only if each renewal is specifically approved by a
vote of the Fund's Board of Directors, including the affirmative votes of a
majority of the Directors who are not parties to the contract or "interested
persons" (as defined in the Investment Company Act of 1940) of any such party,
cast in person at a meeting called for the purpose of considering such approval.
In addition, the question of continuance of the agreement may be presented to
the shareholders of the Fund; in such event, continuance shall be effected only
if approved by the affirmative vote of a majority of the outstanding voting
securities of the Fund. The agreement may be terminated without penalty at any
time (1) either by vote of the Board of Directors of the Fund or by vote of a
majority of the outstanding voting securities of the Fund on sixty (60) days'
written notice to WMC, or (2) by WMC upon ninety (90) days' written notice to
the Fund.
PORTFOLIO TRANSACTIONS The new investment advisory agreement, as does the
present agreement, authorizes WMC (with the approval of the Fund's Board of
Directors) to select the brokers or dealers that will execute the purchases and
sales of portfolio securities for the Fund and directs WMC to use its best
efforts to obtain the best available price and most favorable execution as to
all transactions for the Fund. WMC has undertaken to execute each investment
transaction at a price and commission which provides the most favorable total
cost or proceeds reasonably obtainable under the circumstances.
In placing portfolio transactions, WMC will use its best judgment to choose
the broker most capable of providing the brokerage services necessary to obtain
best available price and most favorable execution. The full range and quality of
brokerage services available will be considered in making these determinations.
In those instances where it is reasonably determined that more than one broker
can offer the brokerage services needed to obtain the best available price and
most favorable execution, consideration may be given to those brokers which
supply investment research and statistical information and provide other
services in addition to execution services to the Fund and/or WMC. WMC considers
such information useful in the performance of its obligations under the
agreement but is unable to determine the amount by which such services may
reduce its expenses.
The investment advisory agreement also incorporates the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Directors, WMC may cause the Fund to pay a
broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transactions; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of WMC to the Fund and the other Funds in the Group.
11
<PAGE> 62
Currently, it is the Fund's policy that WMC may at times pay higher
commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. WMC will only pay such higher commissions if
it believes this to be in the best interest of the Fund. Some brokers or dealers
who may receive such higher commissions in recognition of brokerage services
related to execution of securities transactions are also providers of research
information to WMC and/or the Fund. However, WMC has informed the Fund that it
will not pay higher commission rates specifically for the purpose of obtaining
research services.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be effected through such
firms. However, the Fund may place portfolio orders with qualified
broker-dealers who recommend the Fund to other clients, or who act as agent in
the purchase of the Fund's shares for their clients, and may, when a number of
brokers and dealers can provide comparable best price and execution on a
particular transaction, consider the sale of Fund shares by a broker or dealer
in selecting among qualified broker-dealers.
RELATED INFORMATION CONCERNING WELLINGTON MANAGEMENT COMPANY ("WMC"), 75
State Street, Boston, MA 02109, is a professional investment counseling firm
which provides investment services to investment companies, other institutions
and individuals. Among the clients of WMC are more than 10 of the investment
companies of The Vanguard Group. As of December 31, 1994, WMC held discretionary
management authority with respect to more than $80 billion of assets. WMC and
its predecessor organizations have provided investment advisory services to
investment companies since 1933 and to investment counseling clients since 1960.
WMC is a Massachusetts general partnership of which the following persons are
managing partners: Messrs. Robert W. Doran, Duncan M. McFarland and John B.
Neff.
During the last three fiscal years, the Fund paid the following advisory
fees to WMC:
<TABLE>
<CAPTION>
1992 1993 1994
---------- ---------- ---------
<S> <C> <C> <C>
Basic Fee................................. $1,146,158 $1,198,679 $ 861,873
Increase (Decrease) for Performance
Adjustment.............................. -- (235,201) (351,876)
---------- ---------- ---------
Total................................ $1,146,158 $ 963,478 $ 509,997
========== ========== =========
</TABLE>
FRANKLIN PORTFOLIO ASSOCIATES TRUST The Fund employs Franklin Portfolio
Associates Trust ("Franklin") under an investment advisory agreement dated as of
April 24, 1990 to manage the investment and reinvestment of approximately
one-third of the Fund's assets. Franklin discharges its responsibilities subject
to the control of the Officers and Directors of the Fund.
The Fund pays Franklin Basic Fee by applying various percentage rates to
the average net assets of the Fund managed by Franklin. The fee schedule is as
follows:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------------------------------------------------- ----
<S> <C>
First $100 million.................................. 0.25%
Next $200 billion................................... 0.20%
Over $300 billion................................... 0.15%
</TABLE>
The Basic Fee may be increased or decreased by applying an
incentive/penalty fee based on the investment performance of the Fund relative
to the investment record of the Index. Such incentive/penalty fee provides for
an increase or decrease in Franklin's basic fee in an amount equal to .10% per
annum (.025% per quarter) of the average month-end net assets of the portion of
the Fund managed by Franklin if the investment performance of that portion of
the Fund for the thirty-six months preceding the end of the quarter is six
percentage points or more above or below, respectively, the investment record of
the Index for the same period.
12
<PAGE> 63
The following table sets forth the incentive/penalty fee rates payable by
the Fund to Franklin under the investment advisory agreement:
<TABLE>
<CAPTION>
THREE YEAR PERFORMANCE ANNUAL INCENTIVE(+)/
DIFFERENTIAL VS. THE PENALTY (-) FEE
INDEX RATE
------------------------------------------------------------ --------------------
<S> <C>
+6% or more above........................................... +.10%
Between +6% and -6%......................................... --0--
-6% or more below........................................... -.10%
</TABLE>
The investment performance of the FPA Portfolio, the "FPA Portfolio unit
value" and the "investment record of the Index" will be calculated in the same
manner as set forth under the discussion of the WMC Agreement on page 10.
For the purposes of determining the incentive/penalty fee, the net assets
of the FPA Portfolio will be averaged over the same period as the investment
performance of the FPA Portfolio and the investment record of the Index are
computed.
The formula used to determine the performance adjustments, differs from the
view taken by the staff of the Securities and Exchange Commission. For a more
detailed discussion, see page 11. The Board of Directors of the Fund believes
that the performance adjustments, as included in the proposed agreement with
FPA, are appropriate although less than the 10 percentage points per year range
suggested in SEC Release No. 7113. Under the proposed agreement, the maximum
performance adjustment is made at a difference of approximately 2 percentage
points per year.
The agreement with FPA is dated April 24, 1990 and continued until April
23, 1992. The agreement became renewable thereafter for successive one-year
periods, only if each renewal is specifically approved by a vote of the Fund's
Board of Directors, including the affirmative votes of a majority of the
Directors who are not parties to the contract or "interested persons" (as
defined in the Investment Company Act of 1940) of any such party, cast in person
at a meeting called for the purpose of considering such approval. In addition,
the question of continuance of the agreement may be presented to the
shareholders of the Fund; in such event, such continuance shall be effected only
if approved by the affirmative vote of a majority of the outstanding voting
securities of the Fund. The agreement may be terminated without penalty at any
time (1) either by vote of the Board of Directors of the Fund or by vote of a
majority of the outstanding voting securities of the Fund on 60 days' written
notice to FPA, or (2) by FPA upon 90 days' written notice to the Fund.
During the last three fiscal years, the Fund paid FPA the following
advisory fees:
<TABLE>
<CAPTION>
1992 1993 1994
-------- -------- --------
<S> <C> <C> <C>
Basic Fee..................................... $ 96,012 $470,526 $708,874
Increase (Decrease) for Performance
Adjustment.................................. -- -- --
-------- -------- --------
Total.................................... $ 96,012 $470,526 $708,874
========= ========= =========
</TABLE>
PORTFOLIO TRANSACTIONS The provisions of the agreement with FPA relating
to portfolio transactions are identical to those under the agreement between the
Fund and WMC, as described under "Portfolio Transactions" on page 11.
RELATED INFORMATION CONCERNING FRANKLIN PORTFOLIO ASSOCIATES ("FPA"), One
Post Office Square 3660, Boston, MA 02109, is a Massachusetts business trust,
which is a wholly owned subsidiary of Mellon Financial Service Corporation #1,
which is itself a wholly owned subsidiary of Mellon Bank Corporation. FPA is
managed by a Board of Trustees consisting of Messrs. John J. Nagorniak,
Chairman, Donald A. McMullen, Jr. and G. Christian Lantzsch.
FPA is a professional investment counseling firm which specializes in the
management of common stock portfolios through the use of quantitative investment
models. As of December 31, 1994, FPA provided investment advisory services with
respect to approximately $6.64 billion of client assets, including approximately
$5.9 million for Vanguard Quantitative Portfolios, Inc., another mutual fund
member of The Vanguard
13
<PAGE> 64
Group. During the year ended December 31, 1994, Vanguard Quantitative
Portfolios, Inc. paid FPA an annual advisory fee equal to .18 of 1% before an
increase of .01 of 1% based on performance.
HUSIC CAPITAL MANAGEMENT
The Fund also employs Husic Capital Management ("Husic") under an
investment advisory agreement dated as of September 24, 1993 to manage the
investment and reinvestment of approximately 13% of the Fund's assets. Husic
discharges its responsibilities subject to the control of the Officers and
Directors of the Fund.
For the services provided by Husic under the investment advisory agreement
the Fund will pay Husic a basic fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the average month-end net assets of the Husic Portfolio for
the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------------------------------------------------- ----
<S> <C>
First $25 million................................... 0.40%
Next $125 million................................... 0.35%
Next $350 million................................... 0.25%
Next $500 million................................... 0.20%
Over $1 billion..................................... 0.15%
</TABLE>
The basic fee paid to Husic, as provided above, may be increased or
decreased by applying an incentive/penalty fee based on the investment
performance of the Husic Portfolio relative to the investment record of the
Growth Fund Stock Index ("Growth Index"). Under the incentive/penalty fee
schedule, the basic fee payable to Husic may be increased or decreased by as
much as 75% of the basic fee depending on the investment performance of the
equity investment managed by Husic.
The incentive/penalty fee rates will be determined by measuring the
investment performance of the Husic Portfolio relative to the investment record
of the Index in accordance with the following table:
<TABLE>
<CAPTION>
ANNUAL RATES
AS A PERCENTAGE OF BASIC FEE
--------------------------------------
THREE YEAR PERFORMANCE FIRST ASSETS
DIFFERENTIAL VS. THE $200 MILLION IN EXCESS
GROWTH INDEX OF ASSETS OF $200 MILLION
------------------------------------------- ------------ -----------------
<S> <C> <C>
+12% points or more above.................. 175.0% 150.0%
Between +6% points and +12% points above... 137.5% 125.0%
Between +6% points and -6% points.......... 100.0% 100.0%
Between -6% points and -12% points......... 62.5% 75.0%
-12% points or more below.................. 25.0% 50.0%
</TABLE>
Until the Quarter ending September 30, 1996, the incentive/penalty fee for
Husic will be calculated according to the following transition rules:
(a) July 1, 1994 through September 30, 1996. Beginning with the quarter
ending September 30, 1994, and until the quarter ending September 30, 1996, the
incentive/penalty fee will be computed based upon a comparison of the investment
performance of the Husic Portfolio and that of the Growth Index over the number
of months that have elapsed between October 1, 1993 and the end of the quarter
for which the fee is computed. The number of
14
<PAGE> 65
percentage points by which the investment performance of the Husic Portfolio
must exceed or fall below the investment record of the Growth Index for the
quarters ending during this period are as follows:
<TABLE>
<CAPTION>
NUMBER OF
QUARTER ENDING PERCENTAGE POINTS
--------------------------------------- ------------------
<S> <C>
September 30, 1994..................... 4
December 31, 1994...................... 5
March 31, 1995......................... 6
June 30, 1995.......................... 7
September 30, 1995..................... 8
December 31, 1995...................... 9
March 31, 1996......................... 10
June 30, 1996.......................... 11
September 30, 1996..................... 12
</TABLE>
(b) On and After September 30, 1996. For the quarter ending September 30,
1996 and thereafter, the period used to calculate the incentive/penalty fee
shall be the 36 months preceding the end of the quarter for which the fee is
being computed and the number of percentage points used shall be 12.
The "investment performance of the Husic Portfolio," the "Husic Portfolio
unit value" and the "investment record of the Index" will be calculated in the
same manner as set forth under the discussion of the WMC Agreement on page 10.
For the purposes of determining the incentive/penalty fee, the net assets
of the Husic Portfolio will be averaged over the same period as the investment
performance of the Husic Portfolio and the investment record of the Growth Index
are computed.
The formula used to determine the performance adjustments differs from the
view taken by the staff of the Securities and Exchange Commission. For a more
detailed discussion, see page 11. The Board of Directors of the Fund believes
that the performance adjustments, as included in the proposed agreement with
Husic are appropriate although not within the 10 percentage point per year range
suggested in SEC Release No. 7113. Under the proposed agreement, the maximum
performance adjustment is made at a difference of approximately 4 percentage
points per year.
The new agreement with Husic dated September 24, 1993, will continue until
September 23, 1995. After this date the agreement is renewable for successive
one year periods in the same manner as the WMC agreement, as described under
"Duration and Termination" on page 11.
During the period ended December 31, 1993 and for the fiscal year ended
December 31, 1994, Vanguard/Morgan Growth Fund paid Husic the following advisory
fees:
<TABLE>
<CAPTION>
1993 1994
-------- ---------
<S> <C> <C>
Basic Fee............................ $140,254 $ 495,619
Increase (Decrease) for Performance
Adjustment......................... -- (181,969)
-------- ---------
Total........................... $140,254 $ 313,650
========= =========
</TABLE>
PORTFOLIO TRANSACTIONS The provisions of the agreement with Husic relating
to portfolio transactions are identical to those under the agreement between the
Fund and WMC, as described under "Portfolio Transactions."
RELATED INFORMATION CONCERNING HUSIC Husic Capital Management, 555
California Street, Suite 2900, San Francisco, California 94104, a California
limited partnership founded in 1986, provides investment advisory services to
investment companies, other institutions, and individuals. Frank J. Husic,
managing partner, is a controlling person of Husic. Husic's general partner is
Frank J. Husic & Co., a California corporation that is wholly owned by Frank J.
Husic. As of July 1, 1994, Husic provided investment advisory services to
clients having assets with an approximate value of $2.4 billion.
15
<PAGE> 66
With respect to each adviser, the Fund's Board of Directors may, without
the approval of shareholders, provide for:
A. The employment of a new investment adviser pursuant to the terms of a
new advisory agreement, either as a replacement for an existing adviser or as an
additional adviser.
B. A change in the terms of an advisory agreement.
C. The continued employment of an existing adviser on the same advisory
contract terms where a contract has been assigned because of a change in control
of the adviser.
Any such change will only be made upon not less than 30 days' prior written
notice to shareholders, which shall include the information concerning the
adviser that would have normally been included in a proxy statement.
PORTFOLIO TRANSACTIONS
The investment advisory agreements authorize the Advisers (with the
approval of the Fund's Board of Directors) to select the brokers or dealers that
will execute the purchases and sales of portfolio securities for the Fund and
directs the Advisers to use their best efforts to obtain the best available
price and most favorable execution as to all transactions for the Fund. The
Advisers have undertaken to execute each investment transaction at a price and
commission which provides the most favorable total cost or proceeds reasonably
obtainable under the circumstances. During the fiscal years ended December 31,
1992, 1993 and 1994 the Fund paid $1,402,721, $1,577,672 and $1,931,684
respectively, in brokerage commissions.
In placing portfolio transactions, the Advisers will use their best
judgment to choose the broker most capable of providing the brokerage services
necessary to obtain best available price and most favorable execution. The full
range and quality of brokerage services available will be considered in making
these determinations. In those instances where it is reasonably determined that
more than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration may be given to
those brokers which supply investment research and statistical information and
provide other services in addition to execution services to the Fund and/or the
Advisers. The Advisers consider such information useful in the performance of
their obligations under the agreement but are unable to determine the amount by
which such services may reduce its expenses.
The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Directors, the Advisers may cause the Fund to
pay a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the Advisers to the Fund and the other Funds in the Group.
Currently, it is the Fund's policy that the Advisers may at times pay
higher commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. The Advisers will only pay such higher
commissions if they believe this to be in the best interest of the Fund. Some
brokers or dealers who may receive such higher commissions in recognition of
brokerage services related to execution of securities transactions are also
providers of research information to the Advisers and/or the Fund. However, the
Advisers have informed the Fund that they will not pay higher commission rates
specifically for the purpose of obtaining research services.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be through such firms.
However, the Fund may place portfolio orders with qualified broker-dealers who
recommend the Fund to other clients, or who act as agent in the purchase of the
Fund's shares for their clients, and may, when a number of brokers and dealers
can provide comparable best price and execution on a particular transaction,
consider the sale of Fund shares by a broker or dealer in selecting among
qualified broker-dealers.
16
<PAGE> 67
Some securities considered for investment by the Fund may also be
appropriate for other Funds and/or clients served by the Advisers. If purchase
or sale of securities consistent with the investment policies of the Fund and
one or more of these other Funds or clients serviced by the Advisers are
considered at or about the same time, transactions in such securities will be
allocated among the several Funds and clients in a manner deemed equitable by
the Advisers.
YIELD AND TOTAL RETURN
The yield of the Fund for the 30-day period ended December 31, 1994 was
+1.27%.
The average annual total return of the Fund for the one-, five- and
ten-year periods ending December 31, 1994 was -1.67%, +8.05% and +12.54%,
respectively. Total return is computed by finding the average compounded rates
of return over the one-, five- and ten-year periods set forth above that would
equate an initial amount invested at the beginning of the periods to the ending
redeemable value of the investment.
PERFORMANCE MEASURES
There are a number of different ways to measure the performance of a mutual
fund. One of the these methods is to calculate the current yield of a fund or
portfolio. This is done by dividing the total amount of dividends per share paid
by a fund during the past twelve months by a current offering price (including
the sales charge, if any). Under certain circumstances, such as when there has
been a fundamental change in investment or dividend policies, it might be
appropriate to annualize the dividends paid over the period such policies were
in effect, rather than using the dividends paid during the past twelve months.
An alternate method is to calculate a compound yield. This is derived by
computing the total compounded dividends paid by a fund during the past twelve
months on the assumption that all dividends were reinvested in additional shares
(and giving no effect to capital gains distributions or taxes) and dividing this
by a current offering price. Another method is to calculate the total return by
dividing the change in value of an investment in shares over a period of time
(generally ten years or more), assuming the reinvestment of all dividends and
capital gains distributions, by the original net asset value of the shares.
Regardless of the method used, past performance is not necessarily indicative of
future results, but are an indication of the return to shareholders only for the
limited historical period used.
From time to time, advertisements, reports and promotional literature
regarding the Fund may compare its yield or total return (as calculated above)
to yields or returns reported by other investments and to various indices and
averages to assist an investor's calculation of how an investment in the Fund
might satisfy his investment objectives.
COMPARATIVE INDEXES
Each of the investment company members of the Vanguard Group, including
Vanguard/Morgan Growth Fund, Inc., may, from time to time, use one or more of
the following unmanaged indices for comparative performance purposes.
GROWTH FUND STOCK INDEX -- The Index is composed of the various common stocks
that are held in the 50 largest growth stock mutual funds, using year-end net
assets, monitored by Morningstar, Inc. Under an agreement with the Fund,
Morningstar, Inc. develops the composition of the Index and its total return
each quarter. Neither Vanguard Group, Inc. WMC, Franklin, nor Husic are
affiliated with Morningstar in any way.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES -- consists of more than 6,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
17
<PAGE> 68
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33
preferreds. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The index
is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current coupon
high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield for four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers High
Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Salomon Brothers High
Grade Bond Index.
RUSSELL 2000 SMALL COMPANY STOCK INDEX -- consists of the smallest 2,000 stocks
within the Russell 3000; a widely-used benchmark for small capitalization common
stocks.
LIPPER BALANCED FUND AVERAGE -- An industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)
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LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market
weighted index that contains individually priced U.S. Treasury, agency and
corporate securities rated BBB- or better with maturities greater than 10 years.
The index has a market value of over $900 billion.
RUSSELL 3000 INDEX -- consists of approximately the 3,000 largest stocks of U.S.
domiciled companies commonly traded on the New York and American Stock Exchanges
or the NASDAQ over-the-counter market, accounting for over 90% of the market
value of publicly traded Stocks in the U.S.
CAPITAL OPPORTUNITIES FUND STOCK INDEX -- The Index is composed of the various
common stocks that are held in the 50 largest aggressive growth stock mutual
funds, using year-end net assets, monitored by Morningstar, Inc.
Advertisements which refer to the use of the Fund as a potential investment
for Individual Retirement Accounts may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax applies.
In assessing such comparisons of yields, an investor should keep in mind
that the composition of the investments in the reported averages is not
identical to the Fund's portfolio and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its yield. In addition there can be no assurance that the Fund
will continue its performance as compared to such other averages.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended December 31, 1994,
including the financial highlights for each of the five fiscal years in the
period ended December 31, 1994, appearing in the Vanguard/Morgan Growth Fund
1994 Annual Report to Shareholders, and the report thereon of Price Waterhouse
LLP, independent accountants, also appearing therein, are incorporated by
reference in this Statement of Additional Information. The Fund's 1994 Annual
Report to Shareholders is enclosed with this Statement of Additional
Information.
APPENDIX -- DESCRIPTION OF SECURITIES
I. DESCRIPTION OF FOREIGN INVESTMENTS
The Fund may invest in the securities (payable in U.S. dollars) of foreign
issues and in the securities of foreign branches of U.S. banks such as
negotiable certificates of deposit (Eurodollars). Because the Fund invests in
such securities, investment in the Fund involves investment risks that are
different in some respects from an investment in a fund which invests only in
debt obligations of U.S. issuers. Such risks may include future political and
economic developments, the possible imposition of withholding taxes on interest
income payable on the securities held, possible seizure or nationalization of
foreign deposits, the possible establishment of exchange controls or the
adoption of other restrictions by foreign governments which may adversely affect
the payment of principal and interest on securities held by the Fund, difficulty
in obtaining and enforcing court judgments abroad, the possibility of
restrictions on investments in other jurisdictions, reduced levels of government
regulation of securities markets in foreign countries, and difficulties in
effecting the repatriation of capital invested abroad. A Fund will not purchase
any such foreign security if, as a result, more than 20% of the value of the
Fund's total assets would be invested in such securities.
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