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VANGUARD/
MORGAN GROWTH
FUND
Semiannual Report - June 30, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
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OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 7,000 highly
motivated men and women--who form the cornerstone of our operations. We could
not survive long--let alone prosper--without them. That's why we chose this
fiscal year's fund reports to celebrate the spirit, enthusiasm, and achievements
of our crew. (We call those who work at Vanguard crew members, not employees,
because they operate as a team to accomplish our mission of serving you, our
clients.)
But while we prize the collective contributions of our crew, we also
take time to recognize the importance of the individual. Each calendar quarter,
we present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more than
300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving
you in the years ahead.
[PHOTO] [PHOTO]
John C. Bogle John J. Brennan
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Senior Chairman Chairman & CEO
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<CAPTION>
CONTENTS
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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
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
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FELLOW SHAREHOLDER,
Vanguard/Morgan Growth Fund, continuing to benefit from the unprecedented bull
market in stocks, earned +16.2% during the first half of 1998.
Our total return (capital change plus reinvested dividends) for the
half-year exceeded that of the average growth fund but trailed two relevant
unmanaged benchmarks--the Standard & Poor's 500 Composite Stock Price Index and
the Growth Fund Stock Index, which is based on the holdings of the 50 largest
growth mutual funds.
<TABLE>
<CAPTION>
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TOTAL RETURNS
SIX MONTHS ENDED
JUNE 30, 1998
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<S> <C>
Vanguard/Morgan Growth Fund +16.2%
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Average Growth Mutual Fund +15.1%
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S&P 500 Index +17.7%
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Growth Fund Stock Index* +17.0%
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</TABLE>
*Reflects the average common stock holdings of the 50 largest growth-oriented
mutual funds.
Morgan Growth Fund's return is based on an increase in net asset value
from $17.54 per share on December 31, 1997, to $19.99 per share on June 30,
1998, with the latter figure adjusted for a dividend of $0.01 per share paid
from net investment income and a distribution of $0.37 per share paid from net
realized capital gains.
THE PERIOD IN REVIEW
The U.S. economy grew vigorously, inflation was subdued, and interest rates
declined during the first half of 1998. Strong consumer spending, triggered by
high employment and rising wages, was the economy's propellant and was more than
enough to offset the negative effects of Asia's severe economic slump.
Asia's troubles, which led to lower prices for many products exported to
the United States, were partly responsible for the nation's benign
inflation--consumer prices rose only 1.1% for the six months and 1.7% for the
twelve months ended June 30. And low inflation soothed the bond market, where
bond prices rose and interest rates declined: the yield on the 30-year U.S.
Treasury bond was 5.63% on June 30, down 29 basis points (0.29 percentage point)
from its yield at the start of the year.
Stock prices rose in five of the period's six months, with the market
rebounding strongly in June from a modest setback in May. The stock market's
advance was--once again--led by a relatively narrow segment of blue-chip growth
companies. More than half of the S&P 500 Index's remarkable +17.7 return during
the period was accounted for by fewer than 20 very large-capitalization stocks.
The growth component of the S&P 500 Index returned +23.1%, nearly double the
+12.1% earned by its value stocks.
Morgan Growth Fund, benefiting from the market's tilt toward growth
stocks, gained +16.2%, 1.1 percentage points above the average growth fund's
+15.1% return. Both Morgan and its average competitor lagged the returns of the
unmanaged S&P 500 Index for a simple reason: Neither the fund nor its average
peer was as heavily concentrated as the Index in several incredibly strong
performers, including Microsoft (now the S&P 500's second-largest holding, +68%
for the half-year), Wal-Mart (seventh-largest, +54%), and Lucent Technologies
(twelfth-largest, +108%). Those three issues accounted for more than 4
percentage points of the +17.7% earned by the Index during the half-year.
The fund's strongest sector during the period was the consumer
discretionary group, which represented 21% of the fund's average equity assets
and returned +35.7%. Stocks in
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the "other energy" category, including exploration and oil-services companies,
were our weakest performers (down 23.7%), and we were hurt versus the Index by
holding more than 4% of our assets in that sector, triple the Index weighting.
We note that an unmanaged index is a tough competitor for real-world
funds because indexes exist only on paper and bear none of the operating and
transaction costs that actual mutual funds incur. Also, a stock index holds no
cash, which serves as a drag on performance during a rapidly rising stock
market. Although it is difficult to outperform the Index, that is our long-term
objective. We are fortunate in having to overcome only a relatively modest cost
handicap versus the Index: Morgan Growth Fund's annualized operating costs are
0.47% of net assets. This expense ratio is a distinct advantage versus
competitors, because it is more than 1 percentage point lower than that charged
by the average growth fund.
As we reported six months ago, about 10% of the fund's assets were
reallocated during the period from Husic Capital Management to two of our other
advisers, Franklin Portfolio Associates and Vanguard Core Management. Wellington
Management Company, LLP, continued as a major adviser to the fund. We are
pleased to report that the transition went smoothly. The adjacent table shows
the allocation of assets among our three advisers as of June 30.
<TABLE>
<CAPTION>
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ASSETS MANAGED
JUNE 30, 1998
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$ MILLION PERCENT
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<S> <C> <C>
Franklin Portfolio Associates $1,392 42%
Wellington Management 1,283 39
Vanguard Core Management 455 14
Cash Reserve* 168 5
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Total $3,298 100%
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</TABLE>
*This cash reserve is invested in equity index futures to simulate investment in
stocks; each adviser also maintains a modest cash reserve.
IN SUMMARY
We confess to having been surprised--though quite gratified--by the strength of
the stock market's continuing advance during the first half of 1998. We note
that the returns over the past twelve months for the S&P 500 Index (+30.2%) and
for Morgan Growth Fund (+32.2%) are nearly three times the long-term average
annual return from stocks.
Though we claim no predictive powers, we feel safe in saying that such
outsized returns can't continue indefinitely. And we reiterate our long-standing
recommendation that investors hold balanced portfolios--consisting of bond and
money market funds in addition to stock funds--appropriate to their unique
financial situations, goals, and temperament. Such portfolios are time-tested
vehicles for reaping the rewards of financial markets as well as for "staying
the course" toward your long-term objectives.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
July 10, 1998
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Notice to Shareholders
At a special meeting on June 30, 1998, shareholders of Vanguard/Morgan Growth
Fund overwhelmingly approved four proposals. The proposals and voting results
were:
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. This change will reduce the
amount of state taxes the fund pays annually by approximately $227,000 at
current asset levels. Approved by 96.91% of the shares voted, as follows:
<TABLE>
<CAPTION>
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FOR AGAINST ABSTAIN
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<S> <C> <C>
94,201,459 1,353,323 1,648,767
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</TABLE>
2a. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. This permits
Morgan Growth Fund to participate in Vanguard's interfund lending program, which
allows funds to loan money to each other if--and only if--it makes good
financial sense to do so on both sides of the transaction. The interfund lending
program won't be an integral part of your fund's investment program; it is a
contingency arrangement for managing unusual cash flows. Approved by 94.14% of
the shares voted, as follows:
<TABLE>
<CAPTION>
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FOR AGAINST ABSTAIN
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<S> <C> <C>
91,511,506 3,131,714 2,560,329
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</TABLE>
2b. INVESTMENT LIMITATION CHANGES--BORROWING MONEY AND PLEDGING ASSETS. This
change sets standard limits of 15% of net assets on the amount of money Vanguard
funds can borrow from all sources and on the amount of assets that can be
pledged to secure any loans. Approved by 93.08% of the shares voted, as follows:
<TABLE>
<CAPTION>
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FOR AGAINST ABSTAIN
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<S> <C> <C>
90,473,312 3,788,584 2,941,653
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</TABLE>
2d. INVESTMENT LIMITATION CHANGES--INVESTMENTS IN UNSEASONED COMPANIES. This
change eliminates the fund's policy of not investing more than 5% of net assets
in securities issued by companies that have fewer than three years of operating
history, taking into account any predecessors. Approved by 90.93% of the shares
voted, as follows:
<TABLE>
<CAPTION>
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FOR AGAINST ABSTAIN
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<S> <C> <C>
88,383,519 5,473,301 3,346,730
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</TABLE>
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THE MARKETS IN PERSPECTIVE
Six Months Ended June 30, 1998
Blue skies predominated for U.S. financial markets during the first six months
of 1998, and even the occasional clouds had silver linings. The bond market
provided solid returns during the half-year, while the stock market's
performance was extraordinarily strong.
After expanding at a 5.4% annual pace during the first quarter, the U.S.
economy kept steaming along through June, fueled by powerful increases in
household spending. Consumers had reason to be upbeat: plentiful jobs
(unemployment fell to 4.3% of the workforce in May); rising wages (personal
income in May was 5.9% higher than in May 1997); and tame inflation (consumer
prices in June were up only 1.7% from a year before).
The economic push provided by consumers more than compensated for the
drag caused by Asia's severe economic problems. Weakening currencies and
business slowdowns in Asia cut into U.S. exports and lowered the cost of Asian
imports, causing the U.S. trade deficit to hit record levels. Ominously, Asia's
problems appear to be more serious and enduring than many economists expected.
Yet for Americans this "Asian contagion" has a bright side: It serves as an
escape valve for the inflationary pressures that ordinarily would be expected to
build up with the U.S. economy humming along at high speed.
<TABLE>
<CAPTION>
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TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998
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6 MONTHS 1 YEAR 5 YEARS*
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<S> <C> <C> <C>
EQUITY
S&P 500 Index 17.7% 30.2% 23.1%
Russell 2000 Index 4.9 16.5 16.0
MSCI EAFE Index 16.1 6.4 10.3
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FIXED-INCOME
Lehman Aggregate Bond Index 3.9% 10.5% 6.9%
Lehman 10-Year Municipal Bond Index 2.6 8.5 6.6
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.6 5.3 4.9
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OTHER
Consumer Price Index 1.1% 1.7% 2.5%
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</TABLE>
*Annualized.
U.S. EQUITY MARKETS
The mixture of robust economic growth and anemic inflation was a tonic for the
U.S. stock market. Although prices generally rose, there were striking
disparities in returns between large-capitalization and small-cap stocks and
between growth and value stocks. The large-cap-dominated S&P 500 earned 17.7%
during the six months, nearly double the 9.4% return on the rest of the market
(as measured by the Wilshire 4500 Index) and more than triple the 4.9% return on
the small-cap Russell 2000 Index. Within the S&P 500 Index, growth stocks were
up 23.1%, while value stocks rose 12.1%.
A decline in interest rates contributed to the stock market's rise, as
falling rates on bonds tend to make equities more attractive and to boost the
price investors will pay for each dollar of a stock's earnings or dividends. Yet
growth in earnings and dividends--the long-term underpinning of stock
prices--was unimpressive during the first half of 1998.
Corporate earnings estimates were reduced in June, the tenth consecutive
month in which securities analysts have cut their earnings estimates, according
to I/B/E/S International, a financial research group. Earnings by the S&P 500
companies were expected to
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rise by only about 2% for the first half of 1998, I/B/E/S reported. With gains
in prices outstripping increases in earnings and dividends, stock valuations are
at or near all-time highs, an indication that investors expect ideal conditions
to continue.
Technology stocks were the best-performing sector during the first half
of 1998, generating a 32.7% return. Three other sectors of the stock
market--health care, consumer discretionary stocks such as retailers, and auto &
transportation--each provided returns of about 25% for the six months. Companies
involved in energy, chemicals, or other commodity-based businesses were
generally laggards. Prices of many commodities have declined as Asia's economic
funk cuts demand for energy and other industrial materials in the face of
plentiful supplies.
U.S. FIXED-INCOME MARKETS
Investors in fixed-income securities enjoyed a moderate rise in the market value
of their holdings because of declining interest rates. This price appreciation,
added to coupon interest income, resulted in solid total returns. The 3.9% total
return of the Lehman Aggregate Bond Index during the half-year brought its
return for the 12 months ended June 30 to 10.5%, or a very generous 8.8% after
adjustment for inflation.
Yields on 10-year and 30-year U.S. Treasury bonds declined by 29 basis
points (0.29 percentage point) to 5.45% and 5.63%, respectively, during the
first half of 1998, with most of the drop occurring during the second quarter.
The yield on 3-month Treasury bills declined 36 basis points to 4.99%. Mild
inflation--consumer prices were up 1.1% for the half-year--enabled rates to
decline despite the economy's strong growth.
Yields on corporate and municipal bonds did not decline as far as those
on Treasury securities because of a large increase in the supply of new bonds
issued by companies and municipalities taking advantage of lower rates to
refinance old debt. Similarly, mortgage-backed securities did not match
Treasuries' performance because of expectations that large numbers of homeowners
would pay off old, higher-coupon mortgage loans and refinance with new,
lower-rate loans.
INTERNATIONAL EQUITY MARKETS
Stock markets in Europe soared while those in Asia and most emerging economies
suffered steep declines in U.S.-dollar terms. The 16.1% overall return from
international markets, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East Index, masked the divergence between Europe and
other regions.
Europe's markets were up 27.1% when measured in local currencies and
26.5% in U.S. dollars, after adjusting for a slight overall rise in the dollar's
value. Stocks benefited from an upswing in most European economies, from signs
that corporate managers are increasingly focused on shareholder value, and from
optimism concerning next year's planned adoption of the euro as a single
European currency.
In the Pacific, which is dominated by Japan's stock market, stocks were
buffeted by several problems: slowing growth in economic activity; continued
instability in currencies; political upheavals; and widespread worries about
corporate and banking insolvencies. On balance, the region's stocks fell 6.0% in
U.S.-dollar terms. Japanese stocks were down 2.5%, but losses were more severe
in the region's smaller markets.
Emerging markets were, on balance, down sharply. Asian stock markets
were hurt by continued weakness in the currency values of several countries, by
Japan's recession, and by a growing conviction that the region's economic
troubles are far from transitory. Venezuela and Mexico, both key oil-producing
nations, were hard hit by falling oil prices.
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REPORT FROM THE ADVISERS
Vanguard/Morgan Growth Fund earned a 16.2% return during the first six months of
1998, ahead of the 15.1% return on the average growth mutual fund but behind the
17.7% gain of the S&P 500 Index.
When the market's performance is so top-heavy--the 25 largest stocks in
the S&P 500 outperformed the rest of the Index by more than 4 percentage
points--it is difficult for actively managed funds to match or exceed the Index.
The Index outperformed the average growth fund by 2.6 percentage points during
the half-year and by 4.8 percentage points over the 12 months ended June 30.
Despite the continued unraveling of Asian economies, the U.S. economy
has maintained a stellar performance. As Federal Reserve Board Chairman Alan
Greenspan said recently, we are in a virtuous economic circle with good growth,
practically no inflation, full employment, and rising wages. With short-term
interest rates high (when adjusted for the low inflation rate), the economy may
continue to glide along unscathed by any surge in inflation. At the same time,
the federal budget surplus could reach $100 billion in fiscal 1999, providing
Washington policy makers quite a bit of flexibility in dealing with economic
surprises.
The economy's growth rate should slow to an annual pace of 2.5% to 3%
over the next 18 months or so, and the inflation rate can be expected to bounce
a bit higher, to around 2% in 1999.
During the first half of 1998, Morgan Growth's best-performing groups in
relation to market indexes were the consumer-discretionary category and
utilities stocks. Among the winners in the former category were two of the
fund's top-ten holdings, Home Depot (up 41% for the six months) and Dayton
Hudson (up 44%). Strong gainers among the fund's utility holdings included
Tele-Communications (up 38%) and WorldCom (up 60%).
We had negative returns from our holdings in the "other energy" and
consumer-staples sectors. Lower oil prices took a toll on oil production,
services, and exploration stocks. Among the fund's poor performers were ENSCO
International, Burlington Resources, and Vastar Resources. Proceeds from the
sales of some energy holdings were put to work in USX-Marathon, where good
results are expected to come from planned improvements to operations and growth
in production.
Financial-services stocks--our second-largest industry
concentration--were generally strong performers. Among our winners in this
category were Morgan Stanley Dean Witter (up 55%) and Green Tree Financial (up
64%). We added several financial stocks, including Marsh & McLennan, the world's
largest insurance broker, and Heller Financial, a commercial finance company. We
also added to our stake in Merrill Lynch, the nation's biggest stock-brokerage
firm.
Technology stocks produced plenty of surprises--both pleasant and
unpleasant--during the period. Among the major disappointments were Galileo
Technology, a semiconductor manufacturer, whose price was cut in half
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after we purchased it. On the positive side, we sold DST Systems after a
significant run-up in its share price. Among additions to our technology
holdings was a new position in Flextronics, a contract electronics manufacturer
with extensive operations in Europe.
Morgan Growth Fund's three advisers select stocks for the fund
independently, though they share a common goal of long-term growth in capital.
The following are brief descriptions of the advisers' strategies.
FRANKLIN PORTFOLIO ASSOCIATES
Franklin uses an array of computer models to analyze some 3,500 stocks in search
of issues that appear to be undervalued. Franklin considers the economic cycle
and we rank securities based on three key analyses: fundamental momentum, which
seeks to identify companies with relatively strong near-term business prospects;
relative value, which searches out stocks with attractive prices in relation to
past market values or to specific financial measures such as book value or
sales; and future cash flow, which assesses stocks based on prospects for growth
in earnings and dividends.
WELLINGTON MANAGEMENT COMPANY, LLP
Wellington Management's portfolio manager seeks to identify companies with
above-average prospects for growth, especially in industries undergoing
fundamental changes. The investment process is supported by in-depth,
company-by-company examination and analysis by more than 30 global industry
analysts.
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. Overall rankings are based on weights assigned to the various
measures. A portfolio is constructed from among the higher-ranking stocks to
resemble the Growth Fund Stock Index, which reflects the average common stock
holdings of the 50 largest growth-oriented mutual funds, in such key
characteristics as market capitalization and diversification among industry
sectors.
Franklin Portfolio Associates
Wellington Management Company, LLP
Vanguard Core Management Group
July 13, 1998
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.
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PORTFOLIO PROFILE
Morgan Growth Fund
This Profile provides a snapshot of the fund's characteristics as of June 30,
1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
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PORTFOLIO CHARACTERISTICS
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MORGAN S&P 500
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<S> <C> <C>
Number of Stocks 386 500
Median Market Cap $12.7B $50.0B
Price/Earnings Ratio 24.7x 24.8x
Price/Book Ratio 4.2x 4.5x
Yield 0.9% 1.4%
Return on Equity 18.3% 21.6%
Earnings Growth Rate 20.5% 16.4%
Foreign Holdings 5.3% 1.7%
Turnover Rate 81%* --
Expense Ratio 0.47%* --
Cash Reserves 1.8% --
</TABLE>
*Annualized.
INVESTMENT FOCUS
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[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
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MORGAN S&P 500
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<S> <C> <C>
R-Squared 0.79 1.00
Beta 0.97 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
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<S> <C>
Home Depot, Inc. 2.9%
America Online, Inc. 1.8
Tele-Communications Class A 1.7
Fannie Mae 1.5
Dayton Hudson Corp. 1.4
Morgan Stanley Dean Witter & Co. 1.3
Travelers Group Inc. 1.3
AT&T Corp. 1.3
Ace, Ltd. 1.2
EMC Corp. 1.2
- --------------------------------------------------------
Top Ten 15.6%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
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JUNE 30, 1997 JUNE 30, 1998
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MORGAN MORGAN S&P 500
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<S> <C> <C> <C>
Auto & Transportation............................... 2.8% 2.2% 3.3%
Consumer Discretionary.............................. 18.1 21.8 10.2
Consumer Staples.................................... 4.2 5.2 10.7
Financial Services.................................. 19.4 21.5 18.5
Health Care......................................... 13.6 12.7 12.1
Integrated Oils..................................... 1.0 0.7 6.5
Other Energy........................................ 6.0 3.2 1.0
Materials & Processing.............................. 6.2 5.3 5.2
Producer Durables................................... 5.0 5.3 3.5
Technology.......................................... 16.6 13.0 13.0
Utilities........................................... 3.5 6.3 10.3
Other............................................... 3.6 2.8 5.7
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned 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%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
EARNINGS GROWTH RATE. The average annual 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.
FOREIGN HOLDINGS. The percentage of a portfolio's net assets represented by
stocks or American Depositary Receipts of companies based outside 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. An indicator of the size of companies in which a portfolio
invests; the midpoint of market capitalization (market price x shares
outstanding) of a portfolio's stocks, weighted by the proportion of the
portfolio's assets invested in each stock. Stocks representing half of the
portfolio's assets have market capitalizations above the median, and the rest
are below it.
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.
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.
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 whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a portfolio's common stocks that come
from each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets invested in a portfolio's ten
largest holdings. (The average for stock mutual funds is about 30%.) As this
percentage rises, a portfolio's returns are likely to be more volatile because
they depend more on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Portfolios
with high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
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. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
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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 an investment in the fund could
lose money.
<TABLE>
<CAPTION>
MORGAN GROWTH FUND
TOTAL INVESTMENT RETURNS: DECEMBER 31, 1977-JUNE 30, 1998
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MORGAN GROWTH FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
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 29.7 1.1 30.8 33.4
1998* 16.1 0.1 16.2 17.7
- ----------------------------------------------------------
</TABLE>
*Six months ended June 30, 1998.
See Financial Highlights table on page 18 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998
- -------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION --------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Morgan Growth Fund 12/31/1968 32.24% 21.29% 14.52% 1.90% 16.42%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
FINANCIAL STATEMENTS
June 30, 1998 (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>
- ----------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- ----------------------------------------------------------------------
COMMON STOCKS (93.2%)(1)
- ----------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (2.1%)
AAR Corp. 58,500 $ 1,729
- - AMR Corp. 136,400 11,355
Airborne Freight Corp. 147,400 5,150
- - Alaska Air Group, Inc. 10,200 557
Arctic Cat, Inc. 27,300 270
Burlington Northern Santa
Fe Corp. 38,700 3,800
Dana Corp. 54,600 2,921
Fleetwood Enterprises, Inc. 28,800 1,152
Ford Motor Co. 189,700 11,192
General Motors Corp. 57,300 3,828
Skywest, Inc. 25,000 700
Southwest Airlines Co. 584,850 17,326
Werner Enterprises, Inc. 406,250 7,744
-----------
67,724
-----------
CONSUMER DISCRETIONARY (20.3%)
- - AccuStaff, Inc. 737,800 23,056
- - ADVO, Inc. 54,300 1,531
- - America Online, Inc. 549,000 58,194
- - Anchor Gaming 10,300 800
- - AutoZone Inc. 95,400 3,047
- - Barnes & Noble, Inc. 185,000 6,926
- - Bed Bath & Beyond, Inc. 275,000 14,248
- - Best Buy Co., Inc. 38,400 1,387
- - Brinker International, Inc. 184,000 3,542
- - Brylane, Inc. 40,500 1,863
- - CDI Corp. 11,400 305
CanWest Global Communications
Corp. Class A 235,600 3,784
- - Capstar Broadcasting Corp. 221,800 5,573
- - Carmike Cinemas, Inc. Class A 23,500 633
- - Cendant Corp. 50,800 1,060
- - Central Garden and Pet Co. 62,400 1,942
- - Chancellor Media Corp. 90,000 4,469
- - Clear Channel Communications,
Inc. 54,940 5,995
- - Computer Horizons Corp. 12,600 467
- - Consolidated Graphics, Inc. 6,400 378
- - Consolidated Stores, Inc. 200,000 7,250
Darden Restaurants Inc. 212,600 3,375
Dayton Hudson Corp. 930,800 45,144
Deluxe Corp. 15,200 544
The Walt Disney Co. 307,544 32,311
Eastman Kodak Co. 30,800 2,250
- - Electronic Arts Inc. 215,000 11,610
Ethan Allen Interiors, Inc. 53,900 2,692
- - Federated Department Stores, Inc. 34,200 1,840
Food Lion Inc. Class A 61,900 658
- - Fruit of the Loom, Inc. 439,500 14,586
- - Furniture Brands International Inc. 96,100 2,697
Gannett Co., Inc. 58,500 4,157
The Gap, Inc. 550,000 33,894
- - Gartner Group, Inc. Class A 71,100 2,489
- - General Nutrition Cos., Inc. 49,100 1,528
- - Genesco, Inc. 86,100 1,405
Harcourt General, Inc. 1,600 95
Hasbro, Inc. 39,700 1,561
Hertz Corp. Class A 190,000 8,419
Hollinger International, Inc. 119,900 2,038
Home Depot, Inc. 1,150,300 95,547
- - Host Marriott Corp. 103,300 1,840
IKON Office Solutions, Inc. 73,100 1,065
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
International Game Technology 36,000 $ 873
- - Jacor Communications, Inc. 155,000 9,145
- - Just for Feet, Inc. 43,700 1,245
- - Kmart Corp. 204,400 3,935
Knight Ridder 160,200 8,821
- - Lamar Advertising Co. 135,000 4,843
Estee Lauder Cos. Class A 152,800 10,648
Liz Claiborne, Inc. 26,400 1,379
- - Lone Star Steakhouse &
Saloon, Inc. 19,800 273
Mattel, Inc. 95,300 4,032
Maytag Corp. 5,600 277
McDonald's Corp. 27,900 1,925
- - Michaels Stores, Inc. 43,900 1,549
- - Neiman Marcus Group Inc. 105,600 4,587
News Corp. Ltd. ADR 295,400 9,490
News Corp. Ltd. Pfd. ADR 300,000 8,475
- - Office Depot, Inc. 313,200 9,885
Olsten Corp. 536,800 6,005
- - Outdoor Systems, Inc. 731,868 20,492
- - Papa John's International, Inc. 120,000 4,733
Premark International, Inc. 13,200 426
- - Promus Hotel Corp. 71,812 2,765
- - Republic Industries, Inc. 362,300 9,058
- - Revlon, Inc. Class A 135,200 6,946
Ross Stores, Inc. 46,600 2,004
- - Samsonite Corp. 4,123 45
E.W. Scripps Co. Class A 70,000 3,837
- - Snyder Communications, Inc. 105,200 4,629
TJX Cos., Inc. 175,000 4,222
- - Tele-Communications Liberty
Media Group Class A 1,400,000 54,338
Tiffany & Co. 48,200 2,314
The Times Mirror Co. Class A 40,700 2,559
- - Ugly Duckling Corp. 8,700 84
- - Valassis Communications, Inc. 302,800 11,677
- - Venator Group, Inc. 93,400 1,786
- - Viacom Inc. Class B 127,400 7,421
Wal-Mart Stores, Inc. 377,500 22,933
- - Windmere-Durable Holdings Inc. 15,800 566
- - World Color Press, Inc. 66,100 2,314
-----------
670,731
-----------
CONSUMER STAPLES (4.8%)
Albertson's, Inc. 253,800 13,150
Anheuser-Busch Cos., Inc. 23,100 1,090
Brown-Forman Corp. Class B 1,000 64
CVS Corp. 410,000 15,964
Coca-Cola Enterprises, Inc. 300,000 11,775
Dean Foods Corp. 182,700 10,037
Dimon Inc. 269,400 3,031
Gillette Co. 160,000 9,070
H.J. Heinz Co. 281,000 15,771
Interstate Bakeries Corp. 404,200 13,414
- - The Kroger Co. 12,800 549
Nabisco Holdings Corp. Class A 285,000 10,278
PepsiCo, Inc. 215,000 8,855
Philip Morris Cos., Inc. 183,400 7,221
Procter & Gamble Co. 69,200 6,302
RJR Nabisco Holdings Corp. 103,800 2,465
Richfood Holdings, Inc. 167,700 3,469
- - Safeway, Inc. 87,000 3,540
Sara Lee Corp. 44,400 2,484
Unilever NV ADR 130,000 10,262
Universal Corp. 281,800 10,532
- - Vlasic Foods International, Inc. 4,090 82
-----------
159,405
-----------
FINANCIAL SERVICES (20.1%)
AFLAC, Inc. 47,200 1,431
Ace, Ltd. 1,000,000 39,000
H.F. Ahmanson & Co. 24,700 1,754
Allstate Corp. 204,200 18,697
American Express Co. 65,000 7,410
American International
Group, Inc. 262,048 38,259
Associates First Capital Corp. 208,933 16,062
Automatic Data Processing, Inc. 50,400 3,673
- - BISYS Group, Inc. 180,000 7,380
Banc One Corp. 26,070 1,455
BankAmerica Corp. 300,000 25,931
Bankers Trust Corp. 10,900 1,265
Bear Stearns Co., Inc. 323,574 18,403
The Chase Manhattan Corp. 92,336 6,971
Citicorp 24,800 3,701
Conseco Inc. 571,100 26,699
- - Consumer Portfolio Services, Inc. 83,000 872
Dain Rauscher Corp. 50,005 2,738
Dime Bancorp, Inc. 474,400 14,202
Donaldson, Lufkin & Jenrette, Inc. 43,800 2,226
Dow Jones & Co., Inc. 43,100 2,403
The Dun & Bradstreet Corp. 658,400 23,785
A.G. Edwards & Sons, Inc. 376,400 16,068
The Equitable Cos. 438,400 32,853
Fannie Mae 805,400 48,928
Fifth Third Bancorp 82,400 5,191
First Data Corp. 485,600 16,177
First Union Corp. 389,600 22,694
Franchise Finance Corp. of
America REIT 84,900 2,202
Freddie Mac 338,800 15,945
GATX Corp. 11,700 513
Golden West Financial Corp. 17,300 1,839
- - Heller Financial, Inc. 160,000 4,800
Legg Mason Inc. 113,333 6,524
Lehman Brothers Holdings, Inc. 176,000 13,651
M & T Bank Corp. 3,300 1,828
MGIC Investment Corp. 32,400 1,849
Marsh & McLennan Cos., Inc. 183,950 11,117
McDonald & Co. Investments 77,200 2,533
Mercury General Corp. 4,600 296
Merrill Lynch & Co., Inc. 140,000 12,915
Morgan Keegan, Inc. 225,000 5,822
Morgan Stanley
Dean Witter & Co. 481,900 44,034
NationsBank Corp. 206,200 15,774
Ohio Casualty Corp. 86,800 3,841
Old Republic International Corp. 233,850 6,855
Penncorp Financial Group Inc. 170,100 3,487
- - Policy Management
Systems Corp. 300,000 11,775
Provident Cos., Inc. 130,200 4,492
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
Providian Financial Corp. 20,400 $ 1,603
Reliance Group Holdings 216,700 3,792
SLM Holding Corp. 51,800 2,538
St. Paul Cos., Inc. 40,500 1,704
- - Security Capital Group Inc.
Class B 355,700 9,471
Summit Bancorp. 29,000 1,378
Travelers Property Casualty Corp. 29,400 1,261
Travelers Group Inc. 724,200 43,905
U.S. Bancorp 420,000 18,060
-----------
662,032
-----------
HEALTH CARE (11.8%)
Abbott Laboratories 689,600 28,187
- - Agouron Pharmaceuticals, Inc. 151,900 4,604
American Home Products Corp. 88,400 4,575
- - AmeriSource Health Corp. 174,200 11,443
- - Amgen, Inc. 68,400 4,472
Baxter International, Inc. 64,600 3,476
- - Beverly Enterprises, Inc. 1,140,100 15,748
Biomet, Inc. 150,000 4,959
Bristol-Myers Squibb Co. 3,000 345
Cardinal Health, Inc. 85,700 8,034
Columbia/HCA Healthcare Corp. 400,000 11,650
- - Covance, Inc. 190,000 4,275
- - Express Scripts 26,300 2,120
- - FPA Medical Management, Inc. 141,700 164
- - First Health Group Corp. 34,200 975
- - Genentech, Inc. 195,900 13,297
- - Genzyme Corp. 350,000 8,947
- - Gilead Sciences, Inc. 180,000 5,771
Guidant Corp. 32,100 2,289
HBO & Co. 374,200 13,191
- - HEALTHSOUTH Corp. 1,193,600 31,854
- - Health Management
Associates Class A 166,687 5,574
- - Human Genome Sciences, Inc. 100,000 3,569
- - Immunex Corp. 90,000 5,962
Johnson & Johnson 362,500 26,734
Eli Lilly & Co. 89,000 5,880
- - Magellan Health Services, Inc. 126,700 3,215
Manor Care Inc. 14,900 573
McKesson Corp. 447,500 36,359
Merck & Co., Inc. 28,100 3,758
- - NovaCare, Inc. 104,300 1,226
- - PSS World Medical, Inc. 407,700 5,963
Pharmacia & Upjohn, Inc. 370,000 17,066
Pfizer, Inc. 198,600 21,585
- - Quintiles Transnational Corp. 46,300 2,277
- - Respironics, Inc. 200,000 3,113
Schering-Plough Corp. 46,000 4,215
- - Sierra Health Services 11,400 287
- - Tenet Healthcare Corp. 267,400 8,356
- - Total Renal Care Holdings, Inc. 480,000 16,560
- - Utah Medical Products, Inc. 49,600 360
- - Vencor, Inc. 95,300 691
Warner-Lambert Co. 240,000 16,650
Zeneca Group PLC ADR 425,000 18,647
-----------
388,996
-----------
INTEGRATED OILS (0.7%)
Amoco Corp. 29,200 1,215
Mobil Corp. 33,600 2,575
Pennzoil Co. 16,400 830
Sun Co., Inc. 137,300 5,329
USX-Marathon Group 330,000 11,323
YPF SA ADR 6,000 180
-----------
21,452
-----------
OTHER ENERGY (3.0%)
- - BJ Services Co. 550,600 16,002
Diamond Offshore Drilling, Inc. 17,600 704
ENSCO International, Inc. 752,900 13,082
- - Global Marine, Inc. 55,100 1,030
- - Input/Output, Inc. 268,300 4,779
- - Nabors Industries, Inc. 2,000 40
- - R & B Falcon Corp. 20,414 462
- - Rowan Cos., Inc. 48,900 950
Santa Fe International Corp. 219,500 6,640
Schlumberger Ltd. 219,300 14,981
Tidewater, Inc. 46,900 1,548
Transocean Offshore, Inc. 513,800 22,864
- - Varco International, Inc. 583,100 11,553
- - Western Atlas, Inc. 33,500 2,843
-----------
97,478
-----------
MATERIALS & PROCESSING (4.9%)
Air Products & Chemicals, Inc. 250,000 10,000
Archer-Daniels-Midland Co. 326,260 6,321
- - Bethlehem Steel Corp. 579,900 7,213
Centex Corp. 453,100 17,105
Crompton & Knowles Corp. 241,900 6,093
Crown Cork & Seal Co., Inc. 12,400 589
- - Cytec Industries, Inc. 54,400 2,407
Dexter Corp. 33,700 1,072
Dow Chemical Co. 101,400 9,804
E.I. du Pont de Nemours & Co. 64,900 4,843
Engelhard Corp. 203,500 4,121
Fluor Corp. 81,400 4,151
Fort James Corp. 40,700 1,811
Georgia Pacific Group 189,000 11,139
The BFGoodrich Co. 129,700 6,436
Illinois Tool Works, Inc. 44,100 2,941
Kimberly-Clark Corp. 587,200 26,938
Morton International, Inc. 270,000 6,750
Norsk Hydro AS ADR 104,300 4,602
PPG Industries, Inc. 43,300 3,012
Precision Castparts Corp. 289,400 15,447
RPM Inc. (Ohio) 276,125 4,694
Reynolds Metals Co. 1,000 56
Texas Industries, Inc. 26,800 1,420
The Timken Co. 25,200 776
USG Corp. 24,600 1,331
USX-U.S. Steel Group 29,300 967
-----------
162,039
-----------
PRODUCER DURABLES (4.9%)
- - Alcatel Alsthom ADR 200,000 8,138
- - Allied Waste Industries, Inc. 75,900 1,822
- - American Power Conversion Corp. 23,100 693
AMP, Inc. 60,000 2,063
- - Aztec Technology Partners, Inc. 11,399 87
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
Caterpillar, Inc. 227,500 $ 12,029
Danaher Corp. 53,200 1,952
Deere & Co. 159,200 8,418
General Motors Corp. Class H 75,000 3,534
Honeywell, Inc. 200,000 16,713
Ingersoll-Rand Co. 230,250 10,145
- - Lexmark International Group, Inc.
Class A 196,000 11,956
Herman Miller, Inc. 35,800 870
- - Navigant International, Inc. 5,700 48
Northern Telecom Ltd. 8,500 482
Parker Hannifin Corp. 54,900 2,093
Perkin-Elmer Corp. 135,000 8,395
Philips Electronics NV 282,900 24,046
Pitney Bowes, Inc. 41,600 2,002
Pulte Corp. 71,200 2,127
- - School Specialty, Inc. 6,333 104
Snap-On Inc. 86,500 3,136
Sundstrand Corp. 33,400 1,912
Technitrol, Inc. 103,800 4,146
Tektronix, Inc. 36,900 1,305
- - Thermo Instrument Systems, Inc. 294,250 7,724
Thomas & Betts Corp. 43,179 2,127
- - U.S. Office Products Co. 14,249 278
United Technologies Corp. 218,600 20,220
- - Workflow Management, Inc. 7,600 61
Xerox Corp. 40,700 4,136
-----------
162,762
-----------
TECHNOLOGY (12.1%)
Adobe Systems, Inc. 36,000 1,528
- - Adtran, Inc. 15,000 392
- - Analog Devices, Inc. 350,000 8,597
- - Apple Computer, Inc. 214,600 6,156
- - Ascend Communications, Inc. 1,800 89
- - BMC Software, Inc. 500,000 25,969
- - BEA Systems, Inc. 148,800 3,413
- - CDW Computer Centers, Inc. 31,400 1,570
- - CHS Electronics, Inc. 194,700 3,480
- - Cabletron Systems, Inc. 400 5
- - Cadence Design Systems, Inc. 116,600 3,644
- - Cambridge Technology Partners 17,400 950
- - CIENA Corp. 10,800 752
- - Cisco Systems, Inc. 222,100 20,447
Compaq Computer Corp. 848,492 24,076
Computer Associates
International, Inc. 78,000 4,334
Computer Sciences Corp. 590,000 37,760
- - Compuware Corp. 94,800 4,847
- - Creative Technology Ltd. 44,000 545
- - Dell Computer Corp. 17,900 1,661
- - EMC Corp. 861,100 38,588
Electronic Data Systems Corp. 232,400 9,296
- - Esterline Technologies Corp. 18,600 382
- - Flextronics International Ltd. 135,000 5,873
- - Galileo Technology Ltd. 125,000 1,688
- - Gateway 2000, Inc. 61,800 3,129
Hewlett-Packard Co. 125,000 7,484
- - Ingram Micro, Inc. 280,000 12,390
Innovex, Inc. 19,000 248
Intel Corp. 108,700 8,057
International Business
Machines Corp. 15,400 1,768
- - KEMET Corp. 19,500 257
- - LSI Logic Corp. 14,000 323
- - Loral Space & Communications 240,000 6,780
- - MRV Communications Inc. 31,000 643
- - Microsoft Corp. 255,000 27,636
- - Oracle Corp. 186,900 4,591
- - Parametric Technology Corp. 616,000 16,709
- - PeopleSoft, Inc. 200,000 9,400
- - SCI Systems, Inc. 763,400 28,723
Sony Corp. ADR 69,800 6,007
- - Sterling Software, Inc. 440,000 13,007
- - Storage Technology Corp. 600 26
- - Sun Microsystems, Inc. 250,200 10,868
- - Systemsoft Corp. 19,300 29
- - Tech Data Corp. 242,200 10,384
- - Tellabs, Inc. 56,200 4,025
Texas Instruments, Inc. 111,700 6,514
3Com Corp. 200,000 6,138
- - Vitesse Semiconductor Corp. 30,000 926
- - Xilinx, Inc. 200,000 6,800
-----------
398,904
-----------
UTILITIES (5.8%)
AT&T Corp. 733,900 41,924
- - AirTouch Communications, Inc. 485,700 28,383
ALLTEL Corp. 4,900 228
Ameritech Corp. 24,600 1,104
Bell Atlantic Corp. 22,404 1,022
BellSouth Corp. 65,600 4,403
DTE Energy Co. 498,200 20,115
Duke Energy Corp. 21,900 1,298
Edison International 32,200 952
FPL Group, Inc. 194,400 12,247
GPU, Inc. 15,800 597
GTE Corp. 45,300 2,520
Houston Industries, Inc. 359,233 11,091
- - ICG Communiations, Inc. 130,000 4,753
- - Intermedia Communications Inc. 382,600 16,045
KN Energy, Inc. 34,100 1,848
- - NTL Inc. 121,200 6,484
Public Service Enterprise
Group, Inc. 305,400 10,517
SBC Communications Inc. 39,800 1,592
- - Sempra Energy 88,800 2,464
Southern Co. 24,600 681
- - Tele-Communications, Inc.
Class A 82,900 3,185
- - WorldCom, Inc. 401,200 19,433
-----------
192,886
-----------
OTHER (2.7%)
- - Berkshire Hathaway Class A 10 783
Carlisle Co., Inc. 27,700 1,193
- - Ceridian Corp. 150,000 8,813
Dresser Industries, Inc. 300,000 13,219
General Electric Co. 332,300 30,239
Harris Corp. 29,000 1,296
Ogden Corp. 140,300 3,885
Raytheon Co. Class A 1,957 113
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
Select Appointments
Holdings PLC 275,000 8,112
Tenneco, Inc. 148,600 5,656
- - Thermo Electron Corp. 156,800 5,361
Trinity Industries, Inc. 164,400 6,823
Tyco International Ltd. 43,100 2,715
-----------
88,208
-----------
- ----------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $2,135,569) 3,072,617
- ----------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (8.3%)
- ----------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY BILL
(2) 4.97%, 7/23/1998 $ 7,700 7,677
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.67%, 7/1/1998 212,016 212,016
5.76%, 7/1/1998--Note F 54,895 54,895
- ----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $274,588) 274,588
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (101.5%)
(COST $2,410,157) 3,347,205
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.5%)
- ----------------------------------------------------------------------
Other Assets--Note C 26,963
Liabilities--Note F (75,850)
-----------
(48,887)
- ----------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------
Applicable to 165,025,836 outstanding
$.001 par value shares
(unlimited authorization) $3,298,318
======================================================================
NET ASSET VALUE PER SHARE $19.99
======================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
-Non-Income-Producing Security.
(1)The combined market value of common stocks and index futures contracts
represents 98.2% of net assets. See Note E in Notes to Financial Statements.
(2)Security segregated as initial margin for open futures contracts.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------
<S> <C> <C>
AT JUNE 30, 1998, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------
Paid in Capital $2,094,728 $12.69
Undistributed Net
Investment Income 15,112 .09
Accumulated Net
Realized Gains 247,829 1.50
Unrealized Appreciation--Note E
Investment Securities 937,048 5.69
Futures Contracts 3,601 .02
- ----------------------------------------------------------------------
NET ASSETS $3,298,318 $19.99
======================================================================
</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
SIX MONTHS ENDED JUNE 30, 1998
(000)
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 16,490
Interest 7,234
----------
Total Income 23,724
----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 1,863
Performance Adjustment 346
The Vanguard Group--Note C
Management and Administrative 4,484
Marketing and Distribution 328
Taxes (other than income taxes) 115
Custodian Fees 58
Auditing Fees 5
Shareholders' Reports 55
Annual Meeting and Proxy Costs 13
Trustees' Fees and Expenses 3
----------
Total Expenses 7,270
Expenses Paid Indirectly--Note C (145)
----------
Net Expenses 7,125
- ---------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 16,599
- ---------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 233,036
Futures Contracts 18,356
- ---------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 251,392
- ---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 185,506
Futures Contracts 1,339
- ---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 186,845
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $454,836
===============================================================================================================
</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 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, 1998 DEC. 31, 1997
(000) (000)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 16,599 $ 22,625
Realized Net Gain 251,392 345,022
Change in Unrealized Appreciation (Depreciation) 186,845 275,975
------------------------------------
Net Increase in Net Assets Resulting from Operations 454,836 643,622
------------------------------------
DISTRIBUTIONS
Net Investment Income (1,604) (22,504)
Realized Capital Gain (59,310) (352,704)
------------------------------------
Total Distributions (60,914) (375,208)
------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 240,101 413,455
Issued in Lieu of Cash Distributions 58,653 360,202
Redeemed (189,661) (300,535)
------------------------------------
Net Increase from Capital Share Transactions 109,093 473,122
- ---------------------------------------------------------------------------------------------------------------
Total Increase 503,015 741,536
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 2,795,303 2,053,767
------------------------------------
End of Period $3,298,318 $2,795,303
===============================================================================================================
(1)Shares Issued (Redeemed)
Issued 12,674 23,640
Issued in Lieu of Cash Distributions 3,014 21,663
Redeemed (10,050) (17,290)
------------------------------------
Net Increase in Shares Outstanding 5,638 28,013
===============================================================================================================
</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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
MORGAN GROWTH FUND
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------------
THROUGHOUT EACH PERIOD JUNE 30, 1998 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.54 $15.63 $14.09 $11.36 $12.01 $12.65
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .10 .160 .14 .15 .14 .18
Net Realized and Unrealized Gain (Loss)
on Investments 2.73 4.435 3.07 3.89 (.34) .71
------------------------------------------------------------------------
Total from Investment Operations 2.83 4.595 3.21 4.04 (.20) .89
------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.01) (.160) (.14) (.15) (.14) (.18)
Distributions from Realized Capital Gains (.37) (2.525) (1.53) (1.16) (.31) (1.35)
------------------------------------------------------------------------
Total Distributions (.38) (2.685) (1.67) (1.31) (.45) (1.53)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $19.99 $17.54 $15.63 $14.09 $11.36 $12.01
=========================================================================================================================
TOTAL RETURN 16.19% 30.81% 23.30% 35.98% -1.67% 7.32%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $3,298 $2,795 $2,054 $1,471 $1,075 $1,135
Ratio of Total Expenses to
Average Net Assets 0.47%* 0.48% 0.51% 0.49% 0.50% 0.49%
Ratio of Net Investment Income to
Average Net Assets 1.08%* 0.93% 0.97% 1.10% 1.15% 1.36%
Portfolio Turnover Rate 81%* 76% 73% 76% 84% 72%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
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: Equity securities 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. Prices are taken from the primary market in which each security
trades. 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.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair 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 and S&P Midcap 400 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. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
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, and Franklin Portfolio Associates
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.
The Vanguard Group provides investment advisory services to a portion of
the fund on an at-cost basis; the fund paid Vanguard advisory fees of $172,000
for the six months ended June 30, 1998.
19
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS (continued)
Prior to February 1, 1998, Husic Capital Management served as an adviser
to the fund; effective February 1, 1998, assets managed by Husic Capital
Management were reallocated to Franklin Portfolio Associates and Vanguard.
For the six months ended June 30, 1998, the aggregate investment
advisory fee represented an effective annual basic rate of 0.12% of average net
assets of the fund before an increase of $346,000 (0.02%) based on performance.
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 Trustees. At
June 30, 1998, the fund had contributed capital of $623,000 to Vanguard
(included in Other Assets), representing 0.9% of Vanguard's capitalization. The
fund's Trustees 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, 1998, directed brokerage arrangements reduced the
fund's expenses by $145,000 (an annual rate of 0.01% of average net assets).
D. During the six months ended June 30, 1998, the fund purchased
$1,250,893,000 of investment securities and sold $1,149,421,000 of investment
securities, not counting temporary cash investments.
E. At June 30, 1998, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $937,048,000,
consisting of unrealized gains of $1,004,891,000 on securities that had risen in
value since their purchase and $67,843,000 in unrealized losses on securities
that had fallen in value since their purchase.
At June 30, 1998, the aggregate settlement value of open futures
contracts expiring in September 1998 and the related unrealized appreciation
were:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
(000)
----------------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE APPRECIATION
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 414 $118,301 $2,524
S&P Midcap 400 269 49,039 1,077
----------------------------------------------------------------------------------------------
</TABLE>
F. The market value of securities on loan to brokers/dealers at June 30,
1998, was $52,700,000, for which the fund held cash collateral of $54,895,000.
Cash collateral received is invested in repurchase agreements.
20
<PAGE> 23
HONORARY CHAIRMAN
WALTER L. MORGAN, Founder.
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Senior 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
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc., and
of each of the investment companies in The Vanguard Group.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; 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 Telecommunications 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. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director 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
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DiSTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MacKINNON
Managing Director, Fixed Income Group.
F. WILLIAM McNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company
is the owner of trademarks and copyrights relating to the Russell
Indexes. "Wilshire 4500" and "Wilshire 5000" are trademarks of
Wilshire Associates.
<PAGE> 24
VANGUARD FAMILY OF FUNDS
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BALANCED FUNDS
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Portfolio
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Portfolio
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STAR Portfolio
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Wellesley Income Fund
Wellington Fund
Q262-6/1998
(C) 1998 Vanguard Marketing
Corporation, Distributor.
All rights reserved.
[THE VANGUARD GROUP LOGO]
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Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
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All Vanguard funds are offered by prospectus only. Prospectuses contain more
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be obtained directly from The Vanguard Group.
