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[VANGUARD MORGAN GROWTH FUND LOGO]
Annual Report 1995
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In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard LIFEStrategy Funds and the other Funds in The
Vanguard Group. Mr. Brennan will continue to serve as President of the Funds,
and I will continue to serve as Chairman of the Board.
As a shareholder of the Funds since their inceptions and as Chairman
of all the Vanguard Funds, I want to tell you that I am enthusiastic and
confident that Jack Brennan is exactly the right person to succeed me as Chief
Executive Officer. To use yet another Vanguard nautical metaphor, he will be
the new captain. He has the qualities of leadership, integrity, intelligence,
and vision that must continue to be Vanguard's hallmark as we move toward, and
then into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising like a rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became Chief Executive Officer of Vanguard's predecessor organization in 1967,
at the age of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our costs
of operation to a minimum, and in retaining our position as the lowest-cost
provider of financial services in the world. He is a true competitor, who
shares Vanguard's dedication to providing highly competitive returns to our
investors relative to the returns provided by other mutual funds with
comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you to
Vanguard in the first place will remain intact.
[FIGURE 1]
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in
me in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
-----------------
VANGUARD/MORGAN GROWTH FUND seeks to provide long-term growth of capital by
investing primarily in the common stocks of established growth companies, but
may also invest in emerging and cyclical growth companies. Current income and
short-term fluctuations are not considerations in the selection of investments.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
With a total return of +36.0% during 1995, Vanguard/Morgan Growth Fund enjoyed
the second largest gain in our 27-year history. This gain was achieved in the
most powerful stock market in nearly four decades, making equities clearly the
best asset class in which to have been invested.
The table below reflects our fine absolute performance and also compares
our total return (capital change plus reinvested dividends) with that of the
unmanaged Standard & Poor's 500 Composite Stock Price Index and the average
growth mutual fund. In a year in which large-capitalization stocks led the
market, we gave the large-cap, blue-chip Index a run for its money. We also
provided a return substantially above the return of our mutual fund peer group.
<TABLE>
<CAPTION>
- -------------------------------------------------------
TOTAL RETURN
------------------
YEAR ENDED
DECEMBER 31, 1995
- -------------------------------------------------------
<S> <C>
MORGAN GROWTH FUND +36.0%
- -------------------------------------------------------
AVERAGE GROWTH MUTUAL FUND +30.8%
STANDARD & POOR'S 500 STOCK INDEX +37.6
- -------------------------------------------------------
</TABLE>
The Fund's return is based on net asset values of $11.36 per share on December
31, 1994, and $14.09 on December 31, 1995, with the latter figure adjusted to
take into account the reinvestment of our annual dividend of $.15 per share
from net investment income and two distributions totaling $1.16 per share from
net capital gains, nearly all of which were realized during the calendar year.
THE STOCK MARKET IN 1995
The great bull market in stocks we enjoyed during the year was virtually
uninterrupted, as stock prices rose in eleven of the past twelve months. The
dimension of the increase was close to record breaking, delighting the bulls
even as it astonished the bears. By year's end, the Standard & Poor's 500
Index had generated a total return of +37.6%--its best year since 1958.
There were, as always, many opinions as to the source of the surprising
strength in the stock market. In my view, it resulted from a combination of:
(1) record-breaking corporate profits; (2) a growing speculative fever in the
marketplace, especially during the final weeks of the year; and (3) a sharp
decline in long-term interest rates. The rise in corporate profits was
particularly striking. It's estimated that operating earnings for the companies
in the Standard & Poor's 500 Index increased about +15% in 1995, after already
rising +16% in 1994. (Since 1926, earnings growth has averaged less than +7%
per year.) If there is a cautionary signal in this boom in profits, it is that
the two-year cumulative earnings growth of +33% has been accompanied by
dividend growth of only +11%.
This subdued dividend growth in the face of sharply higher stock prices
resulted in a decline in the yield on the Index to 2.2%, the lowest level on
record. Nonetheless, the Wall Street chorus sings "this time it's different."
Dividend yield and earnings growth--the two fundamentals of stock returns-- are
clearly taking a back seat to the market's high valuation of the long-term
fundamentals. This is called "speculation," and it is hardly an inconsequential
component of 1995's high returns on stocks. So, as 1996 begins, we face an
environment that is surely sobering.
The huge decline in interest rates during the year not only provided a
major stimulus to the stock market but also set bond prices afire. The yield of
the Lehman Long-Term Corporate Bond Index declined from 8.9% to 6.9% during
1995, even below its level of 7.1% at the start of 1994. The 1995 decline drove
long-term bond prices upward by fully +19%, resulting in a total return
(including the interest coupon) of +28%--remarkably competitive with the return
on stocks. Short-term rates also declined, as the Federal Reserve reduced the
Federal funds rate (the rate at which banks borrow from one another) in July
and again in December. On balance during the year, the yield on the U.S.
Treasury bill eased from 5.6% to 5.0%.
This improvement in the actual (and expected) interest rate environment
was caused largely by a measurable softening in the growth of
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[FIGURE 2]
the U.S. economy, perhaps with further weakness to come. A sluggish economy, in
turn, engendered continued optimism about the benign outlook for inflation.
Indeed, the Consumer Price Index (CPI) was quite well behaved in 1995, rising
by but +2.6%, its smallest increase since 1986. Investors should carefully
ponder the extent to which today's high growth rate of corporate earnings is
likely to be sustained in a slowing economy.
THE 1990S SO FAR
During the past year, growth stocks (return of +38.1%) and value stocks
(+37.0%) were relatively equal participants in the great bull market. So far
during the 1990s, as shown in the chart above, there was little overall
difference between the two investment styles, despite some considerable
year-to-year variations.
You will note that, during this six-year period, the average annual rates
of return of the two groups of stocks were virtually identical: +13.3% for the
Standard & Poor's Growth Index and +12.6% for the Standard & Poor's Value
Index. (Each Index represents about 50% of the total market capitalization of
the Standard & Poor's 500 Index.) Since this long-term congruence conceals
significant annual variations, we have also shown the year-by-year total
returns of the two Indexes. Please note especially the enormous disparity of
returns in 1993 (Growth Index +2%; Value Index +19%). Note also that the Growth
Index was the better performer in four of the remaining five years.
What should you make of these numbers? I suggest that you consider my
comments in our 1994 Annual Report: "This outcome suggests the wisdom of
consistently sticking to your objectives, rather than endeavoring (fruitlessly,
I believe) to switch back and forth between these two market segments in the
search for higher returns. Put another way, most investors would benefit by
'staying the course' that best meets their needs, whether in growth stocks or
value stocks, or some steady mix of the two."
I should add that the extraordinary gains achieved by stocks in the great
bull market of 1995 have materially added to the total return of the Standard &
Poor's 500 Index so far during the 1990s. One year ago, the five-year return on
the Index averaged just +8.7% annually. When we tack on an ebullient 1995, the
six-year return rises sharply, to +13.1%. These two returns, in substance,
nicely bracket the +10.7% long-term (since 1926) annual return on stocks. In
any event, I would be very surprised if the decade of the 1990s, when it comes
to its conclusion, will have matched the average return on stocks of +17.5% per
year during the Golden Eighties.
THE FUND IN 1995
In a very strong market for the large blue-chip stocks, we are pleased that the
total return of Morgan Growth Fund proved so competitive with that of the
Standard & Poor's 500 Index. Indeed, despite the fact that less than 60% of our
assets was invested in stocks represented in the Index, the return on the stock
portion of our portfolio exceeded the Index return. Our shortfall, then,
resulted from our customary modest position in cash reserves (averaging about
8% of net assets), which slightly eroded our performance edge.
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Within the stock component, the Fund was aided by its lower position (5%
of assets versus 10% for the Index) in the lagging energy sector. On the other
hand, generally good selections of specific technology issues were pretty much
offset by inferior selections in the health-care arena.
We are especially proud of the drubbing (there is really no other word for
it) we gave the average growth mutual fund, exceeding its return of +30.8% by
more than five percentage points. With one exception, the composition of the
average growth portfolio was quite similar to ours. We both held almost
identical weightings in large-, medium-, and small-cap U.S. stocks, and we both
had small allocations (about 9% of our assets) in the lagging foreign stock
group. The only significant difference was our much larger investment in the
technology sector (26% for the Fund versus 20% for our peers), where our good
choice of individual technology issues, as noted above, appears to have been
largely responsible for our substantial performance superiority.
It gives me great pleasure to report that each of the four investment
advisers we employ under our multi-manager strategy outpaced the average growth
fund, in each case by a substantial margin. The return earned by Husic Capital
Management, however, was truly superb. (Husic trailed the other advisers in
1994; there may be a message here!) Vanguard's Core Management Group also
distinguished itself with an outstanding year. In all, I believe that our
multi-manager strategy, designed and established in 1990 to ensure broad
diversification, is beginning to justify our confidence. This table shows the
Fund's allocation of assets at year end:
<TABLE>
<CAPTION>
- --------------------------------------------------------
TOTAL NET ASSETS
-------------------------
DECEMBER 31, 1995 1994
-------------------------
MILLIONS % %
- --------------------------------------------------------
<S> <C> <C> <C>
WELLINGTON MANAGEMENT CO. $ 567 39 40
FRANKLIN PORTFOLIO ASSOCIATES 484 33 34
HUSIC CAPITAL MANAGEMENT 189 13 12
VANGUARD CORE MANAGEMENT 149 10 10
CASH RESERVES 82 5 4
- --------------------------------------------------------
TOTAL $1,471 100% 100%
- --------------------------------------------------------
</TABLE>
The small annual changes in allocation largely reflect differences in each
manager's relative return; at this time, we expect no reallocations during
1996. We would note that, despite its modest allocation of 13% of assets, Husic
has marginally boosted the Fund's total volatility, and hence its risk.
THE PERSPECTIVE OF A DECADE
Morgan Growth Fund's outstanding return in 1995 added a modest increment to our
ten-year superiority over the average growth fund. As shown in the chart on
the following page, we have experienced our ups and downs during the past
decade. On balance, however, we have provided returns that are more than
competitive with industry norms. While we have lagged the Standard & Poor's 500
Index over the full period, we continue to seek to outpace it (which we have
succeeded in doing over our full twenty-seven years of operations, going back
to December 31, 1968). This table summarizes our ten-year record:
<TABLE>
<CAPTION>
- ----------------------------------------------------
TOTAL RETURN*
----------------------
DECEMBER 31, 1985, TO
DECEMBER 31, 1995
----------------------
FINAL VALUE
AVERAGE OF INITIAL
ANNUAL INVESTMENT
RATE OF $10,000
- ----------------------------------------------------
<S> <C> <C>
MORGAN GROWTH FUND +13.0% $34,030
- ----------------------------------------------------
AVERAGE GROWTH FUND +12.4% $32,080
STANDARD & POOR'S 500 INDEX +14.9 39,950
- ----------------------------------------------------
</TABLE>
*Assumes reinvestment of all income dividends and capital gains distributions.
It should go without saying that the returns reflected in the table are merely
history. Future returns of the Fund--both on an absolute basis and relative to
the average growth fund and the Index--are unpredictable and may be better or
worse than those illustrated.
I would note, in candor, that Morgan Growth Fund's annual margin of
superiority over our peers was more than accounted for by our expense ratio
advantage of about 1.0% (our annual costs amounted to only 0.5% last year,
compared to 1.5% for our
3
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[FIGURE 3]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1995
- -------------------------------------------------------------
1 Year 5 Years 10 Years
- -------------------------------------------------------------
<S> <C> <C> <C>
MORGAN GROWTH FUND +35.98% +15.25% +13.03%
AVERAGE GROWTH FUND +30.79 +15.73 +12.36
STANDARD & POOR'S 500 INDEX +37.58 +16.59 +14.86
</TABLE>
Note: Past performance is not predictive of future performance.
competitors). Thus, the gross returns earned by our advisers were a hair below
average. We aspire to a much higher goal than "average," and our low costs are
designed to give us a bit of a tailwind on our voyage to superior returns.
The chart above also reflects our shortfall in return relative to the
Standard & Poor's 500 Index. This Index, as you know, is a tough competitor for
actively managed mutual funds. It always has been! The Index is calculated "on
paper," without the real world expenses of fund operations, advisory fees,
portfolio transaction costs, and the impact of cash reserves. Mutual funds, on
the other hand, must incur such costs, which has made it difficult for most
professional money managers to provide more than compensatory returns. Indeed,
during the past decade, only 32 of the 154 growth funds in operation throughout
the period (there are now 646 growth funds!) outpaced the Index.
IN SUMMARY
When I wrote to you in our 1994 Annual Report, after a tough and bumpy ride in
a lackluster year, I warned you that "the stock market is surely due for its
share of difficult bumps along the way during the next few years." As 1995 was
to turn out, I hardly could have been more wide of the mark. Whether 1996 or
even 1997 will confirm my caution remains to be seen.
To state the obvious, 1995 was an extraordinarily bountiful year for the
shareholders in Morgan Growth Fund. We should all take (only) a moment to bask
in the light of the generous rewards we earned. We should also recognize,
however, that the financial markets are never a "one-way street," and the risks
that exist today in the stock market may well come home to roost in 1996 and
erode our 1995 bounty. Put even more bluntly, our shareholders enjoyed an
enhancement of +36% in value during the year. With this gain now behind us,
even a significant market decline seems unlikely to take shareholders back to
where we were--presumably with satisfaction--just one year ago.
Under these circumstances, what course of action should shareholders of
Morgan Growth Fund follow? In our Annual Report a year ago, under very
4
<PAGE> 7
different circumstances, I urged you to "stay the course," despite the
lackluster returns provided by equities during the year. Today, you should
recognize that, despite the short-term risks of investing, the biggest
long-term risks are: (1) failing to invest in stocks at all; and (2) following
an erratic and ever- changing course. For our part, we intend to carefully
oversee the work of our four advisers, as they together seek to achieve the
Fund's goal of long-term capital growth that has been in place since we began
operations in 1968. "Stay the course" proved wise counsel a year ago; I
reiterate it today.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
January 11, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
5
<PAGE> 8
AVERAGE ANNUAL TOTAL RETURNS
The average annual total returns for the Fund (periods ended December 31, 1995)
are as follows:
<TABLE>
<CAPTION>
10 YEARS
-------------------------------------
INCEPTION TOTAL CAPITAL INCOME
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
-------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
MORGAN GROWTH FUND 12/31/68 +35.98% +15.25% +13.03% +10.81% +2.22%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
6
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REPORT FROM WELLINGTON MANAGEMENT COMPANY
The domestic stock market turned in a surprisingly strong performance in 1995,
propelled by the unusual combination of sharply falling long-term interest
rates and sharply higher corporate profits. We are happy to report that our
portfolio turned in a result that was close to the market's near-record return,
and we finished the year ahead of comparable growth funds.
Meanwhile, the mid-cycle slowdown in the domestic economy has continued
for longer than we had anticipated. Slow job growth and constrained consumption
have prolonged the inventory overhang, keeping pressure on production and
pricing. While the probabilities of a recession are higher than a year ago, we
still do not see the excesses that have historically led to a severe economic
downturn.
We do see subdued consumer spending patterns plus slowing capital goods
and export growth, but the Federal Reserve has left itself plenty of room to
bring short-term interest rates down. In fact, given the slow pace of business
and the good inflation numbers, the Fed has perhaps been too slow to lower
rates. The recent quarter-point reduction in short rates is apt to be followed
by further Fed action. This combination of easier monetary policy and fiscal
restraint, coming from whatever budget accord is achieved, should spur better
levels of economic activity in the second half of this year. Even so, real
economic growth this year will probably be under 2%, which is less than in
1995. In addition, corporate profit growth will be significantly lower than in
1995.
During the past few months, with the U.S. economy remaining in the
doldrums, technology stocks faltered as investors shifted their emphasis to
companies in more stable industries, such as health care and consumer staples,
as well as to those that benefit from lower interest rates, such as financial
issues. Besides the technology sector, where electronics and communications
stocks suffered the most, other lagging stock groups included the more
economically sensitive consumer cyclical and basic commodity companies. At this
point, valuations on the more stable industry participants seem to be rich in
contrast to their more cyclical brethren, where valuations are more subdued,
but are still at risk for possible earnings disappointment during this extended
period of economic malaise.
Our plan is to emphasize companies that we believe can produce
above-average earnings despite a difficult operating environment. While we
remain big believers in the long-term potential of technology, including such
important trends as client/server computing, data processing outsourcing,
wireless communications, and the burgeoning Internet, we did, in fact, take
some money out of the technology arena during the past six months as selected
stocks reached our price targets. A look at the additions to the portfolio
during this period shows that we established 17 new positions in seven
different sectors; four of the new names were in technology. This diversity
illustrates our approach to the growth universe. At the current time, we
particularly like media, health care, computer software and services, and
communications.
Since our last report, we have added a number of new names to the
portfolio that have developed strong brand identities. In the consumer arena,
we added Gucci, a name synonymous with luxury goods; Starbucks, the coffee
chain; Southwest Airlines, a well-run airline; and two Italian stylists: Fila
in shoes and apparel, and De Rigo in eyewear. The final new brand name
introduced to the portfolio during the period was COMPAQ. While the company
obviously does have strong brand awareness in consumer channels, our interest
in the company is due principally to its strengths in international markets and
in servers for the corporate PC upgrade cycle.
Other additions during this period included three computer
software/service firms, namely IDX Systems in the hospital information market,
DST Systems in the financial/mutual fund sector, and FTP Software, a
communications software company with exposure to the Internet. We also returned
in a way to Vencor, a health services provider that recently purchased
Hillhaven, a stock where we had achieved a very nice return this past year.
Because we have been optimistic about domestic natural gas prices, we bought
two growing gas companies, Noble Affiliates and Union Pacific Resources, the
latter company being the energy operation that is spinning
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<PAGE> 10
out of the railroad conglomerate. In the financial sector, we added State
Street Boston, the largest servicer of financial assets in the world, and
Amerin, a rapidly growing, small, low-cost operator changing the way mortgage
insurance is provided to the home buyer.
Most of the eliminations during this period were examples of
profit-taking, with only a couple of sales due to disappointing developments at
the companies. Of note, we eliminated four broadcasting companies, three on
takeovers--CBS, Capital Cities, and Multimedia--and the fourth, Infinity
Broadcasting, on very strong price movement. We took nice gains in Baby
Superstore and Biogen. We shifted the proceeds of the first into Home Depot,
the predominant home supply chain, and we shifted the proceeds of the latter
into Genetics Institute, another strong biotech entity, and Biomet, the world's
premier orthopedic purveyor. We also took profits in the technology companies
McAfee and Uunet. Although we did well with Uunet, Microsoft's Internet access
provider, we sold the Internet stocks early, maybe because we relied a little
too much on traditional valuation approaches.
Some of the losers we eliminated included Avid Technology, involved in
digital media editing, where we were blindsided on fundamentals, and Physician
Corp. of America, which turned out to be a poorly run HMO. Our final sales were
Estee Lauder, a recent IPO, where we liked the company a lot, but the stock
took a very sharp run-up immediately after it was issued and so we decided to
move on, Cabletron Systems, a networking hardware provider, and Andina, the
Chilean Coke bottler, where we nailed down a very nice profit.
In summary, the global economic slowdown puts earnings at risk at many
companies. However, we believe that there is only a moderate likelihood of a
domestic recession. In response to this slowdown, we do think that there will
be a measurable decline in short-term rates, especially if the budget battle in
Washington can be resolved. Meanwhile, in this weaker economic environment, we
believe that growth companies remain well positioned in the stock market.
Respectfully,
Robert D. Rands, Senior Vice President
Portfolio Manager
Wellington Management Company
January 15, 1996
8
<PAGE> 11
SPECIAL NOTICE TO SHAREHOLDERS
NEW AGREEMENT TO REDUCE INVESTMENT ADVISORY FEES
We are pleased to announce that the Board of Directors of Vanguard/Morgan
Growth Fund has reached an agreement with Wellington Management Company (WMC),
one of the Fund's investment advisers, on a revised investment advisory
agreement. The revised agreement involves a reduction in the annual rate of
advisory fees to be paid to WMC. Given the assets of $567,098,000 currently
assigned to WMC, the dollar amount of the annual fee paid to WMC would decline
from $1,013,000 to $942,000, a reduction of $71,000. The new effective annual
fee rate paid to WMC would equal 0.17% of its current assets and would decline
further if its assets under management were to continue to grow.
Under the terms of the new agreement, the Fund will pay WMC a basic
advisory fee at the end of each fiscal quarter based on the average month-end
net assets managed by WMC during the quarter. The quarterly rate is applied
according to the following annual fee schedule:
<TABLE>
<CAPTION>
- ----------------------------------------------
ANNUAL BASIC
NET ASSETS FEE RATE
- ----------------------------------------------
<S> <C>
FIRST $500 MILLION 0.175%
NEXT $500 MILLION 0.100
OVER $1 BILLION 0.075
- ----------------------------------------------
</TABLE>
Both the current and revised agreements provide that the basic fee may be
increased or decreased by applying an incentive/penalty fee adjustment based on
the investment performance of the WMC-managed assets relative to the investment
performance of the Growth Fund Stock Index. (The Index measures the performance
of the common stock holdings of the 50 largest growth mutual funds, as
calculated by Morningstar, Inc.) The table to the right sets forth the
incentive/penalty adjustment to the basic advisory fee payable by the Fund to
WMC under the new advisory agreement.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
CUMULATIVE 36-MONTH PERFORMANCE PERFORMANCE FEE
VERSUS THE GROWTH FUND STOCK INDEX ADJUSTMENT*
- ----------------------------------------------------------
<S> <C>
LESS THAN -12% -0.50 X BASIC FEE
BETWEEN -12% AND -6% -0.25 X BASIC FEE
BETWEEN -6% AND 6% 0.00 X BASIC FEE
BETWEEN 6% AND 12% +0.25 X BASIC FEE
MORE THAN 12% +0.50 X BASIC FEE
- ----------------------------------------------------------
</TABLE>
*For purposes of this calculation, the basic fee is calculated by applying the
quarterly fee rate against average assets over the 36-month period.
This revised investment advisory agreement replaces the Fund's original
agreement with the adviser dated April 24, 1990, and will go into effect on
April 1, 1996. (Under the rules of the Securities and Exchange Commission, the
new incentive/penalty fee will not be fully operable until the quarter ending
June 30, 1999; until that date, the fee will be calculated according to certain
transition rules.) Until the effective date, the adviser has agreed to waive
its advisory fees to the extent necessary to abide by the new fee schedule. For
the year ended December 31, 1995, the Fund paid approximately $571,000 to WMC
for investment advisory services.
The adviser, located at 75 State Street, Boston, Massachusetts, is a
professional investment advisory firm which globally provides investment
services to investment companies, institutions, and individuals. Among the
clients of WMC are 12 investment companies of The Vanguard Group of Investment
Companies. Under the terms of its investment advisory agreement with the Fund,
the adviser agrees to manage the investment and reinvestment of the assets of
the Fund and to continuously review, supervise, and administer the Fund's
investment program. The adviser discharges its responsibilities subject to the
control of the officers and directors of the Fund.
9
<PAGE> 12
REPORT FROM FRANKLIN PORTFOLIO ASSOCIATES
Toward the end of our 1995 fiscal year, the economy began to show some signs of
slowing as we near the 1996 election campaign. A downward shift in rates by the
Fed is a favorable indication that policymakers are attuned to mitigating the
boom-bust cycle to a sufficient degree. The shift rightward in the economic
agenda seems to have peaked. We foresee a new political equilibrium emerging
that will have the government's share of the economy at lower levels. The
degree to which the budget negotiations have foundered may be in part a sign of
sensitivity to these approaching elections. Although the two sides in the
debate were never as far apart as their rhetoric indicated, it still seems too
early to glance with fear or joy toward the 1996 elections.
The nation's problems associated with income inequality appear to be
growing. This is a structural phenomenon and cannot change greatly in the short
term. The degree to which either policy or market forces mitigate this problem
is open to question and may be one of the big questions of the next few years.
In the financial markets, the dollar showed a spotty weakness against the
major European currencies, but was strong against major Pacific Rim currencies.
During the past fiscal year, particular strength was shown by financial related
issues, and by the health-care sector. Larger capitalization stocks also
outperformed smaller issues. We continue to view equities as being slightly on
the "rich" side. We offer the caveat that market timing is not, in our view, an
ingredient of most successful investment strategies. "Staying the course" with
a well-chosen investment mix suits most investors' needs and temperaments.
We have been managers of part of the Vanguard/Morgan Growth Fund for over
five and one-half years. This period has been a favorable one for the ownership
of equities, with the S&P 500 Index up +14.9% per annum. The strong 1995, with
an S&P return of +37.6%, was an unusual year. It underscores the benefits of
equity ownership.
For the past year, our performance was weaker than our passive Growth Fund
Stock Index benchmark, driven mostly by weak relative performance in December.
We take solace from the fact that performance comparisons for both short and
long time periods show us to have a favorable competitive position within the
peer group of Morningstar Growth Funds. This table summarizes our record:
<TABLE>
<CAPTION>
- ----------------------------------------------------
RANK OF FRANKLIN/MORGAN SUB-PORTFOLIO
VERSUS MORNINGSTAR GROWTH FUNDS
-------------------------------------
THROUGH 12/31/95
- ----------------------------------------------------
<S> <C>
LAST 5 YEARS 83RD OUT OF 294
LAST 3 YEARS 86TH OUT OF 437
LAST 1 YEAR 218TH OUT OF 770
- ----------------------------------------------------
</TABLE>
Source: Morningstar, Inc.
Our strategy is to build a margin of superiority by trying to achieve many
small positive differences in performance rather than a few big ones. This
strategy leads to our being fully invested at all times. Therefore, the market
value of our portion of the portfolio is almost certain to decline in a
sustained bear market for equities. Our strategy is more compatible with the
needs of long-term equity investors than with those of speculators. We look
forward to 1996 with considerable optimism.
Respectfully,
Franklin Portfolio Associates
January 8, 1996
10
<PAGE> 13
SPECIAL NOTICE TO SHAREHOLDERS
NEW AGREEMENT TO REDUCE INVESTMENT ADVISORY FEES
We are pleased to announce that the Board of Directors of Vanguard/Morgan
Growth Fund has reached agreement with Franklin Portfolio Associates (FPA), one
of the Fund's investment advisers, on a revised investment advisory agreement.
The revised agreement involves a reduction in the annual rate of advisory fees
to be paid to FPA, however, the savings will not begin until assets exceed
$500,000,000. The effective annual fee rate equals 0.19% of the adviser's
current assets but will decline if its assets under management grow above
$500,000,000.
Under the terms of the new agreement, the Fund will pay FPA a basic
advisory fee at the end of each fiscal quarter, based on the average month-end
net assets managed by FPA during the quarter. The quarterly rate is applied
according to the following annual fee schedule:
<TABLE>
<CAPTION>
- -----------------------------------------------
ANNUAL BASIC
NET ASSETS FEE RATE
- -----------------------------------------------
<S> <C>
FIRST $100 MILLION 0.25%
NEXT $200 MILLION 0.20
NEXT $200 MILLION 0.15
OVER $500 MILLION 0.10
- -----------------------------------------------
</TABLE>
Both the current and revised agreements provide that the basic fee may be
increased or decreased by applying an incentive/penalty fee adjustment based on
the investment performance of the FPA-managed assets relative to the investment
performance of the Growth Fund Stock Index. (The Index measures the performance
of the common stock holdings of the 50 largest growth mutual funds, as
calculated by Morningstar, Inc.)
This revised investment advisory agreement replaces the Fund's original
agreement with the adviser dated April 24, 1990, and will go into effect on
April 1, 1996. Until the effective date, the adviser has agreed to waive its
advisory fees to the extent necessary to abide by the new fee schedule. For the
year ended December 31, 1995, the Fund paid approximately $923,000 to FPA for
investment advisory services.
The adviser, located at One Post Office Square, Boston, Massachusetts, 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, which is itself a
wholly-owned subsidiary of Mellon Bank Corporation. Under the terms of its
investment advisory agreement with the Fund, the adviser agrees to manage the
investment and reinvestment of the assets of the Fund and to continuously
review, supervise, and administer the Fund's investment program. The adviser
discharges its responsibilities subject to the control of the officers and
directors of the Fund.
11
<PAGE> 14
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD/MORGAN GROWTH FUND for the 25-year period ended December 31, 1995.
During the period illustrated, stock prices fluctuated widely; these results
should not be considered a representation of the dividend income or capital
gain or loss that may be realized from an investment made in the Fund today.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA* TOTAL INVESTMENT RETURN**
- ------------------------------------------------------------------------------------------------------------------------
Morgan Growth Fund S&P 500
Value with Income ------------------------------ -------
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1971 $ 8.06 -- $.10 $ 8.18 +26.3% +1.9% +28.2% +14.2%
- ------------------------------------------------------------------------------------------------------------------------
1972 9.18 $ .48 .07 9.96 +20.7 +1.1 +21.8 +19.0
- ------------------------------------------------------------------------------------------------------------------------
1973 7.11 .27 .09 8.05 -20.0 +0.8 -19.2 -14.7
- ------------------------------------------------------------------------------------------------------------------------
1974 4.74 -- .11 5.45 -33.4 +1.1 -32.3 -26.3
- ------------------------------------------------------------------------------------------------------------------------
1975 6.62 -- .13 7.81 +39.7 +3.4 +43.1 +37.1
- ------------------------------------------------------------------------------------------------------------------------
1976 7.77 -- .11 9.30 +17.4 +1.7 +19.1 +23.8
- ------------------------------------------------------------------------------------------------------------------------
1977 8.18 -- .15 9.99 + 5.2 +2.2 + 7.4 - 7.2
- ------------------------------------------------------------------------------------------------------------------------
1978 9.35 .11 .21 11.92 +16.1 +3.2 +19.3 + 6.5
- ------------------------------------------------------------------------------------------------------------------------
1979 9.47 1.13 .29 14.16 +15.3 +3.5 +18.8 +18.4
- ------------------------------------------------------------------------------------------------------------------------
1980 12.36 -- .31 19.08 +30.5 +4.2 +34.7 +32.4
- ------------------------------------------------------------------------------------------------------------------------
1981 11.05 .45 .29 18.16 - 7.1 +2.3 - 4.8 - 4.9
- ------------------------------------------------------------------------------------------------------------------------
1982 12.01 1.31 .30 23.19 +24.1 +3.6 +27.7 +21.5
- ------------------------------------------------------------------------------------------------------------------------
1983 13.84 1.04 .25 29.77 +25.8 +2.6 +28.4 +22.5
- ------------------------------------------------------------------------------------------------------------------------
1984 11.45 1.39 .31 27.97 - 8.1 +2.0 - 6.1 + 6.3
- ------------------------------------------------------------------------------------------------------------------------
1985 13.82 .60 .25 36.44 +27.5 +2.8 +30.3 +31.8
- ------------------------------------------------------------------------------------------------------------------------
1986 11.50 2.88 .43 39.29 + 4.2 +3.6 + 7.8 +18.6
- ------------------------------------------------------------------------------------------------------------------------
1987 9.39 2.45 .20 41.26 + 3.3 +1.7 + 5.0 + 5.1
- ------------------------------------------------------------------------------------------------------------------------
1988 10.27 .98 .24 50.48 +19.8 +2.5 +22.3 +16.6
- ------------------------------------------------------------------------------------------------------------------------
1989 11.72 .59 .28 61.92 +19.9 +2.8 +22.7 +31.7
- ------------------------------------------------------------------------------------------------------------------------
1990 10.40 .80 .34 60.98 - 4.4 +2.9 - 1.5 - 3.1
- ------------------------------------------------------------------------------------------------------------------------
1991 12.20 .86 .29 78.87 +26.3 +3.0 +29.3 +30.5
- ------------------------------------------------------------------------------------------------------------------------
1992 12.65 .52 .18 86.40 + 8.1 +1.4 + 9.5 + 7.6
- ------------------------------------------------------------------------------------------------------------------------
1993 12.01 1.35 .18 92.73 + 5.9 +1.4 + 7.3 +10.1
- ------------------------------------------------------------------------------------------------------------------------
1994 11.36 .31 .14 91.18 - 2.9 +1.2 - 1.7 + 1.3
- ------------------------------------------------------------------------------------------------------------------------
1995 14.09 1.16 .15 123.99 +34.6 +1.4 +36.0 +37.6
- ------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL +1,843.4% +1,685.7%
- ------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +12.6% +12.2%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Adjusted for the 3-for-2 stock split, February 3, 1979.
**Includes reinvestment of income dividends and any capital gains distributions
for both the Fund and the Index.
Note: The initial net asset value was $6.38 on December 31, 1970, the beginning
of the period illustrated. No adjustment has been made for income taxes
payable by shareholders on reinvested income dividends and capital gains
distributions.
12
<PAGE> 15
STATEMENT OF NET ASSETS
Financial Statements
December 31, 1995
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (91.5%)
- --------------------------------------------------------------------------------
BASIC MATERIALS (7.5%)
Air Products & Chemicals, Inc. 328,900 $ 17,349
Alcan Aluminium Ltd. 68,200 2,123
ASARCO, Inc. 114,400 3,661
Boise Cascade Corp. 30,900 1,070
British Steel PLC ADR 18,700 479
Cabot Corp. 143,700 7,742
Champion International Corp. 125,900 5,288
Commercial Metals Co. 12,900 319
* Cytec Industries, Inc. 14,500 904
Dow Chemical Co. 14,900 1,049
E.I. du Pont de Nemours & Co. 21,100 1,474
Engelhard Corp. 200,000 4,350
Federal Paper Board Co., Inc. 14,000 726
Georgia Gulf Corp. 25,500 784
Georgia-Pacific Corp. 12,300 844
International Paper Co. 20,000 757
Kimberly-Clark Corp. 90,000 7,448
Lyondell Petrochemical Co. 7,700 176
* Magma Copper Co. Class B 25,000 697
Monsanto Co. 60,000 7,350
Morton International, Inc. 416,300 14,935
* Mueller Industries Inc. 34,000 995
Norsk Hydro AS ADR 160,600 6,725
Phelps Dodge Corp. 75,700 4,712
Potash Corp. of Saskatchewan, Inc. 4,800 340
Stone Container Corp. 73,000 1,049
Temple-Inland Inc. 77,700 3,429
Terra Industries, Inc. 312,000 4,407
Union Carbide Corp. 178,000 6,675
Wellman, Inc. 104,600 2,380
Weyerhaeuser Co. 17,200 744
------------
GROUP TOTAL 110,981
------------
- --------------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (4.8%)
AGCO Corp. 15,000 765
Abitibi-Price, Inc. 78,300 1,123
The Boeing Co. 91,300 7,156
Browning-Ferris Industries, Inc. 16,100 475
Dover Corp. 15,800 583
General Electric Co. 323,400 23,285
* General Instrument 275,000 6,428
* International Rectifier Corp. 42,600 1,065
Logicon, Inc. 25,200 693
McDonnell Douglas Corp. 4,500 414
NACCO Industries, Inc. Class A 9,400 522
* Owens-Corning Fiberglas Corp. 15,500 695
Parker Hannifin Corp. 136,250 4,666
* Republic Waste Industries 280,000 10,010
TRW, Inc. 9,800 759
The Timkin Co. 11,100 425
The Toro Co. 37,500 1,233
* Varity Corp. 72,500 2,692
WMX Technologies Inc. 44,100 1,317
York International Corp. 125,000 5,875
------------
GROUP TOTAL 70,181
------------
- --------------------------------------------------------------------------------
CONSUMER CYCLICALS (13.7%)
Armstrong World Industries Inc. 5,600 347
* AutoZone, Inc. 135,000 3,898
* Bed Bath & Beyond Inc. 70,000 2,704
Brunswick Corp. 85,500 2,052
* Caldor Corp. 18,500 60
Capital Cities/ABC, Inc. 65,900 8,130
* Champion Enterprises, Inc. 26,200 809
Chrysler Corp. 185,500 10,272
Circuit City Stores, Inc. 106,600 2,945
Comcast Corp. Class A Special 19,800 359
* CompUSA, Inc. 178,000 5,540
* Detroit Diesel Corp. 80,000 1,490
* Devon Group, Inc. 17,000 493
The Walt Disney Co. 97,300 5,741
Dow Jones & Co., Inc. 16,200 646
Eastman Kodak Co. 17,800 1,193
Eaton Corp. 13,500 724
Echlin, Inc. 107,200 3,913
* Fieldcrest Cannon, Inc. 14,400 239
Fila Holding SPA ADR 100,000 4,550
Gannett Co., Inc. 12,700 779
Gaylord Entertainment Class A 227,955 6,326
General Motors Corp. 30,700 1,623
The Goodyear Tire & Rubber Co. 21,200 962
* Gucci Group NV-
NY Registered Shares 34,300 1,333
* Gymboree Inc. 235,000 4,818
Harman International
Industries, Inc. 12,390 497
* Heritage Media Corp. Class A 97,900 2,509
* Hollywood Entertainment Corp. 22,700 190
Home Depot, Inc. 160,000 7,660
Innovex, Inc. 9,500 145
* King World Productions, Inc. 195,800 7,612
Knight-Ridder, Inc. 8,600 538
La Quinta Inns Inc. 103,700 2,839
Leggett & Platt, Inc. 6,200 150
Magna International, Inc. Class A 14,400 623
May Department Stores Co. 325,000 13,731
Maytag Corp. 16,200 328
McDonald's Corp. 327,900 14,796
* Mirage Resorts, Inc. 45,600 1,573
National Service Industries, Inc. 13,900 450
* Navistar International Corp. 232,100 2,437
New York Times Co. Class A 20,000 593
Newell Co. 108,700 2,813
News Corp. Ltd. ADR 35,800 765
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
News Corp. Ltd. Pfd. ADR 475,000 $ 9,084
* Office Depot, Inc. 126,300 2,494
J.C. Penney Co., Inc. 18,000 857
Premark International, Inc. 7,200 365
* Rainforest Cafe, Inc. 20,000 595
Ross Stores, Inc. 23,300 446
St. John Knits, Inc. 13,500 717
* Scholastic Corp. 100,000 7,775
E.W. Scripps Co. 70,000 2,756
* Sierra On-line, Inc. 20,300 579
* The Sports Authority, Inc. 260,700 5,312
Springs Industries Inc. Class A 11,100 459
Tandy Corp. 17,000 705
Times Mirror Co. Class A 20,200 684
* Tommy Hilfiger Corp. 131,500 5,572
Tribune Co. 41,500 2,537
* Ultratech Stepper, Inc. 93,500 2,396
* Viacom International Class A 20,000 918
* Viacom International Class B 303,647 14,385
* Waban, Inc. 40,300 756
Wal-Mart Stores, Inc. 298,600 6,681
Washington Post Co. Class B 2,000 564
Wendy's International, Inc. 31,700 674
Wolverine World Wide, Inc. 59,300 1,868
------------
GROUP TOTAL 201,374
------------
- --------------------------------------------------------------------------------
CONSUMER STAPLES (5.8%)
American Stores Co. 21,500 575
Anheuser-Busch Co., Inc. 17,400 1,164
Archer-Daniels-Midland Co. 462,788 8,330
Campbell Soup Co. 12,800 768
The Clorox Co. 4,200 301
Gillette Co. 100,000 5,213
Great Atlantic & Pacific
Tea Co., Inc. 5,000 115
Hormel Foods Corp. 8,300 205
Hudson Foods Inc. Class A 10,500 181
IBP, Inc. 172,700 8,721
* The Kroger Co. 187,900 7,046
PepsiCo, Inc. 465,900 26,032
Philip Morris Cos., Inc. 73,800 6,679
Procter & Gamble Co. 21,700 1,801
Ralston-Purina Group 105,000 6,549
* Safeway, Inc. 110,100 5,670
Sara Lee Corp. 100,400 3,200
* Starbucks Corp. 134,600 2,810
------------
GROUP TOTAL 85,360
------------
- --------------------------------------------------------------------------------
ENERGY (4.7%)
Atlantic Richfield Co. 10,800 1,196
British Petroleum Co. PLC ADR 95,300 9,733
Burlington Resources, Inc. 130,000 5,102
* California Energy Co. 126,100 2,459
* Global Industrial Technologies, Inc. 27,700 523
Halliburton Co. 20,500 1,038
* Nabors Industries, Inc. 420,900 4,683
Noble Affiliates, Inc. 180,000 5,378
Panhandle Eastern Corp. 118,700 3,309
Royal Dutch Petroleum Co. ADR 7,500 1,058
Schlumberger Ltd. 97,200 6,731
* Smith International, Inc. 114,900 2,700
Sonat Offshore Drilling Co. 14,000 626
USX-Marathon Group 30,100 587
Union Pacific Resources
Group, Inc. 134,700 3,418
Union Texas Petroleum
Holdings, Inc. 210,500 4,078
Unocal Corp. 290,000 8,446
Vastar Resources, Inc. 260,000 8,255
------------
GROUP TOTAL 69,320
------------
- --------------------------------------------------------------------------------
FINANCIAL (11.6%)
Ace, Ltd. 250,000 9,938
AFLAC, Inc. 150,900 6,545
Alex Brown, Inc. 12,000 504
Allstate Corp. 34,600 1,423
American General Corp. 17,200 600
American International
Group, Inc. 76,032 7,033
American Re Corp. 312,300 12,765
* Amerin Corp. 93,600 2,480
Bank of Boston Corp. 19,523 903
The Bank of New York Co., Inc. 213,500 10,408
BankAmerica Corp. 181,800 11,772
Barnett Banks, Inc. 44,000 2,596
BayBanks, Inc. 6,800 665
Bear Stearns Co., Inc. 127,900 2,542
CMAC Investment Corp. 14,600 642
* CNA Financial Corp. 26,000 2,951
Chemical Banking Corp. 96,700 5,681
Citicorp 18,300 1,230
A.G. Edwards & Sons, Inc. 188,000 4,488
Equifax, Inc. 19,000 406
Exel Ltd. 12,700 775
Federal National Mortgage Assn. 94,200 11,693
First Bank System, Inc. 169,484 8,410
First Chicago NBD Corp. 11,584 458
First Union Corp. 10,605 590
First USA Inc. 97,000 4,304
Great Western Financial Corp. 179,321 4,573
Green Tree Financial Corp. 34,600 913
* Gryphon Holdings, Inc. 31,100 587
Household International, Inc. 124,100 7,337
MBNA Corp. 69,600 2,566
MGIC Investment Corp. 70,000 3,798
Marsh & McLennan Cos., Inc. 1,800 160
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Merrill Lynch & Co., Inc. 25,700 $ 1,311
Morgan Stanley Group, Inc. 70,000 5,644
NationsBank, Inc. 17,314 1,205
Norwest Corp. 130,700 4,313
Old Republic International Corp. 26,500 941
Orion Capital Corp. 16,900 733
Partnerre Ltd. 2,800 76
Republic New York Corp. 12,000 746
Salomon, Inc. 23,500 834
State Street Boston Corp. 72,000 3,240
Student Loan Marketing Assn. 53,000 3,491
Transamerica Corp. 54,100 3,943
Travelers Group Inc. 167,900 10,557
Union Bank of San Francisco 11,100 596
Unitrin Inc. 6,400 302
Westpac Banking Corp. Ltd. ADR 14,800 333
------------
GROUP TOTAL 170,001
------------
- --------------------------------------------------------------------------------
HEALTH CARE (10.1%)
American Home Products Corp. 12,500 1,212
Baxter International, Inc. 26,900 1,127
Becton, Dickinson & Co. 11,400 855
* Beverly Enterprises Inc. 450,000 4,781
* Biomet, Inc. 214,700 3,811
Bristol-Myers Squibb Co. 15,700 1,348
Cardinal Health, Inc. 149,800 8,201
Columbia/HCA Healthcare Corp. 92,500 4,695
* Community Psychiatric Centers 35,800 438
* De Rigo SPA ADR 99,800 2,271
* Elan Corp. PLC ADR 30,200 1,469
* FHP International Corp. 129,900 3,637
* Forest Laboratories, Inc. 58,900 2,665
* Foundation Health Co. 16,600 714
* Genetics Institute Inc.
Depository Shares 149,700 8,009
Glaxo Wellcome PLC ADR 17,600 497
Hafslund Nycomed ADR Class B 286,717 7,526
* Health Management Associates
Class A 117,750 3,076
* Healthcare & Retirement Corp. 55,500 1,942
* HealthCare Compare Corp. 21,100 918
* Horizon/CMS Healthcare Corp. 174,300 4,401
Integrated Health Services, Inc. 155,300 3,882
Johnson & Johnson 122,200 10,463
* Lincare Holdings Inc. 149,500 3,700
* Living Centers of America, Inc. 9,000 315
Medtronic, Inc. 235,300 13,147
Mylan Laboratories, Inc. 28,350 666
* OrNda Healthcorp 21,000 486
* Perrigo Co. 27,500 327
Pfizer, Inc. 306,400 19,303
* Phycor, Inc. 80,000 4,040
Rhone-Poulenc Rorer, Inc. 250,000 13,312
Schering-Plough Corp. 83,000 4,544
* Sierra Health Services 22,400 711
* Sunrise Medical, Inc. 44,400 822
* Sybron Corp. 22,600 537
* Tenet Healthcare Corp. 35,300 733
U.S. Healthcare, Inc. 15,600 724
* Vencor, Inc. 89,960 2,924
Zeneca Group ADR 69,781 4,074
------------
GROUP TOTAL 148,303
------------
- --------------------------------------------------------------------------------
TECHNOLOGY (26.3%)
* Adaptec, Inc. 150,800 6,164
* Alantec Corp. 30,600 1,775
* Amdahl Corp. 28,500 242
* American Radio Systems Corp. 140,000 3,815
AMP, Inc. 35,000 1,343
* Amphenol Corp. 97,800 2,372
* Analog Devices, Inc. 51,400 1,818
* Applied Materials, Inc. 66,000 2,590
* Ascend Communications, Inc. 210,000 17,036
Augat, Inc. 26,400 452
Avnet, Inc. 170,900 7,648
* BISYS Group, Inc. 160,000 4,840
* BMC Software, Inc. 154,500 6,566
* Banctec, Inc. 32,700 601
* Bay Networks 80,300 3,292
* C-Cube Microsystems, Inc. 116,000 7,250
* Cadence Design Systems, Inc. 33,000 1,386
* Cellular Communications Series A 11,900 592
* Cheyenne Software, Inc. 235,000 6,139
* Chips & Technologies, Inc. 269,700 2,427
* Cidco, Inc. 98,600 2,490
* Cirrus Logic 23,000 454
* Cisco Systems, Inc. 243,200 18,149
* COMPAQ Computer Corp. 150,000 7,200
* Computer Sciences Corp. 175,000 12,294
* Computervision Corp. 250,000 3,844
* Compuware Corp. 120,000 2,220
* Cypress Semiconductor Corp. 539,300 6,876
* DSC Communications Corp. 19,700 727
* DST Systems, Inc. 134,500 3,833
* Dell Computer 20,200 700
* Digital Equipment Corp. 21,700 1,391
* Discreet Logic, Inc. 165,000 4,125
* Dynatech Corp. 159,400 2,710
* EMC Corp. 118,200 1,817
* Electroglas, Inc. 23,700 587
L. M. Ericsson Telephone Co.
ADR Class B 140,000 2,713
* Esterline Technologies Corp. 28,200 666
* FTP Software, Inc. 135,000 3,915
First Data Corp. 90,000 6,019
* Gateway 2000 Inc. 72,900 1,777
</TABLE>
15
<PAGE> 18
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
* Global Village Communication 82,200 $ 1,541
HBO and Co. 80,000 6,100
* Hadco Corp. 31,800 894
Harris Corp. 10,500 574
Hewlett-Packard Co. 360,700 30,209
* IDX Systems Corp. 44,000 1,518
* Integrated Device Technology Inc. 154,500 1,989
International Business
Machines Corp. 125,900 11,551
* International Cabletel, Inc. 180,000 4,320
* Intuit, Inc. 80,000 6,240
* KEMET Corp. 19,500 463
* Komag, Inc. 28,400 1,296
* Kulicke & Soffa Industries, Inc. 34,600 796
* Macromedia 17,400 903
* Maxim Integrated Products, Inc. 20,600 788
* McAfee Associates, Inc. 46,900 2,005
* Mentor Graphics Corp. 178,200 3,208
Micron Technology Inc. 129,500 5,131
* Microsoft Corp. 70,000 6,142
* Mobilemedia Corp. 273,600 6,019
Moore Corp. Ltd. 91,000 1,695
Motorola, Inc. 75,000 4,275
* National Semiconductor Corp. 65,700 1,462
* Netscape Communications Corp. 27,000 3,753
* Network Equipment Technologies 68,300 1,870
Nokia Corp. Pfd. ADR 185,000 7,192
* Novellus Systems, Inc. 4,800 259
* Objective Systems Integrators, Inc. 12,500 681
* Parametric Technology Corp. 110,000 7,287
* Peoplesoft Inc. 110,000 4,675
Philips Electronics NV 69,700 2,501
* Policy Management Systems Corp. 150,000 7,144
* Read-Right Corp. 74,500 1,723
* SCI Systems, Inc. 18,200 560
* S3, Inc. 91,400 1,600
* Seagate Technology 131,200 6,232
* Secure Computing Corp. 142,000 7,881
Sensormatic Electronics Corp. 179,700 3,122
* Sequent Computer Systems, Inc .33,400 476
Shared Medical Systems Corp. 97,300 5,254
* Shiva Corp. 30,000 2,182
* Silicon Valley Group, Inc. 80,200 2,025
* Sterling Software, Inc. 15,300 954
* Sun Microsystems, Inc. 300,600 13,715
* Symantec Corp. 150,000 3,469
* Symbol Technologies, Inc. 20,000 790
* Sync Research, Inc. 63,600 2,878
* Tandem Computers, Inc. 40,900 434
* Teradyne, Inc. 86,500 2,162
Texas Instruments, Inc. 202,600 10,485
* U.S. Robotics Corp. 70,900 6,204
* VLSI Technology, Inc. 21,400 385
Varian Associates, Inc. 50,000 2,387
Vodafone Group PLC ADR 300,000 10,575
Wallace Computer Services, Inc. 4,300 235
* Wang Laboratories, Inc. 89,200 1,483
Xerox Corp. 10,700 1,466
* Zebra Technologies Class A 10,200 347
------------
GROUP TOTAL 386,360
------------
- --------------------------------------------------------------------------------
TRANSPORT & SERVICES (2.6%)
* AMR Corp. 69,400 5,153
American President Cos., Ltd. 69,000 1,587
CSX Corp. 26,800 1,223
Canadian Pacific Ltd. 49,300 896
Delta Air Lines, Inc. 39,100 2,888
* Federal Express Corp. 40,300 2,977
Norfolk Southern Corp. 8,600 683
* Northwest Airlines Corp. Class A 142,100 7,229
Ryder System, Inc. 55,600 1,376
Southwest Airlines Co. 335,000 7,789
* Swift Transportation Co., Inc. 120,500 1,808
* UAL Corp. 5,500 982
Werner Enterprises, Inc. 220,000 4,345
------------
GROUP TOTAL 38,936
------------
- --------------------------------------------------------------------------------
UTILITIES (3.0%)
Ameritech Corp. 18,000 1,062
BellSouth Corp. 16,000 696
British Telecom PLC ADR 68,300 3,859
Centerior Energy Corp. 201,500 1,788
Consolidated Edison Co. of
New York, Inc. 4,800 154
GTE Corp. 26,700 1,175
General Public Utilities Corp. 4,300 146
MCI Communications Corp. 400,000 10,450
NYNEX Corp. 14,600 788
Ohio Edison Co. 5,800 136
Pacific Gas & Electric Co. 165,400 4,693
Pacific Telesis Group 22,300 750
* Public Service Co. of New Mexico 65,300 1,151
SCEcorp 32,200 572
Southern New England
Telecommunications Corp. 10,300 409
Sprint Corp. 185,700 7,405
Telefonica de Espana ADR 117,900 4,937
Unicom Corp. 102,600 3,360
------------
GROUP TOTAL 43,531
------------
- --------------------------------------------------------------------------------
MISCELLANEOUS (1.4%)
American Financial Group, Inc. 96,800 2,965
* Anixter International Inc. 64,200 1,196
* CDI Corp. 63,200 1,138
Interpublic Group of Cos., Inc. 12,500 542
Loews Corp. 66,400 5,204
Manpower Inc. 105,600 2,970
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
McKesson Corp. 13,300 $ 673
Olsten Corp. 68,800 2,718
PHH Corp. 52,100 2,436
Service Corp. International 16,000 704
* Westell Technologies, Inc. 25,600 640
------------
GROUP TOTAL 21,186
------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $1,020,156) 1,345,533
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (9.2%)
- --------------------------------------------------------------------------------
Face
Amount
(000)
------
U.S. TREASURY BILL--NOTE E
5.33%, 3/21/96 $ 300 296
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.89%, 1/2/96 135,214 135,214
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $135,510) 135,510
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.7%)
(Cost $1,155,666) 1,481,043
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.7%)
- --------------------------------------------------------------------------------
Other Assets--Notes C and F 47,759
Liabilities--Note F (57,704)
------------
(9,945)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 104,424,178 outstanding
$.10 par value shares
(authorized 150,000,000 shares) $1,471,098
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $14.09
================================================================================
+See Note A to Financial Statements.
*Non-Income Producing Security.
ADR=American Depository Receipt.
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1995,
NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Amount Per
(000) Share
------------- ------------
Paid in Capital $1,107,080 $10.60
Overdistributed Net
Investment Income (431) --
Accumulated Net
Realized Gains 39,083 .37
Unrealized Appreciation
(Depreciation)--Note E:
Investment Securities 325,377 3.12
Futures Contracts (11) --
- --------------------------------------------------------------------------------
NET ASSETS $1,471,098 $14.09
- --------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
(000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,208
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,771
- ------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,979
- ------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,390
Performance Adjustments . . . . . . . . . . . . . . . . . . . . . . . . (621) 1,769
--------
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . . . . . . 3,929
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . 203 4,132
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . . . . . -------- 100
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . . . . 32
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 5
- ------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,225
Expenses Paid Indirectly--Note C . . . . . . . . . . . . . . . . . . (180)
- ------------------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 6,045
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . 13,934
- ------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . . . . 142,679
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
- ------------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . 142,881
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,587
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8)
- ------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . . . . . . . . . . 220,579
- ------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . . . . . $377,394
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
DECEMBER 31, 1995 December 31, 1994
(000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,934 $ 12,724
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,881 26,841
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . . . 220,579 (57,609)
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . . . . 377,394 (18,044)
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,339) (12,947)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (110,668) (28,776)
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . (125,007) (41,723)
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . . . . . . . . . . . 148,280 96,403
--In Lieu of Cash Distributions . . . . . . . . . . . . . . . . 118,797 36,605
--Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,127 30,934
--Exchange for Net Assets of Vanguard Specialized
Portfolios-Service Economy Portfolio--Note G . . . . . . . . . -- 29,513
Redeemed --Regular . . . . . . . . . . . . . . . . . . . . . . . . . . . (131,103) (109,146)
--Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . (79,193) (84,894)
- ------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share Transactions . . . . . . . . 143,908 (585)
- ------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . . . . . . . . . . . 396,295 (60,352)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,074,803 1,135,155
- ------------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,471,098 $1,074,803
========================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . $ .15 $.14
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.16 $.31
- ------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,895 11,123
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . . . . . 8,675 3,196
Issued in Exchange for Net Assets of Vanguard Specialized
Portfolios-Service Economy Portfolio--Note G . . . . . . . . . . . -- 2,556
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,754) (16,801)
- ------------------------------------------------------------------------------------------------------------------------
9,816 74
- ------------------------------------------------------------------------------------------------------------------------
(3) Overdistributed Net Investment Income . . . . . . . . . . . . . . . . . $ (431) $ (26)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . . $11.36 $12.01 $12.65 $12.20 $10.40
INVESTMENT OPERATIONS ------ ------ ------ ------ ------
Net Investment Income . . . . . . . . . . . . . . . . . .15 .14 .18 .18 .29
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . . . 3.89 (.34) .71 .97 2.66
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . 4.04 (.20) .89 1.15 2.95
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . (.15) (.14) (.18) (.18) (.29)
Distributions from Realized Capital Gains . . . . . . . (1.16) (.31) (1.35) (.52) (.86)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . (1.31) (.45) (1.53) (.70) (1.15)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . $14.09 $11.36 $12.01 $12.65 $12.20
========================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . +35.98% -1.67% +7.32% +9.54% +29.33%
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . . . $1,471 $1,075 $1,135 $1,116 $957
Ratio of Expenses to Average Net Assets . . . . . . . . . . .49%* .50% .49% .48% .46%
Ratio of Net Investment Income
to Average Net Assets . . . . . . . . . . . . . . . . . 1.10% 1.15% 1.36% 1.51% 2.36%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . 76% 84% 72% 64% 52%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Effective in fiscal 1995, does not include expense reductions from directed
brokerage arrangements. The 1995 Ratio of Expenses to Average Net Assets is
.48% after including these reductions. See Note C.
20
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
Vanguard/Morgan Growth Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of the New York Stock Exchange
(generally 4:00 PM) on the valuation date; securities not traded are valued
at the mean of the latest quoted bid and asked prices. Securities not listed
are valued at the latest quoted bid prices. Temporary cash investments
acquired over sixty days to maturity are valued utilizing the latest quoted
bid prices and on the basis of a matrix system (which considers such factors
as security prices, yields, maturities, and ratings), both as furnished by
independent pricing services. Other temporary cash investments are valued at
amortized cost which approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly, no
provision for Federal income taxes is required in the financial statements.
3. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard
Group of Investment Companies, transfers uninvested cash balances into a
Pooled Cash Account, the daily aggregate of which is invested in repurchase
agreements secured by U.S. Government obligations. Securities pledged as
collateral for repurchase agreements are held by a custodian bank until
maturity of each repurchase agreement. Provisions of each agreement require
that the market value of this collateral is sufficient in the event of
default: however, in the event of default or bankruptcy by the other party
to the agreement, realization and/or retention of the collateral may be
subject to legal proceedings.
4. FUTURES: The Fund utilizes Standard & Poor's 500 Index futures contracts to
a limited extent, to increase its exposure to the stock market. The primary
risks associated with the use of futures contracts are imperfect correlation
between changes in market values of stocks held by the Fund and the prices
of futures contracts, and the possibility of an illiquid market. Futures
contracts are valued based upon their quoted daily settlement prices.
Fluctuations in the values of futures contracts are recorded as unrealized
appreciation (depreciation) until terminated, at which time realized gains
(losses) are recognized. Unrealized appreciation (depreciation) related to
open futures contracts is required to be treated as realized gain (loss) for
Federal income tax purposes.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities sold.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
B. Under the terms of investment advisory contracts, the Fund pays Wellington
Management Company, Franklin Portfolio Associates, and Husic Capital Management
investment advisory fees calculated at an annual percentage rate of average net
assets of the Fund. The basic fees of each adviser are subject to quarterly
adjustments based on performance relative to the Growth Fund Stock Index. For
the year ended December 31, 1995, the aggregate investment advisory fee
represented an effective annual base rate of .19 of 1% of average net assets,
before a decrease of $621,000 (.05 of 1%) based on performance.
21
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (continued)
The Vanguard Group, Inc. also provides investment advisory services to a
portion of the Fund on an at-cost basis.
C. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing, and distribution services. The costs of such
services are allocated to the Fund under methods approved by the Board of
Directors. At December 31, 1995, the Fund had contributed capital of $172,000
to Vanguard (included in Other Assets), representing .9% of Vanguard's
capitalization. The Fund's directors and officers are also directors and
officers of Vanguard.
Vanguard has requested the Fund's investment advisers to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate or credit to the Fund a portion of the commissions
generated. Such rebates or credits are used solely to reduce the Fund's
administrative expenses. For the year ended December 31, 1995, directed
brokerage arrangements reduced the Fund's expenses by $180,000 (.01 of 1% of
average net assets).
D. During the year ended December 31, 1995, the Fund made purchases of
$885,742,000 and sales of $911,371,000 of investment securities other than U.S.
Government securities and temporary cash investments.
E. At December 31, 1995, net unrealized appreciation of investment securities
for financial reporting and Federal income tax purposes aggregated
$325,377,000, of which $355,443,000 related to appreciated securities and
$30,066,000 related to depreciated securities.
At December 31, 1995, the aggregate settlement value of open Standard & Poor's
500 Index futures contracts expiring in March 1996, the related unrealized
depreciation, and the market value of securities deposited as initial margin
for those contracts were $1,546,000, $11,000, and $296,000, respectively.
F. The market value of securities on loan to broker/dealers at December 31,
1995, was $32,502,000 for which the Fund had received cash collateral of
$33,047,000.
G. In accordance with the terms of an agreement approved by the shareholders
of Vanguard Specialized Portfolios-Service Economy Portfolio (the "Portfolio"),
on June 2, 1994, the Fund issued 2,556,000 of its capital shares in exchange
for the net assets of the Portfolio of $29,513,000, including $7,453,000 of
unrealized appreciation; combined net assets were $1,117,495,000 as of the
merger date. Shareholders of the Portfolio received 1.877 shares of the Fund
for each share of the Portfolio. This tax-free exchange was accounted for by
combining the assets and liabilities of the Fund and the Portfolio at their
values on the date of the merger. The identified cost of investments were
similarly combined.
22
<PAGE> 25
REPORT OF INDEPENDANT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard/Morgan Growth Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard/Morgan Growth Fund (the "Fund") at December 31, 1995, and the results
of its operations, the changes in its net assets and the financial highlights
for each of the respective periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1996
SPECIAL 1995 TAX INFORMATION (UNAUDITED)
FOR VANGUARD/MORGAN GROWTH FUND, INC.
Corporate shareholders should note that for the fiscal year ended December 31,
1995, 25.1% of the Fund's dividend income (i.e., dividend income plus
short-term capital gains, if any) qualifies for the intercorporate dividends
received deduction.
23
<PAGE> 26
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd. and The St. Paul Companies, Inc.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and
The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co. and
NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
- --------------------------------------------------------------------------------
HONORARY CHAIRMAN
WALTER L. MORGAN, Founder
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
ROBERT A. DISTEFANO IAN A. MACKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
24
<PAGE> 27
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LIFEStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
[THE VANGUARD GROUP LOGO]
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q260-12/95
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet annihilated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval history.
Our Report's cover illustration is Thomas Luny's 1830 painting, The Battle Of
The Nile, in which the French flagship, L'Orient, is shown as it exploded at
10:00 p.m. under a gibbous moon.
<PAGE> 28
VANGUARD MORGAN GROWTH FUND
EDGAR APPENDIX
This appendix describes the components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile".
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appears at the top of pages one through five.
A running head featuring an hour glass, compass & telescope, and battleships in
the background appears at the top of page six.
A running head featuring ships wheel, rope and battleships in the background
appears at the top of pages seven through eleven.
A running head featuring a cannon and battleships in the background appears at
the top of page twelve.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages thirteen through twenty three.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page twenty four.
A running head featuring birds flying and ships in the background appears at
the top of the inside back cover.
