<PAGE> 1
VANGUARD/
MORGAN GROWTH
FUND
Annual Report
December 31, 1996
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future. The montage
includes a bronze medallion with a likeness of our namesake, HMS Vanguard (Lord
Nelson's flagship at The Battle of the Nile); a clock built circa 1816 in
Scotland, featuring a portrait of Nelson (who is also shown, accepting a
surrender, in a detail from a nineteenth-century engraving); and several views
of our recently completed campus, which is steeped in nautical imagery--from
our buildings named after Nelson's warships (Victory, Majestic, and Goliath are
three shown), to our artwork and ornamental compass rose.
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[PHOTO]
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide a candid
assessment of the Fund's performance relative to an appropriate unmanaged
market benchmark and a peer group of mutual funds with similar investment
policies. It also reviews the principal factors contributing to--and detracting
from--the returns earned by the Fund. To help you evaluate your Fund's
current-year performance, the Message includes a discussion of the Fund's
long-term investment results, as well as a look ahead to the prospects for the
coming year. A recap of the financial markets, which had been included as part
of the Chairman's letter, now appears in The Markets In Perspective. This
overview covers the world's financial markets, putting the results of the
Fund's strategy in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS AN ADDITION TO OUR FUND REPORTS. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics.
The Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the
adviser to address--and we do our best to ensure that this Report is written in
the same simple and candid manner that characterizes all Vanguard
communications. Finally, each Adviser's Report will include an inset reminder
of the adviser's basic investment philosophy.
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
4
Report From
The Advisers
6
Portfolio
Profile
8
Performance
Summary
10
Financial
Statements
11
Report Of
Independent
Accountants
21
Directors And
Officers
INSIDE BACK COVER
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[PHOTO]
JOHN C. BOGLE
[PHOTO]
JOHN J. BRENNAN
FELLOW SHAREHOLDER,
Vanguard/Morgan Growth Fund not only participated in, but surpassed, the
continuing vigorous advance by the stock market in 1996, the second consecutive
year of powerful gains for both the Fund and the market averages. During the
twelve months ended December 31--our 28th year of operations--the Fund's return
outpaced the returns of both the average growth mutual fund and the unmanaged
Standard & Poor's 500 Composite Stock Price Index.
The following table compares our total return (capital change plus
reinvested dividends) for the year with those of the S&P 500 Index, which is
dominated by large, blue chip stocks, and the average growth fund, the peer
group that best reflects the investment objective that Morgan Growth Fund has
sought over the years.
The Fund's return is based on an increase in net asset value from $14.09
per share on December 31, 1995, to $15.63 per share on December 31, 1996, with
the latter figure adjusted for dividends of $0.14 per share paid from net
investment income and distributions totaling $1.53 per share paid from net
realized capital gains.
<TABLE>
<CAPTION>
- ------------------------------------------------------
TOTAL RETURN
YEAR ENDED
DECEMBER 31, 1996
<S> <C>
- ------------------------------------------------------
Vanguard/Morgan Growth Fund +23.3%
- ------------------------------------------------------
Average Growth Fund +19.2%
- ------------------------------------------------------
S&P 500 Index +23.0%
- ------------------------------------------------------
</TABLE>
1996 PERFORMANCE OVERVIEW
In a nearly ideal environment of moderate economic growth, rising corporate
profits, and continued low inflation, the U.S. stock market flourished in 1996.
Interest rates fluctuated substantially, rising early in the year along with
estimates of the economy's strength, then declining in the autumn as estimates
of economic growth abated, and with them, inflation anxieties. However,
interest rates closed the year with a sharp upward spike in December. The yield
on the benchmark 30-year U.S. Treasury bond finished the year at 6.6%--up about
six-tenths of a percentage point from 6.0% at the end of 1995--driving the
price of the long bond down by about -8%.
In contrast, the price trend for common stocks was virtually one-way: up.
The S&P 500 Index provided positive returns in all but two months (July and
December), as both growth stocks and value stocks turned in strong
performances. While returns on these two groups are quite similar over long
periods, they often diverge over shorter periods. In 1996, the S&P/BARRA Growth
Index earned a return of +24.0%, not far ahead of the S&P/BARRA Value Index,
which provided a return of +22.0%.
Of course, not all market sectors performed alike during the year. By far
the highest-performing sector (with a return of +43%) was technology, where
Morgan Growth Fund held more than 25% of its assets, a weighting more than
twice that of the S&P 500 Index and roughly one-third more than that of the
average growth fund. Although we heavily emphasized the "right" sector, the
returns on our technology holdings lagged by a wide margin the return on the
sector as a whole. A big part of this gap was due to a striking disparity
between the returns of the very large-capitalization technology stocks and
those
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of the smaller-cap technology stocks. For example, the three largest tech
stocks in the S&P 500 Index (Intel, Microsoft, and IBM) provided an astounding
+94% return versus a return of +5% for the technology sector of the Russell
2000 Index of small-cap stocks. This large-cap bias extended to many other
market sectors, to the detriment of most diversified growth funds, including
ours. Indeed, despite the leadership of growth stocks as a group, only one of
every four growth funds managed to beat the return of the S&P 500 Index.
Our advisers' stock selections outside of the technology sector generally
fared well, especially in the energy, financial, and utilities sectors. We are
gratified that the returns achieved by three of our four investment
advisers--Franklin Portfolio Associates, Vanguard Core Management Group, and
Wellington Management Company--surpassed the S&P 500 Index and, of course, the
average competing growth fund. However, the results achieved by our fourth
adviser, Husic Capital Management, trailed our comparative benchmarks by a wide
margin. Husic's investment style most resembles the more aggressive,
smaller-cap- oriented growth funds, a group that did not fare as well as the
large-cap growth funds during 1996. Husic, as you may recall from previous
Reports, turned in the highest returns among our four advisers in 1995, after
having achieved the lowest returns among the advisers the previous year.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
TOTAL ASSETS MANAGED
DECEMBER 31,
-----------------------------
1996 1995
-----------------------------
$ MILLION PERCENT PERCENT
- ------------------------------------------------------------
<S> <C> <C> <C>
Wellington Management $ 797 39% 39%
Franklin Portfolio Associates 718 35 33
Husic Capital Management 241 12 13
Vanguard Core Management 192 9 10
Cash Reserves 106 5 5
- ------------------------------------------------------------
Total $2,054 100% 100%
- ------------------------------------------------------------
</TABLE>
The table above shows the proportion of the Fund's assets supervised by
each of our four advisers on December 31, 1996, and one year earlier. As you
can see, there were no major changes in the allocation of assets.
LONG-TERM PERFORMANCE OVERVIEW
Morgan Growth Fund's strong 1996 performance--in absolute and relative
terms--lengthened our long-term lead over the average growth fund. While our
advisers have made a solid contribution to our success, the largest part of our
long-term performance margin of 1.6% annually over our average competitor is
accounted for by our lower expense ratio. Our expenses amounted to only 0.51%
of average net assets in 1996, giving us an advantage (which we believe is
sustainable) of 0.85% over the average expense ratio of about 1.36% for our
competitors. In the long run, clearly, cost matters.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
TOTAL RETURN
10 YEARS ENDED DECEMBER 31, 1996
-----------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- --------------------------------------------------------------------
<S> <C> <C>
Vanguard/Morgan Growth Fund +14.6% $38,910
- --------------------------------------------------------------------
Average Growth Fund +13.0% $33,837
- --------------------------------------------------------------------
S&P 500 Index +15.3% $41,491
- --------------------------------------------------------------------
</TABLE>
Although neither we nor our average competitor has matched the return of
the S&P 500 Index over the decade, we are pleased to have outperformed the
Index over the full 28-year period since December 31, 1968, when we commenced
operations. As we have
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noted before, the Index is a very tough benchmark since it is a theoretical
construct that bears none of the administrative, operating, and investment
management expenses that all mutual funds incur. Nor does the Index hold cash,
which retards performance when stock prices are rising, as they were for most
of the past decade. By contrast, equity mutual funds typically hold a small
portion (5% to 10%) of their assets in interest-bearing cash equivalents to
provide liquidity or because recent cash inflows are awaiting investment in
equities.
The table on page 2 summarizes our ten-year record. We should emphasize
that future returns from the stock market may be lower than those of the past
decade, which by historical standards was an unusually bountiful era for
stocks. Indeed, with stock prices at high levels based on several valuation
measures, there is ample reason to expect returns to be lower in the coming
decade.
IN SUMMARY
Most mutual fund investors understand that volatility risk is a measure of how
much an investment may fluctuate in value over a given period of time. But many
investors today have experienced only "upside volatility." The U.S. stock
market has been rising--with only a few, brief setbacks--for nearly 15 years,
fully half of Morgan Growth Fund's existence.
Against this backdrop, it seems appropriate to step back and assess the
outlook for the financial markets. While no one can accurately predict what
will happen over the next decade--or even the next year--it seems unlikely that
stocks will enjoy a repeat of the exceptional returns of the past 15 years.
Indeed, there are sure to be some rough seas ahead. Nonetheless, we believe
that investors who maintain a balanced portfolio of stock funds, bond funds,
and money market funds will withstand the volatility of financial markets and
be rewarded. "Stay the course" has proved wise counsel in the past, and we see
no reason why it should not continue to be in the future.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
Chairman of the Board President
January 8, 1997
3
<PAGE> 6
THE MARKETS IN PERSPECTIVE: YEAR ENDED DECEMBER 31, 1996
[PHOTO]
U.S. EQUITY MARKETS
The stock market in 1996 could not match its astonishing 37.6% return of the
previous year--but it made a good run, with the Standard & Poor's 500 Composite
Stock Price Index up by 23.0%. When the two years are considered cumulatively,
the S&P 500 Index has risen 69.2%. Not surprisingly, many of the factors that
drove the market higher in 1995 were still at work: Once again, steady economic
growth, low inflation, and solid earnings growth were powerful motivators.
The market's gains, however, were far from evenly distributed. Investors
strongly favored larger companies, such as those that dominate the S&P 500
Index. In fact, even within the Index, it was the largest companies that
prevailed: The 50 biggest (which account for roughly half the Index's market
value) gained 26.7% in 1996, compared with an increase of 23.0% for the entire
Index. Looking at the S&P 500 Index's performance by sector, technology stocks
were strongest, closing the year with a 42.5% gain. Financial stocks were a
close second, gaining 35.5%. Utilities, plagued early in the year by higher
interest rates and a rapidly changing competitive landscape, eked out a meager
1.8% return, the lowest within the Index.
With the largest companies performing so well, most smaller issues could
not keep pace. This was evidenced in the considerable difference between the
23.0% return of the S&P 500 Index and the 16.5% return of the Russell 2000
Index of small stocks. Even for the smaller companies, there was a significant
range of performance among sectors. Energy stocks led the Russell 2000 Index
with a 62.0% gain for the year. Here, rising prices, limited exposure to the
cyclical refining business, and a reduced number of competitors created a
favorable environment for the stocks. At the other end of the spectrum were
health-care stocks, which showed a loss of -3.3%.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1996
-------------------------------
1 YEAR 3 YEARS 5 YEARS
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 23.0% 19.7% 15.2%
Russell 2000 Index 16.5 13.7 15.6
MSCI-EAFE Index 6.4 8.6 8.5
- -----------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 3.6% 6.0% 7.0%
Lehman 10-Year Municipal
Bond Index 4.5 5.3 7.5
Salomon 90-Day U.S. Treasury Bills 5.3 5.1 4.4
- -----------------------------------------------------------------------
Other
Consumer Price Index 3.3% 2.8% 2.8%
- -----------------------------------------------------------------------
</TABLE>
U.S. FIXED-INCOME MARKETS
At year-end, the yield on the 30-year U.S. Treasury bond was 6.64%, noticeably
higher than its 5.95% level on December 31, 1995. The change in rates during
1996 reflects increased concern about the prospects for rising inflation, due
to indications of greater than expected strength in the economy.
When the year began, the general expectation was that modest economic
growth and benign inflation would continue, giving the Federal Reserve no
reason to boost inter.
4
<PAGE> 7
est rates. That complacency was shattered by an exceptionally strong February
jobs report, the first of what turned out to be a succession of signs that in
fact the economy was growing at a much faster--and potentially
inflation-inducing--pace. The bond market reacted swiftly to meet the perceived
risk: The 30-year Treasury bond's yield jumped from just below 6.0% at the end
of 1995 to 6.7% in late March. The next several months saw a consistent pattern
in which bond yields rose on the Friday of the jobs-report release only to fall
back by the middle of the month. Hindsight shows that most of the worry was
wasted: Inflation, as measured by the Consumer Price Index, remained near an
annualized rate of 3.3%. But increasing signs of growth in late November and
December reignited inflation concerns and caused bonds to finish the year on a
sour note.
Despite the numerous setbacks suffered by the bond market in 1996, indexes
were able to finish the year with positive total returns. Although the specter
of the Federal Reserve Board loomed large during the year, in fact the Board
acted only once, lowering the federal funds rate by a total of 0.25% in
January.
Corporate bonds, mortgage-backed issues, and municipals were three
relatively bright spots in 1996. The strength in earnings that benefited stock
prices extended to the corporate bond sector as well. These bonds, especially
those of lower credit quality, performed well relative to Treasuries, supported
by general confidence in companies' ability to meet payments. The
stable-to-rising interest-rate environment throughout most of the year
benefited another large segment of the bond market--mortgage-backed
securities--as the threat of refinancings receded. Finally, municipal bonds
outpaced their U.S. Treasury counterparts. The sector was shielded to a certain
extent from the inflation wars of the Treasury market, as demand outstripped
supply for much of the year.
INTERNATIONAL EQUITY MARKETS
Investors who assess international markets by the often-cited EAFE
benchmark--the Morgan Stanley Capital International-Europe, Australasia, Far
East Index, with its 1996 return of 6.4%--could have overlooked a striking
regional disparity between the Euro-pean and Pacific markets. Europe's markets
gained 21.4% during the year, while their Pacific counterparts posted a decline
of -8.2%. Clearly, the outlook and environments that characterized the
European and Far East markets were quite different.
The poor returns in the Pacific region largely reflected ongoing concern
about the health of the Japanese economy. Growth in Japan has remained modest
at best for several years despite government efforts to stimulate the economy
through public works programs and tax incentives. In Europe, the picture was
dramatically different, with the region benefiting from a variety of factors.
Among the most important were (1) ongoing efforts to lower government deficits
consistent with the Maastricht Treaty guidelines, (2) improving economic
growth, and (3) a greater commitment by corporate executives to increasing
"shareholder value."
5
<PAGE> 8
REPORT FROM THE ADVISERS
[PHOTO]
Vanguard/Morgan Growth Fund's total return of 23.3% in 1996 exceeded the
returns of both the average competing growth fund and the Standard & Poor's 500
Composite Stock Price Index. More details on the Fund's performance can be
found in the Message To Shareholders, which begins on page 1.
Conditions were quite favorable for stocks in 1996, as the U.S. economy
expanded at a pace sufficient to allow for growth in corporate profits but not
fast enough to propel inflation or interest rates to worrisome levels. As 1997
begins, the environment remains favorable, as the economy seems to be in little
danger of either falling into recession or overheating.
The Fund's modest advantage over the S&P 500 Index in 1996 was noteworthy,
since the stock market's excellent performance was skewed toward the very large
growth stocks that dominate the Index but were only lightly represented in the
Fund. A good illustration of the divergence in 1996 between large- and
small-capitalization growth stocks is the 25.6% return on the Russell Top 200
Growth Index, which comprises 200 of the largest growth stocks, versus the
11.3% return on the broader Russell 2000 Growth Index.
The stock market's performance also varied considerably across industry
sectors. The best-performing sector was technology, where we averaged a 27%
weighting--nearly 2 1/2 times the weighting of tech stocks in the S&P 500
Index. This emphasis did little to aid our performance, however, because the
market's bias toward large-cap stocks was particularly pronounced in the
technology sector. Our tech holdings were primarily in mid- and small-cap
issues, which badly lagged such industry giants as Microsoft and IBM. However,
we didn't miss the large-cap party altogether: Intel was one of our best
performers.
The Fund was fortunate to be under-represented in utility stocks, the
worst-performing sector in 1996, and to have received excellent returns on the
relatively few utilities we did own. Utility stocks made up on average less
than 4% of the Fund versus 11% for the S&P 500 Index. The returns on our
utility holdings exceeded 23% versus the 2% return on the utilities in the
Index.
Among our best performers in 1996 were CompUSA, the computer retailer; the
supermarket chain Safeway; Nabors Industries, a petroleum-drilling company; and
Household International, a rapidly growing purveyor of credit cards that has
eliminated some underperforming divisions.
Although media stocks continue to constitute a significant portion of the
Fund's assets, we sold several broadcasting companies on which we had nice
profits, including Chancellor Broadcasting, Cox Radio, Providence Journal, and
Univision.
INVESTMENT PHILOSOPHY
The Fund reflects a belief that superior long-term investment
results can be achieved by holding a well-diversified portfolio of
growth stocks selected by several advisers using distinct investment
strategies. Over time, such a portfolio should provide gross returns
that parallel those of other large, growth-oriented mutual funds and
net returns that exceed the group average.
Not all of our selections were winners, of course. We sold the last of our
holdings of MobileMedia, a provider of paging services whose results suffered
from a series of poorly integrated acquisitions. Another poor performer in 1996
was Olsten, a temporary-services firm whose earnings fell well short of
expectations. Other
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<PAGE> 9
laggards in the Fund included Westell Technologies, whose products allow phone
companies to provide multimedia service over copper wire, and Secure Computing,
whose growth potential came into question because of competitive pressures.
Each of the Fund's four advisers employs its own strategy in pursuit of
the common goal of long-term capital growth. Brief descriptions of each
adviser's strategy follow.
WELLINGTON MANAGEMENT COMPANY, LLP
Wellington's research on companies seeks to identify those with above-average
prospects for growth, especially in industries undergoing fundamental changes.
We are currently emphasizing technology, health-care, and media companies.
Major additions in 1996 include Cadence Design, the leading provider of
electronic design automation software; Barnes & Noble, the largest operator of
book superstores; Gulfstream Aerospace, the world leader in intercontinental
business jets; and Tupperware, which sells low-cost household goods worldwide.
FRANKLIN PORTFOLIO ASSOCIATES
Franklin uses an array of computer models to analyze a broad range of
information about some 3,500 stocks in search of those issues that appear to be
undervalued. We consider the economic cycle and rank securities based on three
key factors: fundamental momentum, an analysis that seeks to identify companies
with relatively strong near-term business prospects; relative value, an
analysis of which stocks have attractive prices in relation to past market
values or to specific financial measures such as book value or sales; and
future cash flow, an assessment of stock valuations based on prospects for
growth in earnings and dividends.
HUSIC CAPITAL MANAGEMENT
Husic's stock selection starts with research on individual companies. We
emphasize stocks that fit investment themes that we believe will lead to higher
valuations. Themes reflected in our current selections are corporate
renaissance, stocks that should benefit from corporate restructurings or
cost-cutting efforts; the power of growth, stocks that should prosper because
of continued economic growth in the U.S. and rapid growth in West Coast states
experiencing increased trade, involvement in high technology, and tourism;
riding the information superhighway, stocks that should benefit from heavy
spending by corporations on computers, networks, and software; and super
secular growers, companies we believe can maintain rapid growth rates.
VANGUARD CORE MANAGEMENT GROUP
Vanguard Core Management Group uses computer models to rank some 2,000 stocks
by a variety of measures, including cash flow, relative value, and share price
momentum. Stocks are ranked according to weights assigned to the various
measures, and a portfolio is constructed from among the most promising stocks
to resemble the Growth Fund Stock Index in such key characteristics as market
capitalization and diversification among industry sectors.
Wellington Management Company, LLP
Franklin Portfolio Associates
Husic Capital Management
Vanguard Core Management Group
January 14, 1997
7
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PORTFOLIO PROFILE: MORGAN GROWTH FUND
DECEMBER 31, 1996
This Profile provides a snapshot of the Fund's characteristics, compared where
appropriate to an unmanaged index. Key elements of this Profile are defined on
page 9.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------
MORGAN S&P 500
- -----------------------------------------
<S> <C> <C>
Number of Stocks 373 500
Median Market Cap $6.4B $24.5B
Price/Earnings Ratio 20.3x 19.6x
Price/Book Ratio 3.4x 3.4x
Yield 1.0% 2.0%
Return on Equity 17.4% 19.6%
Earnings Growth Rate 20.4% 13.5%
Foreign Holdings 7.9% 3.7%
Turnover Rate 73% --
Expense Ratio 0.51% --
Cash Reserves 9.2% --
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------
MORGAN S&P 500
- -----------------------------------------
<S> <C> <C>
R-Squared 0.80 1.00
Beta 1.06 1.00
</TABLE>
INVESTMENT FOCUS
- -----------------------------------------
[FIGURE]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ---------------------------------------------
<S> <C>
Cisco Systems, Inc. 2.4%
General Electric Co. 1.5
Transocean Offshore Inc. 1.1
Republic Industries, Inc. 1.1
Kimberly-Clark Corp. 1.1
Compaq Computer Corp. 1.1
Travelers Group Inc. 1.0
Rhone-Poulenc Rorer, Inc. 1.0
Ace, Ltd. 0.9
Liberty Media Group Class A 0.9
- ---------------------------------------------
Top Ten 12.1%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- -----------------------------------------------------------------------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------------------------
MORGAN MORGAN S&P 500
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Materials . . . . . . . . . . . 8.3% 4.9% 6.2%
Capital Goods & Construction . . . . . 5.3 6.9 8.4
Consumer Cyclical . . . . . . . . . . 14.4 17.1 12.1
Consumer Staples . . . . . . . . . . . 6.4 4.5 12.4
Energy . . . . . . . . . . . . . . . . 5.2 7.1 9.7
Financial . . . . . . . . . . . . . . 12.7 15.8 15.0
Health Care . . . . . . . . . . . . . 11.1 11.8 10.4
Technology . . . . . . . . . . . . . . 28.9 23.5 12.1
Transport & Services . . . . . . . . . 2.9 2.3 1.5
Utilities . . . . . . . . . . . . . . 3.3 2.9 9.9
Miscellaneous . . . . . . . . . . . . 1.5 3.2 2.3
- -----------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
[PHOTO]
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has a beta of 1.00, so a portfolio with a beta of
1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
EARNINGS GROWTH RATE. The annual average rate of growth in earnings over the
past five years for the stocks now in a portfolio.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly
reduce returns to investors. The average expense ratio for a stock mutual fund
was 1.34% in 1995.
FOREIGN HOLDINGS. The percentage of a portfolio's investments represented by
stocks or American Depository Receipts of companies based outside of the United
States.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of the stocks in a portfolio. Half the stocks in the portfolio
have higher market capitalizations and half lower.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a portfolio, the weighted average P/E of the
stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's
future growth.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a portfolio, the weighted average return
on equity for the companies represented in the portfolio.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
SECTOR DIVERSIFICATION. The percentage of a portfolio's common stocks invested
in each of the major industry classifications that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of a portfolio's total net assets in its
ten largest investments (the average for stock mutual funds is about 25%). As
this percentage rises, a portfolio's returns are likely to be more volatile,
since its return is more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year.
Portfolios with high turnover rates incur higher transaction costs and are more
likely to realize and distribute capital gains (which are taxable to
investors). The average turnover rate for stock mutual funds is about 80%.
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based
on income earned over the past 30 days and is annualized, or projected forward
for the coming year.
9
<PAGE> 12
PERFORMANCE SUMMARY: MORGAN GROWTH FUND
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Fund. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Fund could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 12/31/76-12/31/96
- -------------------------------------------
MORGAN GROWTH FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -------------------------------------------
<S> <C> <C> <C> <C>
1977 5.2% 2.2% 7.4% -7.2%
1978 16.1 3.2 19.3 6.5
1979 15.3 3.5 18.8 18.4
1980 30.5 4.2 34.7 32.4
1981 -7.1 2.3 -4.8 -4.9
1982 24.1 3.6 27.7 21.5
1983 25.8 2.6 28.4 22.5
1984 -8.1 2.0 -6.1 6.3
1985 27.5 2.8 30.3 31.8
1986 4.2 3.6 7.8 18.7
1987 3.3 1.7 5.0 5.3
1988 19.8 2.5 22.3 16.6
1989 19.9 2.8 22.7 31.7
1990 -4.4 2.9 -1.5 -3.1
1991 26.3 3.0 29.3 30.5
1992 8.1 1.4 9.5 7.6
1993 5.9 1.4 7.3 10.1
1994 -2.9 1.2 -1.7 1.3
1995 34.6 1.4 36.0 37.6
1996 22.3 1.0 23.3 23.0
- -------------------------------------------
</TABLE>
See Financial Highlights table on page 18 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 12/31/86-12/31/96
- ---------------------------------------------------------------------------------------
Cumulative Performance 10 yr Graph - Portfolio/ Benchmark - Vanguard/Morgan Growth Fund
Vanguard/Morgan Growth Lipper Growth Standard & Poor's 500 Index
<S> <C> <C> <C> <C>
1986 12 10000 10000 10000
1987 03 12522 12020 12136
1987 06 12939 12233 12745
1987 09 13843 12942 13587
1987 12 10502 10115 10526
1988 03 11855 10864 11126
1988 06 12930 11467 11867
1988 09 12839 11376 11907
1988 12 12848 11527 12275
1989 03 13524 12336 13145
1989 06 14337 13296 14305
1989 09 15475 14668 15837
1989 12 15759 14460 16164
1990 03 15503 14127 15678
1990 06 16624 15118 16664
1990 09 13950 12711 14374
1990 12 15521 13667 15662
1991 03 18073 16047 17937
1991 06 17864 15883 17896
1991 09 18641 17124 18853
1991 12 20074 18600 20434
1992 03 19860 18361 19918
1992 06 19481 17792 20296
1992 09 20276 18399 20936
1992 12 21990 20049 21991
1993 03 22463 20540 22951
1993 06 22534 20651 23063
1993 09 23185 21704 23659
1993 12 23600 22172 24207
1994 03 22645 21318 23289
1994 06 21931 20851 23387
1994 09 23398 22012 24530
1994 12 23207 21695 24527
1995 03 25109 23197 26915
1995 06 28070 25491 29484
1995 09 30949 27707 31827
1995 12 31557 28377 33743
1996 03 33512 29764 35554
1996 06 35416 31150 37150
1996 09 37182 32109 38298
1996 12 38910 33837 41491
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MORGAN GROWTH FUND 23.30% 14.15% 14.55% $38,910
AVERAGE GROWTH FUND 19.24 12.71 12.96 33,837
S&P 500 INDEX 22.96 15.22 15.29 41,491
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
- --------------------------------------------------------------------------------------
10 YEARS
INCEPTION -----------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Morgan Growth Fund 12/31/68 23.30% 14.15% 12.59% 1.96% 14.55%
- --------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
FINANCIAL STATEMENTS
DECEMBER 31, 1996
[PHOTO]
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, preferred stocks, bonds,
etc.) and by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the Fund's Net
Assets. Finally, Net Assets are divided by the outstanding shares of the Fund
to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the Fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested
by shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the Fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date. Any Accumulated Net Realized Losses, and any cumulative
excess of distributions over net income or net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the market value of the Fund's investments and their cost, and reflects
the gains (losses) that would be realized if the Fund were to sell all of its
investments at their statement-date values.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (90.7%)
- --------------------------------------------------------------------------------
BASIC MATERIALS (4.4%)
Air Products & Chemicals, Inc. 150,000 $ 10,369
Barrick Gold Corp. 9,000 259
Cabot Corp. 134,900 3,389
Cleveland-Cliffs Iron Co. 49,100 2,228
- Cytec Industries, Inc. 18,900 768
E.I. du Pont de Nemours & Co. 18,800 1,774
Engelhard Corp. 200,000 3,825
- Fort Howard Corp. 99,100 2,738
M.A. Hanna Co. 183,400 4,012
Hercules, Inc. 11,400 493
Kimberly-Clark Corp. 239,100 22,774
The Mead Corp. 3,500 203
Minorco Sponsored ADR 5,000 104
Monsanto Co. 239,900 9,326
Morton International, Inc. 440,400 17,946
Newmont Mining Corp. 6,900 309
Norsk Hydro AS ADR 104,300 5,593
Nucor Corp. 2,900 148
Phelps Dodge Corp. 13,400 905
A. Schulman Inc. 11,200 274
Terra Industries, Inc. 22,400 330
- Titanium Metals Corp. 45,900 1,497
Union Carbide Corp. 33,400 1,365
- WHX Corp. 41,900 372
-----------
91,001
-----------
CAPITAL GOODS & CONSTRUCTION (6.2%)
The Boeing Co. 22,600 2,404
Caterpillar, Inc. 13,400 1,008
Centex Corp. 12,300 463
Crane Co. 10,200 296
Deere & Co. 225,500 9,161
Fluor Corp. 12,600 791
General Electric Co. 309,900 30,641
- Gulfstream Aerospace Corp. 255,000 6,184
Harsco Corp. 4,300 295
Ingersoll-Rand Co. 152,400 6,782
- International Rectifier Corp. 146,400 2,233
Johnson Controls, Inc. 5,200 431
McDonnell Douglas Corp. 21,700 1,389
Oakwood Homes Corp. 186,500 4,266
- Republic Industries, Inc. 736,870 22,935
- Rohr, Inc. 140,100 3,170
Southdown, Inc. 10,100 314
Technitrol, Inc. 51,900 1,992
Texas Industries, Inc. 34,800 1,762
- Thermo Electron Corp. 31,400 1,295
- Thermo Instrument Systems, Inc. 144,600 4,790
Thomas & Betts Corp. 16,779 745
The Timkin Co. 12,600 578
The Toro Co. 103,800 3,789
Trinity Industries, Inc. 87,500 3,281
- UCAR International, Inc. 242,500 9,124
United Technologies Corp. 15,000 990
- Waste Management International 90,300 711
Wheelabrator Technologies, Inc. 43,500 707
York International Corp. 100,000 5,588
-----------
128,115
-----------
CONSUMER CYCLICAL (15.8%)
Aaron Rents, Inc. Class B 11,200 129
- Anchor Gaming 10,300 407
- Barnes & Noble Inc. 200,000 5,400
- Bed Bath & Beyond, Inc. 210,000 5,093
Black & Decker Corp. 391,600 11,797
Bush Industries, Inc. 28,600 551
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
Carnival Corp. Class A 34,500 $ 1,139
Chrysler Corp. 367,700 12,134
Claire's Stores, Inc. 170,900 2,222
Comcast Corp. Class A Special 81,077 1,439
- CompUSA, Inc. 212,200 4,377
Dana Corp. 23,800 776
Dayton-Hudson Corp. 360,400 14,146
Deluxe Corp. 29,400 963
- Detroit Diesel Corp. 80,000 1,840
The Walt Disney Co. 76,944 5,357
- Doubletree Corp. 135,600 6,034
The Dun & Bradstreet Corp. 56,300 1,337
- Eagle Hardware & Garden, Inc. 239,600 4,942
Eastman Kodak Co. 16,000 1,284
- Federated Department Stores 464,400 15,848
Fila Holding SPA ADR 78,800 4,580
Fred's, Inc. 2,900 25
Gannett Co., Inc. 15,300 1,146
Gaylord Entertainment Class A 355,602 8,134
General Motors Corp. 48,200 2,687
- Genesco, Inc. 152,700 1,412
The Goodyear Tire & Rubber Co. 16,400 843
Gucci Group NV NY
Registered Share 100,500 6,419
- The Gymboree Corp. 200,000 4,525
- HFS Inc. 16,900 1,010
Harcourt General, Inc. 1,600 74
Hilton Hotels Corp. 176,700 4,616
Home Depot, Inc. 360,000 18,045
Innovex, Inc. 19,000 513
- Interstate Hotels Co. 40,100 1,133
- King World Productions, Inc. 212,400 7,832
Knight-Ridder, Inc. 110,200 4,215
- Liberty Media Group Class A 660,000 18,810
Liz Claiborne, Inc. 12,400 479
May Department Stores Co. 200,000 9,350
Maytag Corp. 30,800 608
McDonald's Corp. 397,900 18,005
Herman Miller, Inc. 20,700 1,164
- Mirage Resorts, Inc. 281,700 6,092
New York Times Co. Class A 24,600 935
Newell Co. 323,300 10,184
News Corp. Ltd. Pfd. ADR 450,000 7,875
Nike, Inc. Class B 83,800 5,007
- Oakley, Inc. 9,900 108
- Office Depot, Inc. 280,000 4,970
- Outdoor Systems, Inc. 111,850 3,132
Pep Boys (Manny, Moe & Jack) 19,200 590
Premark International, Inc. 13,200 294
Ross Stores, Inc. 23,300 1,159
SPX Corp. 8,100 314
- Saks Holdings, Inc. 200,000 5,400
- Scholastic Corp. 120,000 7,980
E.W. Scripps Co. 70,000 2,450
Sears, Roebuck & Co. 31,400 1,448
A.O. Smith Corp. 19,200 574
Springs Industries Inc. Class A 11,100 477
TJX Cos., Inc. 30,200 1,431
Time Warner, Inc. 31,100 1,166
- Tommy Hilfiger Corp. 240,000 11,520
Tribune Co. 39,400 3,108
VF Corp. 5,600 378
- Viacom International Inc. Class A 20,000 690
- Viacom International Inc. Class B 334,947 11,681
- Waban, Inc. 39,900 1,037
Wal-Mart Stores, Inc. 303,200 6,936
Washington Post Co. Class B 3,200 1,072
Wendy's International, Inc. 43,800 898
- Woolworth Corp. 594,600 13,007
-----------
324,753
-----------
CONSUMER STAPLES (4.1%)
American Stores Co. 21,800 891
Archer-Daniels-Midland Co. 511,414 11,251
CPC International, Inc. 14,600 1,132
Crown Cork & Seal Co., Inc. 38,300 2,083
Dimon Inc. 90,900 2,102
Dole Food Co. 17,800 603
Food Lion Inc. Class A 61,900 604
Gillette Co. 114,800 8,926
Great Atlantic &
Pacific Tea Co., Inc. 21,600 689
IBP, Inc. 28,000 679
Estee Lauder Cos. Class A 100,000 5,088
Libbey, Inc. 3,000 84
- Paragon Trade Brands, Inc. 17,500 525
PepsiCo, Inc. 265,000 7,751
Philip Morris Cos., Inc. 40,400 4,550
RJR Nabisco Holdings Corp. 101,900 3,465
Ralston-Ralston Purina Group 105,000 7,704
- Revlon, Inc. 240,000 7,170
- Safeway, Inc. 30,100 1,287
Sara Lee Corp. 115,800 4,314
Schweitzer-Mauduit
International, Inc. 7,500 237
The Seagram Co. Ltd. 24,800 961
SuperValu Inc. 21,600 613
Tupperware Corp. 163,200 8,752
UST Inc. 45,600 1,476
-----------
82,937
-----------
ENERGY (6.4%)
- Abacan Resource Corp. 80,000 695
Atlantic Richfield Co. 10,000 1,325
British Petroleum Co. PLC ADR 82,500 11,663
Burlington Resources, Inc. 100,000 5,038
- Cooper Cameron Corp. 106,000 8,109
Dresser Industries, Inc. 236,700 7,338
- ENSCO International, Inc. 317,000 15,375
- Global Marine, Inc. 81,400 1,679
Halliburton Co. 24,900 1,500
Helmerich & Payne, Inc. 12,100 631
- Nabors Industries, Inc. 508,000 9,779
PanEnergy Corp. 50,700 2,282
Pennzoil Co. 54,200 3,062
Phillips Petroleum Co. 17,700 783
- Reading & Bates Corp. 31,600 837
- Santa Fe Energy Resources, Inc. 4,400 61
Schlumberger Ltd. 100,400 10,027
Texaco Inc. 11,300 1,109
Transocean Offshore Inc. 376,500 23,578
- United Meridian Corp. 109,600 5,672
Unocal Corp. 298,100 12,110
Vastar Resources, Inc. 221,700 8,425
- Western Atlas Inc. 13,800 978
-----------
132,056
-----------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL (14.3%)
Ace, Ltd. 320,000 $ 19,240
Allstate Corp. 37,200 2,153
American Express Co. 256,600 14,498
American International
Group, Inc. 76,032 8,230
Banc One Corp. 25,800 1,109
BankAmerica Corp. 133,000 13,267
Bankers Trust New York Corp. 68,500 5,908
BanPonce Corp. 7,500 251
Barnett Banks, Inc. 202,000 8,307
Bear Stearns Co., Inc. 537,785 14,991
CIGNA Corp. 11,800 1,612
- CNA Financial Corp. 55,400 5,928
Chase Manhattan Corp. 119,768 10,689
Donaldson, Lufkin & Jenrette, Inc. 25,900 932
A.G. Edwards & Sons, Inc. 471,000 15,837
The Equitable Cos. 45,100 1,111
Federal National Mortgage Assn. 267,200 9,953
First Bank System, Inc. 110,000 7,508
First Chicago NBD Corp. 23,300 1,252
First Union Corp. 164,000 12,136
Franchise Finance Corp.
of America REIT 84,900 2,345
General Re Corp. 3,900 615
Golden West Financial Corp. 17,300 1,092
Great Western Financial Corp. 259,953 7,539
Green Tree Financial Corp. 119,400 4,612
- Gryphon Holdings, Inc. 42,800 594
Household International, Inc. 146,700 13,533
MGIC Investment Corp. 60,000 4,560
Mercury Finance Co. 86,700 1,062
Merrill Lynch & Co., Inc. 142,900 11,646
Mid Ocean Ltd. 5,900 310
J.P. Morgan & Co., Inc. 12,600 1,230
Morgan Stanley Group, Inc. 164,000 9,369
Norwest Corp. 130,700 5,685
Old Republic International Corp. 40,200 1,075
Orion Capital Corp. 19,600 1,198
PNC Bank Corp. 33,200 1,249
PaineWebber Group, Inc. 34,100 959
PartnerRe Ltd. 2,800 95
Penncorp Financial Group, Inc. 246,300 8,867
Salomon, Inc. 272,300 12,832
Signet Banking Corp. 100,000 3,075
Sirrom Capital Corp. 15,400 551
State Street Boston Corp. 72,000 4,644
Student Loan Marketing Assn. 123,500 11,501
Summit Properties, Inc. REIT 3,000 66
Torchmark Corp. 18,400 929
Travelers Group Inc. 432,800 19,638
USLIFE Corp. 15,700 522
Washington Mutual Inc. 174,500 7,547
-----------
293,852
-----------
HEALTH CARE (10.7%)
Abbott Laboratories 230,100 11,678
American Home Products Corp. 23,300 1,366
- Amgen, Inc. 30,100 1,637
- Beverly Enterprises Inc. 450,000 5,738
Biomet, Inc. 350,000 5,294
Bristol-Myers Squibb Co. 8,200 892
Columbia/HCA Healthcare Corp. 433,900 17,681
Eisai Ltd. ADR 450,000 8,831
- Elan Corp. PLC ADR 296,700 9,865
- Genetics Institute Inc.
Depository Shares 57,200 4,848
- Genesis Health Ventures Inc. 250,100 7,784
- Genzyme Corp. 275,000 5,981
- Gilead Sciences, Inc. 96,000 2,388
Guidant Corp. 32,300 1,841
- HEALTHSOUTH Corp. 287,800 11,116
- HealthCare Compare Corp. 17,100 725
- Health Management Associates
Class A 367,925 8,278
- Interneuron Pharmaceutical, Inc. 3,900 101
Johnson & Johnson 337,900 16,811
- Lincare Holdings Inc. 15,400 631
- Living Centers of America, Inc. 9,000 250
- Magellan Health Services Corp. 200,000 4,475
Manor Care Inc. 14,900 402
Medtronic, Inc. 140,000 9,520
- OrNda Healthcorp 35,700 1,044
- Oxford Health Plan 15,800 924
Pfizer, Inc. 226,400 18,763
Rhone-Poulenc Rorer, Inc. 250,000 19,531
- RoTech Medical Corp. 399,400 8,288
Schering-Plough Corp. 83,000 5,374
- Sierra Health Services 22,400 552
- Tenet Healthcare Corp. 53,400 1,168
- Utah Medical Products, Inc. 49,600 657
- Vencor, Inc. 375,000 11,859
Vital Signs, Inc. 15,300 396
Warner-Lambert Co. 90,000 6,750
Zeneca Group ADR 69,781 5,862
-----------
219,301
-----------
TECHNOLOGY (21.3%)
- ACC Corp. 117,750 3,547
- Adaptec, Inc. 270,000 10,800
- Advanced Micro Devices, Inc. 200,000 5,150
- America Online, Inc. 118,800 3,950
- American Radio Systems Corp. 250,000 6,687
AMP, Inc. 60,000 2,302
- Analog Devices, Inc. 22,950 777
- Applied Magnetics Corp. 654 19
- Ascend Communications, Inc. 138,000 8,556
- Atmel Corp. 83,200 2,756
- Baan Co. NV 207,000 7,167
- Banctec, Inc. 40,700 839
- BISYS Group, Inc. 100,000 3,700
- Black Box Corp. 11,300 458
- BMC Software, Inc. 250,000 10,344
- Cadence Design Systems, Inc. 391,050 15,544
Canwest Global
Communications Corp. 300,000 3,075
- Cascade Communications Corp. 102,500 5,650
- Ceridian Corp. 16,600 672
- Cisco Systems, Inc. 783,600 49,856
- Compaq Computer Corp. 292,000 21,681
Computer Associates
International, Inc. 29,000 1,443
- Computer Sciences Corp. 175,000 14,372
- Compuware Corp. 131,500 6,575
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
- Dell Computer 39,600 $ 2,104
- DST Systems, Inc. 215,000 6,746
- Electronics for Imaging, Inc. 95,000 7,743
- Esterline Technologies Corp. 28,200 737
First Data Corp. 264,300 9,647
- FSI International, Inc. 5,000 75
- Geoworks 167,400 4,059
- Glenayre Technologies, Inc. 88,300 1,898
- Hadco Corp. 31,800 1,546
Harris Corp. 14,500 995
HBO and Co. 276,400 16,411
Hewlett-Packard Co. 363,500 18,266
- Input/Output, Inc. 125,000 2,312
Intel Corp. 120,600 15,784
- Intercel, Inc. 100,000 1,200
International Business
Machines Corp. 37,100 5,602
- International Cabletel, Inc. 180,000 4,478
- Jacor Communications Inc. 155,000 4,243
- KEMET Corp. 19,500 446
- Komag, Inc. 104,700 2,827
Lucent Technologies, Inc. 140,000 6,475
The MacNeal-Schwendler Corp. 41,600 328
- McAfee Associates, Inc. 213,525 9,315
- Microsoft Corp. 159,200 13,154
- National Semiconductor Corp. 401,900 9,796
Nokia Corp. Pfd. ADR 235,000 13,542
- Oak Industries, Inc. 100,000 2,300
- Parametric Technology Corp. 220,000 11,302
- Peoplesoft Inc. 180,000 8,617
Pitney Bowes, Inc. 20,800 1,134
- Policy Management
Systems Corp. 150,000 6,919
Reuters Holdings PLC ADR 8,900 681
- S3, Inc. 150,000 2,437
- SCI Systems, Inc. 241,800 10,790
- SGS-Thomson Microelectronics
NV ADR 7,200 504
- Seagate Technology 103,500 4,088
- Shiva Corp. 107,300 3,715
Sony Corp. ADR 110,200 7,232
The Standard Register Co. 11,000 358
- Sterling Commerce, Inc. 130,260 4,592
- Sterling Software, Inc. 150,000 4,744
- Sun Microsystems, Inc. 377,700 9,678
Tektronix, Inc. 24,600 1,261
Tele Danmark AS ADR 23,100 629
- U.S. Robotics Corp. 13,400 965
Vodafone Group PLC ADR 200,000 8,275
Wallace Computer Services, Inc. 12,600 435
- Xylan Corp. 29,600 829
-----------
437,134
-----------
TRANSPORT & SERVICES (2.1%)
- AMR Corp. 59,400 5,235
- Alaska Air Group, Inc. 221,700 4,656
CSX Corp. 24,600 1,039
Canadian Pacific Ltd. 514,600 13,637
Consolidated Freightways, Inc. 1,000 22
Delta Air Lines, Inc. 50,300 3,565
Norfolk Southern Corp. 1,300 114
Pittston Burlington Group 150,000 3,000
Southwest Airlines Co. 250,000 5,531
- UAL Corp. 18,800 1,175
Werner Enterprises, Inc. 300,000 5,438
-----------
43,412
-----------
UTILITIES (2.6%)
ALLTEL Corp. 28,400 891
AT&T Corp. 43,100 1,875
Ameritech Corp. 22,000 1,334
Bell Atlantic Corp. 17,900 1,159
British Telecommunications PLC 153,300 10,520
Consolidated Edison Co.
of New York, Inc. 4,800 140
Edison International 32,200 640
GPU Inc. 15,800 531
GTE Corp. 23,800 1,083
NorAm Energy Corp. 60,000 923
NYNEX Corp. 29,300 1,410
Public Service Co.
of New Mexico 250,300 4,912
Sprint Corp. 307,200 12,250
Telefonica de Espana ADR 173,100 11,987
Telefonos de Mexico SA
Class L ADR 92,700 3,059
Unicom Corp. 47,400 1,286
-----------
54,000
-----------
MISCELLANEOUS (2.8%)
- Accustaff, Inc. 348,700 7,366
American Financial Group, Inc. 246,500 9,305
- Corrections Corp. of America 275,400 8,434
Hanson PLC ADR 192,800 1,301
Interpublic Group of Cos., Inc. 14,600 694
Loews Corp. 174,100 16,409
Manpower Inc. 72,500 2,356
- National Education Corp. 43,100 657
Olsten Corp. 532,900 8,060
PHH Corp. 73,800 3,173
Textron, Inc. 1,100 104
-------
57,859
-------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $1,386,577) 1,864,420
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (9.7%)
- --------------------------------------------------------------------------------
U.S. TREASURY BILL--Note E
5.17%, 1/9/97 $ 300 300
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.39%, 1/2/97 197,991 197,991
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $198,291) 198,291
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.4%)
(COST $1,584,868) 2,062,711
- --------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.4%)
- --------------------------------------------------------------------------------
<S> <C>
Other Assets--Notes C and F $ 73,508
iabilities--Note F (82,452)
-----------
(8,944)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 131,375,067 outstanding
$.10 par value shares
(authorized 350,000,000 shares) $2,053,767
================================================================================
NET ASSET VALUE PER SHARE $15.63
- --------------------------------------------------------------------------------
</TABLE>
*See Note A in Notes to Financial Statements.
-Non-Income Producing Security.
ADR--American Depository Receipt.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,512,513 $11.51
Overdistributed Net
Investment Income (4) --
Accumulated Net Realized Gains 63,429 .48
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 477,843 3.64
Futures Contracts (14) --
- --------------------------------------------------------------------------------
NET ASSETS $2,053,767 $15.63
================================================================================
</TABLE>
15
<PAGE> 18
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If the
Fund invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MORGAN GROWTH FUND
YEAR ENDED DECEMBER 31, 1996
(000)
- --------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 17,829
Interest 8,649
-----------
Total Income 26,478
-----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 2,872
Performance Adjustment (11)
The Vanguard Group--Note C
Management and Administrative 5,684
Marketing and Distribution 312
Taxes (other than income taxes) 116
Custodian Fees 80
Auditing Fees 10
Shareholders' Reports 99
Annual Meeting and Proxy Costs 34
Directors' Fees and Expenses 6
-----------
Total Expenses 9,202
Expenses Paid Indirectly--Note C (124)
-----------
Net Expenses 9,078
- --------------------------------------------------------------------------------------
NET INVESTMENT INCOME 17,400
- --------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 206,293
Futures Contracts 284
- --------------------------------------------------------------------------------------
REALIZED NET GAIN 206,577
- --------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 152,466
Futures Contracts (3)
- --------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 152,463
- --------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $376,440
======================================================================================
</TABLE>
16
<PAGE> 19
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
that is detailed in the Statement of Operations. The amounts shown as
Distributions to shareholders from the Fund's net income and capital gains may
not match the amounts shown in the Operations section, because distributions
are determined on a tax basis and may be made in a period different from the
one in which the income was earned or the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount
shareholders invested in the Fund, either by purchasing shares or by
reinvesting distributions, as well as the amounts redeemed. The corresponding
numbers of Shares Issued and Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
MORGAN GROWTH FUND
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995
(000) (000)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 17,400 $ 13,934
Realized Net Gain 206,577 142,881
Change in Unrealized Appreciation (Depreciation) 152,463 220,579
--------------------------------------
Net Increase in Net Assets Resulting from Operations 376,440 377,394
--------------------------------------
DISTRIBUTIONS
Net Investment Income (16,973) (14,339)
Realized Capital Gain (182,231) (110,668)
--------------------------------------
Total Distributions (199,204) (125,007)
--------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 453,288 235,407
Issued in Lieu of Cash Distributions 191,528 118,797
Redeemed (239,383) (210,296)
--------------------------------------
Net Increase from Capital Share Transactions 405,433 143,908
- ----------------------------------------------------------------------------------------------------------
Total Increase 582,669 396,295
- ----------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 1,471,098 1,074,803
- ---------------------------------------------------------------------------------------------------------
End of Year $2,053,767 $1,471,098
==========================================================================================================
(1) Shares Issued (Redeemed)
Issued 30,100 16,895
Issued in Lieu of Cash Distributions 12,544 8,675
Redeemed (15,693) (15,754)
--------------------------------------
Net Increase in Shares Outstanding 26,951 9,816
==========================================================================================================
</TABLE>
17
<PAGE> 20
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the
Fund; and the extent to which the Fund tends to distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Fund for one year. Finally, the table lists the Fund's Average Commission
Rate Paid, a disclosure required by the SEC beginning in 1996. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
MORGAN GROWTH FUND
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $14.09 $11.36 $12.01 $12.65 $12.20
- ----------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .14 .15 .14 .18 .18
Net Realized and Unrealized Gain (Loss) on Investments 3.07 3.89 (.34) .71 .97
-----------------------------------------------------
Total from Investment Operations 3.21 4.04 (.20) .89 1.15
-----------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.14) (.15) (.14) (.18) (.18)
Distributions from Realized Capital Gains (1.53) (1.16) (.31) (1.35) (.52)
-----------------------------------------------------
Total Distributions (1.67) (1.31) (.45) (1.53) (.70)
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $15.63 $14.09 $11.36 $12.01 $12.65
======================================================================================================================
TOTAL RETURN 23.30% 35.98% -1.67% 7.32% 9.54%
======================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $2,054 $1,471 $1,075 $1,135 $1,116
Ratio of Total Expenses to Average Net Assets 0.51% 0.49% 0.50% 0.49% 0.48%
Ratio of Net Investment Income to Average Net Assets 0.97% 1.10% 1.15% 1.36% 1.51%
Portfolio Turnover Rate 73% 76% 84% 72% 64%
Average Commission Rate Paid $.0362 N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
Vanguard/Morgan Growth Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the
latest quoted bid and asked prices. Securities not listed on an exchange are
valued at the latest quoted bid prices. Temporary cash investments acquired
over 60 days to maturity are valued using the latest bid prices or using
valuations based on 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, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.
4. FUTURES: The Fund uses S&P 500 Index futures contracts to a limited
extent, with the objective of maintaining full exposure to the stock market
while maintaining liquidity. The Fund may purchase or sell futures contracts to
achieve a desired level of investment, whether to accomodate portfolio turnover
or cash flows from capital share transactions. 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 at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Under investment advisory contracts, the Fund pays Wellington Management
Company, LLP; Franklin Portfolio Associates; and Husic Capital Management
advisory fees calculated at an annual percentage rate of average net assets.
The basic fees of each adviser are subject to quarterly adjustments based on
performance relative to an index of the equity holdings of the largest growth
stock mutual funds. For the year ended December 31, 1996, the aggregate
investment advisory fee represented an effective annual basic rate of 0.16% of
average net assets of the Fund before a decrease of $11,000 based on
performance. The basic fee reflects a fee waiver of $32,000 for the period
January 1, 1996, to March 31, 1996.
The Vanguard Group provides investment advisory services to a portion of
the Fund on an at-cost basis.
19
<PAGE> 22
C. The Vanguard Group 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,
1996, the Fund had contributed capital of $184,000 to Vanguard (included in
Other Assets), representing 0.9% of Vanguard's capitalization. The Fund's
directors and officers are also directors and officers of Vanguard.
Vanguard has asked 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 to the Fund part of the commissions generated. Such
rebates are used solely to reduce the Fund's administrative expenses. For the
year ended December 31, 1996, these arrangements reduced the Fund's expenses by
$124,000 (0.01% of average net assets).
D. During the year ended December 31, 1996, the Fund purchased $1,363,815,000
of investment securities and sold $1,203,537,000 of investment securities, not
counting temporary cash investments.
E. At December 31, 1996, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $477,843,000,
consisting of unrealized gains of $504,108, 000 on securities that had risen
in value since their purchase and $26,265,000 in unrealized losses on
securities that had fallen in value since their purchase.
At December 31, 1996, the aggregate settlement value of open S&P 500 Index
futures contracts expiring in March 1997, the unrealized depreciation on those
contracts, and the market value of U.S. Treasury bills deposited as initial
margin for those contracts were $745,000, $14,000, and $300,000, respectively.
Unrealized depreciation on open futures contracts is required to be treated as
realized loss for federal income tax purposes.
F. The market value of securities on loan to broker/dealers at December 31,
1996, was $61,940,000, for which the Fund held cash collateral of $64,558,000.
20
<PAGE> 23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
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, 1996, and the results
of its operations, the changes in its net assets and the financial highlights
for each of the periods indicated, 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 at December 31, 1996 by correspondence with the
custodian, with respect to unsettled securities transactions, and the
application of alternative auditing procedures, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1997
21
<PAGE> 24
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
VANGUARD/MORGAN GROWTH FUND
This information for the fiscal year ended December 31, 1996, is included
pursuant to provisions of the Internal Revenue Code.
The Fund designates $166,384,000 as capital gain dividends (from net
long-term capital gains), of which $116,406,000 was distributed to
shareholders in December 1996 and $49,978,000 will be distributed in March
1997.
For corporate shareholders, 26.2% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received
deduction.
All comparative mutual fund data are from Upper Analytical Services, Inc. or
Morningstar unless otherwise noted.
22
<PAGE> 25
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer Inc.;
Director of Sun Company, Inc. and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and
Massa-chusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
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., Procter & Gamble 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; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President, Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President, Institutional.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGUARD LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
[email protected] http://www.vanguard.com
All Vanguard Funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from
The Vanguard Group.
(C) 1996 Vanguard Marketing Corporation, Distributor
<PAGE> 26
[PHOTO]
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
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Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
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GROWTH FUNDS
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Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
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INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
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Portfolio
INDEX FUNDS
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FIXED-INCOME FUNDS
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INCOME FUNDS
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(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q260-12/96
