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VANGUARD/MORGAN GROWTH FUND
Semiannual Report
June 30, 1997
[PHOTO]
[THE VANGUARD GROUP LOGO]
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[PHOTO]
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; 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.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
3
Report From
The Advisers
5
Performance
Summary
7
Financial
Statements
8
Directors And
Officers
INSIDE BACK COVER
All comparative mutual fund data
are from Lipper Analytical Services, Inc.
or Morningstar unless otherwise noted.
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[PHOTO]
FELLOW SHAREHOLDER,
The stock market continued its amazing climb during the first half of
1997. Vanguard/Morgan Growth Fund provided a return of +14.9% during the
period. This performance was good on an absolute basis and slightly ahead of
our peers, although it lagged broad stock market indexes.
The table below compares the Fund's total return (capital change plus
reinvested dividends) for the six-month period with those of the average growth
mutual fund and the unmanaged Standard & Poor's 500 Composite Stock Price
Index, which is dominated by very large-capitalization stocks.
The Fund's return is based on an increase in net asset value from $15.63
per share on December 31, 1996, to $17.42 per share on June 30, 1997, with the
latter figure adjusted for a dividend of $0.01 per share paid from net
investment income and distributions totaling $0.475 per share from net realized
capital gains.
<TABLE>
<CAPTION>
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TOTAL RETURN
SIX MONTHS ENDED
JUNE 30, 1997
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<S> <C>
Vanguard/Morgan Growth Fund +14.9%
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Average Growth Mutual Fund +14.3%
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S&P 500 Index +20.6%
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</TABLE>
THE PERIOD IN REVIEW
A nearly perfect climate for common stocks--strong economic growth, rising
corporate profits, and decelerating inflation--prevailed during the six months
ended June 30. While the market's rising tide lifted all boats,
large-capitalization stocks rose the most. The advance was not without
incident: The S&P 500 Index declined nearly -10% during the seven weeks
following February 18, when it reached a record high. However, that drop was
quickly aborted and by early May the market was setting record highs almost
weekly.
Jitters about interest rates and inflation were the apparent causes of the
brief slide. Although the Federal Reserve Board raised its target for
short-term interest rates by a quarter-point to 5.50% on March 25, short-term
interest rates ended the period where they began it (5.17% for 90-day U.S.
Treasury bills). Longer-term rates rose only slightly (less than one-quarter
percentage point) on balance during the first half of 1997. The stock market's
strong rebound in the second quarter stemmed from a combination of factors,
including strong earnings reports, a lessening of inflation fears, and an
easing in interest rates. Whatever their causes, the price fluctuations served
as a clear reminder of the volatility that is very much a part of investing in
stocks.
Vanguard/Morgan Growth Fund's return of +14.9% was excellent by any normal
yardstick. But the first half of 1997, when the S&P 500 Index returned +20.6%,
was hardly normal. The market strongly favored the largest-capitalization
stocks, a bias that explains most of the gap between the Fund's return and that
of the S&P 500 Index. One indicator of this tilt is that the return on the S&P
500 Index was nearly double the +10.6% return on the rest of the stock market
(as represented by the Wilshire 4500 Equity Index).
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Thus, in a period when bigger was decidedly better, we had a significant
handicap: The average market capitalization of the Fund's holdings ($6.9
billion) was less than one-quarter of the market cap of the S&P 500 Index
($32.9 billion). Another factor in our shortfall versus the Index was our small
position in cash reserves, which represented a "drag"--albeit a modest one--on
our performance in a rapidly rising stock market. As theoretical constructs,
indexes hold no cash and bear none of the operating expenses that mutual funds
incur.
The Fund's edge of 0.6 percentage point over the average growth stock fund
during the six months is largely explained by the Vanguard cost advantage. The
Fund's administrative, investment management, and operational expenses equaled
about 0.50% of average net assets, roughly one-third the 1.50% expense ratio of
the average growth fund.
As you know, investment management chores for the Fund are divided among
four advisers. The division of the Fund's assets, shown in the table at left,
was essentially unchanged during the period.
<TABLE>
<CAPTION>
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TOTAL ASSETS MANAGED
JUNE 30, 1997
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$ MILLION PERCENT
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<S> <C> <C>
Wellington Management $ 927 38%
Franklin Portfolio Associates 881 37
Husic Capital Management 266 11
Vanguard Core Management 226 9
Cash Reserves* 112 5
- ------------------------------------------------------------------------
Total $2,412 100%
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</TABLE>
*Each adviser also may maintain a modest cash reserve.
IN SUMMARY
The extraordinary bull market for U.S. stocks that began almost 15 years ago
has amply demonstrated the rewards of long-term investing. Risk, the
inseparable companion of reward, may not be so apparent just now. Yet investors
disregard risk at their peril. So we hope that the sizable, sudden
fluctuations in the stock market during the first half of 1997 reinforced two
key messages that we have repeatedly stressed in these Reports to you.
The first message, of course, concerns the importance of holding a
balanced portfolio of stock funds, bond funds, and money market funds in
proportions appropriate to your financial situation, tolerance for risk, and
investment objectives. By making it easier to ride out episodes of market
volatility, a balanced portfolio helps investors to adhere to our second
message: Always "stay the course" toward your long-term investment goals.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
July 14, 1997
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[PHOTO]
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 1997
U.S. EQUITY MARKETS
As the economy continued to grow while the rate of inflation did not, a robust
market provided solid gains to investors in U.S. common stocks during the
first half of 1997. The best performers were primarily larger-capitalization
issues, although the small-company indexes exhibited some strength in the final
two months of the period. Over the half-year, the Standard & Poor's 500
Composite Stock Price Index gained 20.6%, fueled by a 10.8% boost since the end
of April. Reflecting the gains among smaller companies, the Russell 2000 Index
posted a 10.2% increase for the six-month period, driven by an 11.1% jump in
May and a 4.3% rise in June. It was particularly noteworthy that the recent
small-cap gains were led by small growth stocks, the worst segment of the U.S.
market during the past 12 months. This group has surged 17.6% since the end of
March, although at the half-year's end it still lagged the S&P 500 Index by a
sizable margin (5.2% versus 20.6%).
Stocks benefited from the continued strength of corporate earnings, which
rose some 15% during the past year, and from a widespread confidence reflected
in increased price/earnings ratios. The strength in earnings, the expectation
that income will continue to increase at an attractive pace, and the further
conviction that inflation is not a problem helped stocks to continue to produce
solid gains in the fiscal period. What's more, earnings have shown not only
good strength but remarkable consistency in beating the consensus forecasts of
Wall Street analysts.
<TABLE>
<CAPTION>
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TOTAL RETURNS
PERIODS ENDED JUNE 30, 1997
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6 MONTHS 1 YEAR 5 YEARS*
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<S> <C> <C> <C>
EQUITY
S&P 500 Index 20.6% 34.7% 19.8%
Russell 2000 Index 10.2 16.3 17.9
MSCI EAFE Index 11.4 13.2 13.2
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FIXED-INCOME
Lehman Aggregate Bond Index 3.1% 8.2% 7.1%
Lehman 10-Year Municipal
Bond Index 3.3 8.3 7.4
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.6 5.3 4.5
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OTHER
Consumer Price Index 1.1% 2.3% 2.7%
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</TABLE>
*Average annual.
The strongest gains in the S&P 500 Index during the past six months came
from the health-care sector (up 31.4%) and the consumer-staples sector (up
23.9%). By contrast, numerous uncertainties for utilities caused the issues in
that sector to lag the broad market, although, on an absolute basis, their 8.2%
return over six months is quite good.
U.S. FIXED-INCOME MARKETS
The modest rise in interest rates during the past six months reflects the
economy's underlying momentum. The 10-year U.S. Treasury's yield increased from
6.42% at the end of December to 6.97% by the middle of April. In the following
weeks, economic reports indicated a slowing in economic growth and further
reduced fears of an increase in inflation. This news helped interest rates fall
to 6.50% by the end of June.
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Fueled by robust consumer spending, the U.S. economy expanded at a
remarkable 5.8% rate in the first three months of 1997. Reflecting the vibrant
economy, the nation's unemployment rate stood at 5.0% in June. Strong economic
growth and tight labor markets have often led to rising inflation because of
increased demand for goods and services. With this in mind, the Federal Reserve
raised its federal funds interest rate target by 0.25% on March 25 in a
"preemptive" strike against mounting inflationary pressures. Observed price
increases have been subdued in recent months, however. Wholesale prices have
fallen in each of the first six months of 1997, and so far this year consumer
prices have risen at a slower pace than last year.
With interest rates very close to year-end levels, bond investors have
fared reasonably well during the past six months, as illustrated by the 3.1%
return of the Lehman Brothers Aggregate Bond Index. Investors who favored
shorter-maturity and lower-quality issues achieved somewhat better returns.
Mortgage-backed securities continued to perform well because refinancing
activity has been reduced to historically low levels as interest rates have
risen. Municipal issues also tended to perform better than their taxable
counterparts.
INTERNATIONAL EQUITY MARKETS
International investors received fairly good returns over the past six months.
As measured by the broad Morgan Stanley Capital International Europe,
Australasia, Far East Index, foreign markets gained 11.4%.
The period saw two major developments. First, the Japanese stock market
moved sharply higher in the spring, returning 11.1% in May and 7.5% in June to
U.S. investors. Better tone in the economy, plus strong earnings reported by
export-oriented companies benefiting from the weak yen, gave Japan a
long-awaited boost. For the six months, the Japanese market is up 9.2%. The
competitive benefits of a weak currency relative to the dollar extended to
Germany, where the export-driven capital goods and chemical manufacturers
gained; overall, the German market rose 17.0% during the six-month period.
Arguably the biggest news came from the French elections at the end of
May. The new government is considered to be less friendly toward the austerity
measures needed to meet the eligibility requirements for the European Monetary
Union (EMU) in 1999. The French elections also had a broad impact across the
continent. Although most investors appear to agree that the elections won't
jeopardize the continent's move toward the EMU, the timing and intensity of the
fiscal measures are now less certain. For the six months, Europe gained 24.8%
in local currencies, which a strong dollar trimmed to 14.4% for U.S. investors.
4
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[PHOTO]
REPORT FROM THE ADVISERS
Vanguard/Morgan Growth Fund provided a return of 14.9% in the first half
of 1997. The Fund's return was marginally higher than the average growth fund
but significantly behind the Standard & Poor's 500 Composite Stock Price Index.
We were not alone in failing to keep up with the S&P 500 Index: The Index
return of 20.6% beat approximately 95% of all general equity funds during the
six-month period. The strongest performance was concentrated in remarkably few
stocks. For example, the largest 25 stocks in the S&P 500 Index had a total
return of 26.5% in the first half of 1997, nearly 6 percentage points higher
than the return on the full Index. Although Vanguard/Morgan Growth Fund had
stakes in a majority of those 25 elite stocks, they represented a much smaller
proportion of the Fund than of the Index.
Still, it was a marvelous half-year generally for the stock market. The
economy, after expanding at a torrid pace in the first quarter of the year,
slowed to a more sustainable growth rate in the second. Inflation remained
subdued and no big imbalances are apparent in the economy. The combination of
strong real economic growth, good profits, low inflation, and low interest
rates cannot go on forever, but while it does it remains a positive for the
financial markets.
The Fund benefited during the half-year from an overweighting versus the
market in the financial-services sector and from good stock selection among
financial firms. Another positive for the Fund was our small position (about
3% of assets versus 9% for the Index) in utility stocks, the weakest of the
market sectors during the six months. However, our stock selections lagged the
Index returns in several key sectors, including technology and health care.
Among individual stocks that contributed strongly to our returns during
the period were America Online, Pennzoil, Travelers, Merrill Lynch, and Student
Loan Marketing. Among stocks that performed poorly and have been sold are
Shiva, Scholastic, Tupperware, S3, and Abacan Resource.
We continue to emphasize growth companies that we believe can produce
strong gains in earnings without relying on price increases, which are
difficult to push through in a period of low inflation. Market leadership may
finally shift from the very large-capitalization stocks to smaller companies, a
change that should improve our performance in relation to the
large-cap-dominated S&P 500 Index.
Each of the Fund's 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 seeks to identify companies with above-average prospects
for growth, especially in industries undergoing fundamental changes. We are
currently emphasizing technology, health-care, financial, and
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.
5
<PAGE> 8
media companies. Major additions to our holdings in the first half of the year
included a package of regional stock brokerage firms (Legg Mason, McDonald,
Morgan Keegan, and Piper Jaffray) and three technology companies (EMC, General
Motors Hughes Electronics, and Xilinx). In the consumer sector, we added CVS,
the drug store chain, and Hertz, the leading car-rental firm.
FRANKLIN PORTFOLIO ASSOCIATES
Franklin uses an array of computer models to analyze a broad range of facts on
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 fundamental research on individual
companies. We emphasize stocks that fit certain investment themes that we
believe will lead to faster growth and higher valuations. Four 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 economic growth, especially 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 higher-ranking 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
July 14, 1997
6
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PERFORMANCE SUMMARY
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.
MORGAN GROWTH FUND
TOTAL INVESTMENT RETURNS: DECEMBER 31, 1976-JUNE 30, 1997
<TABLE>
<CAPTION>
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MORGAN GROWTH FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
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<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
1997* 14.9 0.0 14.9 20.6
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</TABLE>
*Six months ended June 30, 1997.
See Financial Highlights table on page 15 for dividend and capital gains
information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
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10 YEARS
INCEPTION ----------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
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<S> <C> <C> <C> <C> <C> <C>
Morgan Growth Fund 12/31/68 26.28% 18.08% 11.26% 1.94% 13.20%
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</TABLE>
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[PHOTO]
FINANCIAL STATEMENTS
JUNE 30, 1997 (unaudited)
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>
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MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
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COMMON STOCKS (93.3 %)
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<S> <C> <C>
AUTO & TRANSPORTATION (2.2%)
# Autoliv, Inc. 8,218 322
# Aviall Inc. 94,800 1,327
CNF Transportation Inc. 14,900 480
CSX Corp. 24,600 1,365
Cooper Tire & Rubber Co. 20,900 460
Delta Air Lines, Inc. 73,400 6,019
# Federal Express Corp. 93,000 5,371
Ford Motor Co. 384,300 14,507
General Motors Corp. 48,200 2,684
# Halter Marine Group, Inc. 31,876 765
Kansas City Southern
Industries, Inc. 14,800 955
Pittston Burlington Group 120,000 3,375
Southwest Airlines Co. 191,100 4,945
# UAL Corp. 72,500 5,188
Werner Enterprises, Inc. 300,000 5,811
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53,574
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CONSUMER DISCRETIONARY (17.4%)
Aaron Rents, Inc. Class B 11,200 145
# AccuStaff, Inc. 561,100 13,291
# America Online, Inc. 274,500 15,269
# American Radio Systems Corp.
Class A 250,000 9,969
Amway Asia Pacific Ltd. 9,800 427
# Anchor Gaming 10,300 490
# Barnes & Noble, Inc. 200,000 8,600
# Bed Bath & Beyond, Inc. 250,000 7,594
# Boston Chicken, Inc. 13,700 191
# CDI Corp. 24,900 1,038
CanWest Global
Communications Corp.
Class A Non-Voting 250,000 3,703
# Carmike Cinemas, Inc. Class A 23,500 770
Cintas Corp. 4,500 309
# Corporate Express, Inc. 119,000 1,711
Dayton-Hudson Corp. 411,400 21,881
Deluxe Corp. 29,400 1,003
The Walt Disney Co. 199,944 16,044
# Doubletree Corp. 12,200 501
Eastman Kodak Co. 4,400 338
# Federated Department Stores 464,400 16,138
Fila Holdings SPA ADR 20,600 689
# Florida Panthers Holdings, Inc. 209,000 5,016
Food Lion Inc. Class A 61,900 443
Fortune Brands Inc. 26,600 993
# Furniture Brands International Inc. 58,500 1,133
Gannett Co., Inc. 15,300 1,511
# Gartner Group, Inc. Class A 12,000 430
Gaylord Entertainment Co.
Class A 10,400 240
# Genesco, Inc. 113,900 1,616
# Gymboree Corp. 150,000 3,591
# HFS Inc. 205,200 11,902
Harcourt General, Inc. 1,600 76
# Hertz Corp. Class A 240,000 8,640
# Tommy Hilfiger Corp. 200,000 8,037
Hilton Hotels Corp. 38,600 1,025
Home Depot, Inc. 754,100 51,986
# Insight Enterprises, Inc. 22,300 663
# Jacor Communications, Inc. 155,000 5,938
# Just for Feet, Inc. 43,700 759
</TABLE>
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<TABLE>
<CAPTION>
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MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
King World Productions, Inc. 195,800 6,853
Knight-Ridder, Inc. 160,200 7,860
Libbey, Inc. 3,000 105
Liz Claiborne, Inc. 101,500 4,732
# Lone Star Steakhouse & Saloon 35,800 931
# Mail-Well, Inc. 17,700 504
Mattel, Inc. 120,000 4,065
Maytag Corp. 30,800 805
McDonald's Corp. 427,900 20,673
# Fred Meyer, Inc. 61,900 3,199
Newell Co. 222,100 8,801
News Corp. Ltd. ADR 155,100 2,986
News Corp. Ltd. Pfd. ADR 250,000 3,906
# Outdoor Systems, Inc. 216,850 8,240
# Playboy Enterprises Inc. Class A 13,000 149
# Playboy Enterprises Inc. Class B 12,900 149
Premark International, Inc. 13,200 353
# Proffitt's, Inc. 140,900 6,164
# Promus Hotel Corp. 6,500 252
Reuters Holdings PLC ADR 8,900 561
# Revlon, Inc. Class A 210,000 10,881
Ross Stores, Inc. 46,600 1,520
# Saks Holdings, Inc. 220,000 5,500
E.W. Scripps Co. Class A 70,000 2,914
Sears, Roebuck & Co. 31,400 1,688
# Spectrum Holobyte 113,200 545
Sunbeam Corp. 330,000 12,457
TJX Cos., Inc. 60,400 1,593
# Tele-Communications Liberty
Media Group Class A 990,000 23,512
# Teletech Holdings Inc. 65,500 1,715
Time Warner, Inc. 194,900 9,404
The Toro Co. 103,800 3,931
Tribune Co. 78,800 3,787
# Ugly Duckling Corp. 35,400 544
# Universal Outdoor Holdings, Inc. 45,500 1,587
# Viacom Inc. Class A 20,000 589
# Viacom Inc. Class B 452,247 13,567
# Waban, Inc. 39,900 1,284
Wal-Mart Stores, Inc. 53,200 1,799
Washington Post Co. Class B 3,200 1,274
Windmere-Durable Holdings Inc. 15,800 259
# Woolworth Corp. 594,600 14,270
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420,008
------------
CONSUMER STAPLES (3.8%)
Anheuser-Busch Cos., Inc. 9,000 377
CVS Corp. 170,000 8,713
The Clorox Co. 3,500 462
Coca-Cola Enterprises, Inc. 550,000 12,650
Colgate-Palmolive Co. 26,800 1,749
ConAgra, Inc. 24,100 1,545
Dimon Inc. 129,700 3,437
# Gallaher Group PLC ADR 26,600 490
General Mills, Inc. 19,700 1,283
Gillette Co. 92,100 8,726
Great Atlantic &
Pacific Tea Co., Inc. 21,600 587
Interstate Bakeries 182,900 10,848
PepsiCo, Inc. 283,000 10,630
Philip Morris Cos., Inc. 372,800 16,543
RJR Nabisco Holdings Corp. 324,600 10,712
# Safeway, Inc. 30,100 1,388
SuperValu Inc. 22,800 787
UST Inc. 46,300 1,285
------------
92,212
------------
FINANCIAL SERVICES (18.4%)
# Acceptance Insurance Cos. Inc. 40,800 928
Ace, Ltd. 370,000 27,334
H.F. Ahmanson & Co. 281,300 12,096
Allstate Corp. 37,200 2,716
American Express Co. 305,900 22,790
American Financial Group, Inc. 246,500 10,461
American International Group, Inc. 76,032 11,357
# BISYS Group, Inc. 180,000 7,549
BankAmerica Corp. 474,600 30,641
Barnett Banks, Inc. 202,000 10,605
Bear Stearns Co., Inc. 610,674 20,877
CIGNA Corp. 11,400 2,024
# CNA Financial Corp. 62,200 6,558
Chase Manhattan Corp. 21,868 2,123
Citicorp 7,700 928
# Consumer Portfolio Services, Inc. 83,000 996
# ContiFinancial Corp. 17,600 642
# Credit Acceptance Corp. 39,300 504
# DST Systems, Inc. 215,000 7,162
Donaldson, Lufkin & Jenrette, Inc. 25,900 1,548
The Dun & Bradstreet Corp. 57,100 1,499
A.G. Edwards & Sons, Inc. 444,900 19,019
# Envoy Corp. 30,000 998
The Equitable Cos. 45,100 1,500
Fannie Mae 551,800 24,072
Federal Home Loan
Mortgage Corp. 86,100 2,960
First Bank System, Inc. 110,000 9,391
First Chicago NBD Corp. 23,300 1,410
First Data Corp. 375,000 16,477
First Union Corp. 139,000 12,858
Franchise Finance Corp.
of America REIT 84,900 2,213
General Re Corp. 3,900 710
Golden West Financial Corp. 17,300 1,211
Green Tree Financial Corp. 119,400 4,254
Household International, Inc. 171,700 20,164
Legg Mason Inc. 85,000 4,574
Loews Corp. 99,200 9,932
MGIC Investment Corp. 110,000 5,273
McDonald and Co. Investments 60,000 2,753
Mercantile Bankshares Corp. 18,800 748
Mercury Finance Co. 33,100 81
Mercury General Corp. 2,300 167
Merrill Lynch & Co., Inc. 129,600 7,727
Mid Ocean Ltd. 5,900 309
J.P. Morgan & Co., Inc. 12,600 1,315
Morgan Keegan, Inc. 200,000 3,975
Norwest Corp. 105,000 5,906
Ohio Casualty Corp. 150,700 6,593
Old Republic International Corp. 40,200 1,219
Orion Capital Corp. 19,600 1,446
PNC Bank Corp. 33,200 1,382
Penncorp Financial Group Inc. 177,100 6,818
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
Piper Jaffray Cos., Inc. 185,000 3,793
# Policy Management
Systems Corp. 150,000 7,050
Popular Inc. 7,500 300
Republic New York Corp. 900 97
Signet Banking Corp. 105,000 3,780
Sirrom Capital Corp. 15,400 527
State Street Corp. 40,000 1,850
Student Loan Marketing Assn. 123,500 15,685
Travelers Group Inc. 440,600 27,785
# Uniao de Bancos Brasileiros SA 100,000 3,713
United Dominion
Realty Trust REIT 75,400 1,070
Washington Mutual, Inc. 294,900 17,620
Wells Fargo & Co. 5,900 1,590
------------
443,653
------------
HEALTH CARE (12.7%)
Abbott Laboratories 285,100 19,030
American Home Products Corp. 23,300 1,782
Amgen, Inc. 30,100 1,748
# Beverly Enterprises, Inc. 713,800 11,599
Biomet, Inc. 375,000 6,984
Bristol-Myers Squibb Co. 16,400 1,328
Columbia/HCA Healthcare Corp. 651,500 25,612
# Dura Pharmaceuticals, Inc. 66,500 2,643
# Elan Corp. PLC ADR 296,700 13,426
# Express Scripts 15,700 650
# Genzyme Corp. 350,000 9,669
Guidant Corp. 26,600 2,261
HBO & Co. 232,000 15,979
# HEALTHSOUTH Corp. 1,193,600 29,765
# HealthCare COMPARE Corp. 17,100 896
# Health Management Associates
Class A 367,925 10,486
# Immunex Corp. 102,500 3,690
# Interneuron Pharmaceutical, Inc. 3,900 78
Johnson & Johnson 337,900 21,752
# Lincare Holdings Inc. 15,400 662
# Magellan Health Services, Inc. 160,000 4,720
Manor Care Inc. 14,900 486
Merck & Co., Inc. 12,400 1,283
Olsten Corp. 640,700 12,454
# Oxford Health Plan 15,800 1,134
Pfizer, Inc. 140,000 16,730
Rhone-Poulenc Rorer, Inc. 275,000 24,991
# Rotech Medical Corp. 500,700 10,045
Schering-Plough Corp. 166,000 7,947
# Sierra Health Services 22,400 700
# Sybron International Corp. 23,800 949
# Tenet Healthcare Corp. 53,400 1,579
# Utah Medical Products, Inc. 49,600 391
# Vencor, Inc. 425,000 17,956
Warner-Lambert Co. 157,500 19,569
Zeneca Group PLC ADR 50,000 4,956
------------
305,930
------------
INTEGRATED OILS (1.0%)
Atlantic Richfield Co. 21,200 1,495
British Petroleum Co. PLC ADR 1,250 94
Chevron Corp. 10,200 754
Pennzoil Co. 85,000 6,524
Phillips Petroleum Co. 31,900 1,396
Texaco Inc. 11,300 1,229
Unocal Corp. 290,000 11,256
YPF SA ADR 6,000 185
------------
22,933
------------
OTHER ENERGY (5.5%)
# BJ Services Co. 259,800 13,932
Burlington Resources, Inc. 435,700 19,225
# Cooper Cameron Corp. 212,000 9,911
# Diamond Offshore Drilling, Inc. 7,000 547
# ENSCO International, Inc. 298,000 15,720
# Global Marine, Inc. 256,400 5,961
Helmerich & Payne, Inc. 40,900 2,357
# Nabors Industries, Inc. 430,600 10,765
# Reading & Bates Corp. 31,600 845
# Rowan Cos., Inc. 61,000 1,719
# Santa Fe Energy Resources, Inc. 4,400 65
# Santa Fe International Corp. 219,500 7,463
Schlumberger Ltd. 100,400 12,550
Transocean Offshore, Inc. 341,900 24,830
Vastar Resources, Inc. 225,000 7,889
------------
133,779
------------
MATERIALS & PROCESSING (5.7%)
Air Products & Chemicals, Inc. 100,000 8,125
Archer-Daniels-Midland Co. 462,414 10,867
Banta Corp. 48,500 1,316
Centex Corp. 101,400 4,119
Cleveland-Cliffs Iron Co. 49,100 2,001
Corning, Inc. 18,700 1,040
Crown Cork & Seal Co., Inc. 38,300 2,047
Dexter Corp. 1,400 45
E.I. du Pont de Nemours & Co. 37,600 2,364
Engelhard Corp. 150,000 3,141
Fluor Corp. 285,000 15,728
# Fort Howard Corp. 324,200 16,392
W.R. Grace & Co. 20,400 1,125
M.A. Hanna Co. 183,400 5,284
Harsco Corp. 8,600 348
Hercules, Inc. 11,400 546
Kimberly-Clark Corp. 534,200 26,576
Morton International, Inc. 241,800 7,299
Newmont Mining Corp. 6,900 269
Norsk Hydro AS ADR 104,300 5,652
# Owens-Illinois, Inc. 48,600 1,507
Phelps Dodge Corp. 13,400 1,142
Sigma-Aldrich Corp. 31,200 1,090
Terra Industries, Inc. 22,400 260
Texas Industries, Inc. 26,800 712
The Timken Co. 25,200 896
USX-U.S. Steel Group 486,300 17,051
Union Carbide Corp. 33,400 1,572
------------
138,514
------------
PRODUCER DURABLES (3.8%)
# American Power
Conversion Corp. 249,500 4,709
AMP, Inc. 60,000 2,505
# Applied Materials, Inc. 140,000 9,905
# Beazer Homes USA, Inc. 58,000 928
The Boeing Co. 600 32
Caterpillar, Inc. 20,300 2,180
Deere & Co. 119,100 6,536
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
# Detroit Diesel Corp. 105,000 2,513
# Gulfstream Aerospace Corp. 310,000 9,145
Ingersoll-Rand Co. 152,400 9,411
# Lexmark International
Group, Inc. Class A 103,900 3,156
Herman Miller, Inc. 41,400 1,480
Northrop Grumman Corp. 15,400 1,352
Pitney Bowes, Inc. 20,800 1,446
# Republic Industries, Inc. 606,800 14,677
# Rohr, Inc. 140,100 3,073
# Sterling Commerce, Inc. 53,160 1,748
Technitrol, Inc. 103,800 2,842
Tecumseh Products Co. Class A 3,100 186
Tektronix, Inc. 24,600 1,476
# Thermo Instrument Systems, Inc. 194,400 5,954
Thiokol Corp. 2,500 175
Thomas & Betts Corp. 43,179 2,270
United Technologies Corp. 22,700 1,884
# Veeco Instruments, Inc. 31,200 1,209
------------
90,792
------------
TECHNOLOGY (16.1%)
# Adaptec, Inc. 260,000 9,035
# Advanced Micro Devices, Inc. 320,100 11,524
# Analog Devices, Inc. 320,000 8,500
# Ascend Communications, Inc. 1,800 71
# BMC Software, Inc. 250,000 13,844
# CACI International, Inc. 27,200 415
# Cabletron Systems, Inc. 400 11
# Cadence Design Systems, Inc. 459,550 15,395
# Cisco Systems, Inc. 390,400 26,206
# Cognos Inc. 150,000 4,669
# Compaq Computer Corp. 354,100 35,144
Computer Associates
International, Inc. 34,300 1,910
# Computer Sciences Corp. 285,000 20,556
# Dell Computer Corp. 25,400 2,981
# EMC Corp. 380,000 14,820
# Electronics For Imaging, Inc. 120,100 5,667
# Esterline Technologies Corp. 28,200 1,005
General Motors Corp. Class H 50,000 2,888
# Hadco Corp. 29,800 1,937
Hewlett-Packard Co. 363,500 20,356
Innovex, Inc. 19,000 549
Intel Corp. 89,300 12,642
International Business
Machines Corp. 2,200 198
# KEMET Corp. 19,500 485
# Komag, Inc. 29,900 490
# LSI Logic Corp. 201,600 6,451
# Loral Space & Communications 225,000 3,375
Lucent Technologies, Inc. 108,200 7,797
# McAfee Associates, Inc. 72,725 4,582
# Microsoft Corp. 121,000 15,299
# Microage, Inc. 74,400 1,367
# Micron Technology, Inc. 800 32
# National Semiconductor Corp. 481,700 14,752
Nokia Corp. A ADR 240,000 17,700
# Parametric Technology Corp. 298,400 12,682
# PeopleSoft Inc. 130,000 6,858
# Quantum Corp. 41,200 837
# SCI Systems, Inc. 286,400 18,258
# Seagate Technology 167,700 5,901
Sony Corp. ADR 155,400 13,675
# Sterling Software, Inc. 220,000 6,875
# Storage Technology Corp. 300 13
# Stratus Computer, Inc. 29,600 1,480
# Sun Microsystems, Inc. 430,600 16,013
# Systemsoft Corp. 19,300 205
# Tech Data Corp. 242,200 7,599
# Western Digital Corp. 217,800 6,888
# Xilinx, Inc. 140,000 6,860
# Xylan Corp. 29,600 503
------------
387,300
------------
UTILITIES (3.3%)
AT&T Corp. 43,100 1,511
# AirTouch Communications, Inc. 430,000 11,771
ALLTEL Corp. 4,900 164
Ameritech Corp. 22,000 1,495
Bell Atlantic Corp. 17,900 1,358
British Telecommunications
PLC ADR 142,100 10,551
Consolidated Edison Co.
of New York, Inc. 146,900 4,324
Edison International 32,200 801
Energy Group PLC ADR 24,100 1,021
GPU Inc. 15,800 567
Houston Industries, Inc. 351,900 7,544
# NTL Inc. 180,000 4,433
NorAm Energy Corp. 60,000 915
NYNEX Corp. 29,300 1,688
Public Service Co.
of New Mexico 152,300 2,722
Public Service Enterprise
Group Inc. 275,300 6,883
Telefonica de Espana ADR 115,800 9,988
Telefonos de Mexico
SA Class L ADS 80,000 3,820
Unicom Corp. 47,400 1,055
# United International
Holdings, Inc. Class A 43,400 445
# WorldCom, Inc. 170,000 5,429
------------
78,485
------------
OTHER (3.4%)
Canadian Pacific Ltd. 448,300 12,749
# Ceridian Corp. 16,600 701
Dresser Industries, Inc. 236,700 8,817
Eisai Co., Ltd. ADR 550,000 10,450
General Electric Co. 579,300 37,872
Harris Corp. 14,500 1,218
Johnson Controls, Inc. 10,400 427
# Thermo Electron Corp. 31,400 1,079
Trinity Industries, Inc. 282,000 8,954
------------
82,267
------------
- --------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $1,625,522) 2,249,447
- --------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
MORGAN GROWTH FUND (000) (000)
- --------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (6.1%)
- --------------------------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY BILL
5.21%, 7/24/97 $ 300 $ 299
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.93%, 7/1/97 146,795 146,795
- --------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $147,094) 147,094
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.4%)
(COST $1,772,616) 2,396,541
- --------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.6%)
- --------------------------------------------------------------------------------------
Other Assets--Notes C and F 114,668
Liabilities--Note F (99,301)
------------
15,367
- --------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------
Applicable to 138,419,351 outstanding
$.10 par value shares
(authorized 350,000,000 shares) $2,411,908
======================================================================================
NET ASSET VALUE PER SHARE $17.42
- --------------------------------------------------------------------------------------
</TABLE>
*See Note A in Notes to Financial Statements.
#Non-Income Producing Security.
ADR--American Depository Receipt.
ADS--American Depository Share.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------
AT JUNE 30, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,623,975 $11.73
Undistributed Net
Investment Income 8,944 0.06
Accumulated Net Realized Gains 155,064 1.12
Unrealized Appreciation--Note E 623,925 4.51
- --------------------------------------------------------------------------------------
NET ASSETS $2,411,908 $17.42
======================================================================================
</TABLE>
12
<PAGE> 15
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
SIX MONTHS ENDED JUNE 30, 1997
(000)
- --------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 10,408
Interest 5,502
------------
Total Income 15,910
------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 1,718
Performance Adjustment 162
The Vanguard Group--Note C
Management and Administrative 3,432
Marketing and Distribution 224
Taxes (other than income taxes) 81
Custodian Fees 35
Auditing Fees 5
Shareholders' Reports 44
Annual Meeting and Proxy Costs 3
Directors' Fees and Expenses 3
------------
Total Expenses 5,707
Expenses Paid Indirectly--Note C (88)
------------
Net Expenses 5,619
- --------------------------------------------------------------------------------------
NET INVESTMENT INCOME 10,291
- --------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 154,958
Futures Contracts 188
- --------------------------------------------------------------------------------------
REALIZED NET GAIN 155,146
- --------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 146,082
Futures Contracts 14
- --------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 146,096
- --------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $311,533
======================================================================================
</TABLE>
13
<PAGE> 16
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
----------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 1997 DEC. 31, 1996
(000) (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 10,291 $ 17,400
Realized Net Gain 155,146 206,577
Change in Unrealized Appreciation (Depreciation) 146,096 152,463
-------------------------
Net Increase in Net Assets Resulting from Operations 311,533 376,440
-------------------------
DISTRIBUTIONS
Net Investment Income (1,343) (16,973)
Realized Capital Gain (63,511) (182,231)
-------------------------
Total Distributions (64,854) (199,204)
-------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 201,129 453,288
Issued in Lieu of Cash Distributions 62,485 191,528
Redeemed (152,152) (239,383)
-------------------------
Net Increase from Capital Share Transactions 111,462 405,433
- --------------------------------------------------------------------------------------
Total Increase 358,141 582,669
- --------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 2,053,767 1,471,098
-------------------------
End of Period $2,411,908 $2,053,767
======================================================================================
(1)Shares Issued (Redeemed)
Issued 12,484 30,100
Issued in Lieu of Cash Distributions 4,026 12,544
Redeemed (9,466) (15,693)
-------------------------
Net Increase in Shares Outstanding 7,044 26,951
======================================================================================
</TABLE>
14
<PAGE> 17
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 SIX MONTHS ENDED ------------------------------------------
THROUGHOUT EACH PERIOD JUNE 30, 1997 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.63 $14.09 $11.36 $12.01 $12.65 $12.20
- -------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .070 .14 .15 .14 .18 .18
Net Realized and Unrealized Gain (Loss)
on Investments 2.205 3.07 3.89 (.34) .71 .97
Total from Investment Operations 2.275 3.21 4.04 (.20) .89 1.15
DISTRIBUTIONS
Dividends from Net Investment Income (.010) (.14) (.15) (.14) (.18) (.18)
Distributions from Realized Capital Gains (.475) (1.53) (1.16) (.31) (1.35) (.52)
Total Distributions (.485) (1.67) (1.31) (.45) (1.53) (.70)
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $17.42 $15.63 $14.09 $11.36 $12.01 $12.65
=======================================================================================================
TOTAL RETURN 14.94% 23.30% 35.98% -1.67% 7.32% 9.54%
=======================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $2,412 $2,054 $1,471 $1,075 $1,135 $1,116
Ratio of Total Expenses to
Average Net Assets 0.52%* 0.51% 0.49% 0.50% 0.49% 0.48%
Ratio of Net Investment Income to
Average Net Assets 0.94%* 0.97% 1.10% 1.15% 1.36% 1.51%
Portfolio Turnover Rate 74%* 73% 76% 84% 72% 64%
Average Commission Rate Paid $.0434 $.0362 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
15
<PAGE> 18
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 accommodate 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. Wellington Management Company, LLP, Franklin Portfolio Associates, and
Husic Capital Management provide investment advisory services to the Fund for
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 six months ended June 30, 1997, the aggregate investment
advisory fee represented an effective annual basic rate of 0.16% of average net
assets of the Fund before an increase of $162,000 (an annual rate of 0.02%)
based on performance.
The Vanguard Group provides investment advisory services to a portion of
the Fund on an at-cost basis.
16
<PAGE> 19
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 June 30, 1997,
the Fund had contributed capital of $177,000 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
six months ended June 30, 1997, these arrangements reduced the Fund's expenses
by $88,000 (an annual rate of 0.01% of average net assets).
D. During the six months ended June 30, 1997, the Fund purchased $820,714,000
of investment securities and sold $736,502,000 of investment securities, not
counting temporary cash investments.
E. At June 30, 1997, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $623,925,000,
consisting of unrealized gains of $651,199,000 on securities that had risen in
value since their purchase and $27,274,000 in unrealized losses on securities
that had fallen in value since their purchase.
F. The market value of securities on loan to broker/dealers at June 30, 1997,
was $77,612,000, for which the Fund held cash collateral of $79,514,000.
17
<PAGE> 20
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.; Managing Director of Global Health Care Partners/DLJ
Merchant Banking Partners; Director of Sun Company, Inc.
and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Ikon Business Solutions, Inc., Raytheon Co., Knight-Ridder,
Inc., and Massachusetts Mutual Life Insurance Co.; Trustee
Emerita of Wellesley College.
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 Investor Group.
RALPH K. PACKARD, Senior Vice President and Chief Financial Officer.
[THE VANGUARD GROUP 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
http://www.vanguard.com [email protected]
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) 1997 Vanguard Marketing Corporation, Distributor
<PAGE> 21
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Growth and Income Portfolio
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-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 Portfolios
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
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard International Value Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q262-6/97
