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VANGUARD/
MORGAN GROWTH
FUND
Annual Report - December 31, 1997
[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 6,000 highly
motivated men and women--who form the cornerstone of our operations. As with any
cornerstone, we could not survive long--let alone prosper--without it. That's
why we chose this fiscal year's annual report 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
Chairman President
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS ....... 1
THE MARKETS IN PERSPECTIVE .......... 4
REPORT FROM THE ADVISERS ............ 6
PORTFOLIO PROFILE ................... 8
PERFORMANCE SUMMARY ................. 10
FINANCIAL STATEMENTS ................ 11
REPORT OF INDEPENDENT ACCOUNTANTS ... 21
</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 earned a remarkable +30.8% return in 1997 as
the U.S. stock market continued its powerful advance, capping a three-year run
during which market averages more than doubled.
Our Fund outpaced the average growth mutual fund by a substantial
margin but trailed our unmanaged benchmark, the Standard & Poor's 500 Composite
Stock Price Index. The following table presents the twelve-month total return
(capital change plus reinvested dividends) of Morgan Growth Fund and its two
primary comparative standards. Our return is based on an increase in net asset
value from $15.63 per share on December 31, 1996, to $17.54 per share on
December 31, 1997, with the latter figure adjusted for dividends of $0.16 per
share paid from net investment income and distributions totaling $2.525 per
share paid from net realized capital gains.
<TABLE>
<CAPTION>
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TOTAL RETURNS
YEAR ENDED
DECEMBER 31, 1997
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<S> <C>
Vanguard/Morgan Growth Fund +30.8%
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Average Growth Fund +25.3%
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S&P 500 Index +33.4%
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</TABLE>
THE FINANCIAL MARKETS IN BRIEF
The historic bull market in U.S. stocks that began in August 1982 continued in
impressive fashion during 1997. The economy, corporate earnings, and employment
all grew solidly, and consumer confidence strengthened. Yet interest rates
declined and inflation decelerated. In short, the domestic economic news
couldn't have been better. The sole dark cloud to be seen--severe turmoil in
Asian economies and currencies--only briefly darkened Wall Street's mood. After
a sharp decline in October--the S&P 500 Index tumbled -7% on October 27
alone--stocks resumed their climb, and the Index produced a +33.4% return for
the year.
Long-term interest rates rose through the first quarter of 1997 on
expectations that the economy's robust growth would cause inflation to
accelerate. The yield on the benchmark 30-year U.S. Treasury bond peaked at
7.17% in mid-April. Then, as news on inflation got better rather than worse, the
yield turned downward, falling to 5.92% on December 31, down 72 basis points
from the 6.64% level at which it began the year.
Short-term interest rates bottomed out in June and began an irregular
climb that was apparently due to sales of short-term Treasuries by foreign
central banks and investors. At year-end 1997, the yield on three-month U.S.
Treasury bills was 5.35%, up just a bit from 5.17% when the year began. The
spread between yields on three-month T-bills and 30-year Treasury bonds was a
slim 0.57 percentage point on December 31, 1997. Such a "flattening" of the
yield curve has more often than not been the precursor of a slowing economy.
1997 PERFORMANCE OVERVIEW
The +30.8% return earned by your Fund in 1997 was the third highest in the past
20 years, trailing only its +36.0% return in 1995 and its +34.7% gain in 1980.
Our 5.5-percentage-point edge over the average growth fund was due to excellent
stock selection by our advisers, especially during the second half of the year.
We were handicapped in our effort to outperform the S&P 500 Index by the
market's extreme bias toward large-capitalization growth stocks during 1997,
when the growth
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component of the S&P 500 Index earned +36.5%, nearly three times
the +12.9% return of the growth component of the small-cap Russell 2000 Index.
The midpoint of market capitalization for stocks we hold is $8.6 billion, far
smaller than the median market cap of $34.1 billion for the stocks in the S&P
500 Index.
Despite the market's tilt toward large-caps, the stocks in the Fund
actually outperformed the Index slightly--+33.7% versus +33.4%. However, the
total return earned by our shareholders was reduced because of our customary
holding of approximately 5% of the Fund's assets in a pooled cash fund as a
liquidity reserve. Over lengthy periods, the "drag" on performance that a cash
reserve represents is a serious handicap versus an index benchmark because of
the stock market's upward trend. To counter this disadvantage, Morgan Growth
Fund's cash pool has, since mid-December, been invested in stock index futures
so that the Fund is fully invested in stocks. Vanguard Core Management Group
manages these futures contracts for the Fund.
As you know, the Fund has used four investment advisers to manage its
assets. The adjacent table shows the proportion of the Fund's assets supervised
by each adviser as of December 31, 1997, approximately the same allocations as
at the beginning of the year. However, on December 12, 1997, after a careful
examination of the strategies and results achieved by Husic Capital Management,
we decided that its portion of the Fund's assets should be reallocated equally
to two of our other advisers: Franklin Portfolio Associates and Vanguard Core
Management Group. Both managers have provided us with outstanding returns during
their five-year tenures. After the reallocation, which we expect to be completed
by January 31, 1998, Franklin will be responsible for about 43% of the Fund's
assets, and Vanguard Core Management will oversee about 14%. The share allocated
to Wellington Management Company will remain at approximately 38%.
<TABLE>
<CAPTION>
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TOTAL ASSETS MANAGED
DECEMBER 31, 1997
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$ MILLION PERCENT
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<S> <C> <C>
Wellington Management $1,053 38%
Franklin Portfolio Associates 1,051 38
Husic Capital Management 288 10
Vanguard Core Management 257 9
Cash Reserve* 146 5
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Total $2,795 100%
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</TABLE>
*Cash reserve is invested in equity index futures to simulate investment in
stocks; each adviser also maintains a modest cash reserve.
LONG-TERM PERFORMANCE OVERVIEW
The table below compares Morgan Growth Fund's record over the decade ended
December 31, 1997, with those of the average growth fund and the S&P 500 Index.
It also shows how a hypothetical $10,000 investment ten years earlier would have
grown in each case, assuming the reinvestment of all income dividends and
capital gains distributions.
The extra 1.7 percentage points annually in return that Morgan Growth
Fund has provided versus the average growth fund amounted to a difference of
$6,551 over the full decade--equal to an astounding 65%
<TABLE>
<CAPTION>
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TOTAL RETURNS
10 YEARS ENDED
DECEMBER 31, 1997
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AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
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<S> <C> <C>
Vanguard/Morgan Growth Fund +17.1% $48,466
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Average Growth Fund +15.4% $41,915
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S&P 500 Index +18.1% $52,567
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</TABLE>
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of the original $10,000 investment. While we were much more successful (coming
within a single percentage point of the S&P 500 Index), neither we nor our peers
kept pace with the Index during the decade. As a theoretical construct, the
Index is a tough competitor because it incurs none of the operating or
transaction costs that burden real-world investment portfolios. Nor does the
Index hold cash reserves, which, as mentioned earlier, proved to be a
significant drag on performance in the rising stock market that prevailed over
the past decade.
However difficult it may be to outperform our benchmark Index as well as
our competitors, that remains our long-term goal. Our low costs represent a
significant wind at our back versus competitors. Morgan Growth Fund's expense
ratio (operating costs as a percentage of average net assets) of 0.48% is fully
one percentage point lower than the 1.50% expense ratio of the average growth
fund. This expense advantage gives us a head start over the competition year
after year, and accounts for more than half of our margin of superiority over
the past decade. As mutual fund investors are learning, however slowly, costs
matter.
We emphasize that the long-term returns shown in the table were unusually
high, as they encompass a ten-year period without a single serious downturn in
the U.S. stock market. While financial markets are inherently unpredictable, we
believe it is safe to say that returns for the stock market and the Fund itself
over the next decade are almost sure to be lower than those of the past decade.
If so, we believe the merits of low operating costs will become even more
apparent.
IN SUMMARY
Returns from the U.S. stock market over the past three calendar years--indeed
over the past 15 years--have no precedent in American financial history. While
as investors we have every reason to be grateful for the bounty of the financial
markets, we also have reason to regard the future with some caution. Lengthy
bull markets can breed complacency and cause investors to discount the risks
inherent in investing in stocks. Make no mistake--the market will from time to
time demonstrate these risks.
However, the greatest risk is failure to invest in the first place. We
believe that the stock market's risks can be partially offset by holding a
balanced portfolio that includes not only stock funds, but also bond funds and
money market funds. Investors who maintain such portfolios allocated in
accordance with their time horizon, financial situation, and tolerance for
market volatility should be well prepared to "stay the course" toward their
investment objectives, no matter what the future has in store.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
January 14, 1998
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THE MARKETS IN PERSPECTIVE
Year Ended December 31, 1997
U.S. EQUITY MARKETS
Despite some year-end rockiness, 1997 again provided U.S. equity investors with
exceptional returns, as illustrated by the 33.4% advance of the S&P 500 Index.
Investors' mettle was tested several times, however, and most severely by the
upheavals that devastated a number of Asian markets in the fourth quarter.
Beginning in late October, the U.S. market grew increasingly volatile, a direct
result of investors' struggle to understand the nature and implications of
Asia's economic turmoil. By the end of the year, it appeared that a new
consensus was emerging, grounded in two basic beliefs: (1) that the collapse of
currencies in the Far East would help keep inflation tame in the United States
and (2) that slower growth in Asia would most likely lead to weaker corporate
profits over the next several years.
As the dust continued to settle, many investors sought havens traditional
in periods of high uncertainty: large-capitalization issues and particularly the
"defensive" sectors of the stock market, such as utilities, consumer staples,
and health care. The closing weeks of 1997 saw a broad advance in these "safe"
sectors, with utilities gaining 20.1% and consumer staples 10.4% in the last
quarter. By contrast, more economically sensitive sectors were thrashed in the
wake of the Asian crisis, with technology issues falling 12.3% and producer
durables down 9.0% over the three months. After posting strong results in the
third quarter, small-company stocks also suffered in the fourth, falling 3.3%.
The year-end excitement did not detract from 1997's overall record as a
stellar year for U.S. stock investors. The best-performing sector was financial
services, which rose 46.9%. This sector benefited from a number of factors,
including the strength of the economy, the vibrant financial markets, and merger
activity. By contrast, the commodity-oriented materials & processing sector
posted a gain of "only" 12.3%--in itself more than a percentage point above the
long-term average return from common stocks. Small-cap stocks also fared well
overall, as illustrated by the 22.4% increase of the Russell 2000 Index.
Small-company technology issues were the most glaring exception, mustering a
gain in 1997 of just 1.1%.
<TABLE>
<CAPTION>
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AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1997
-------------------------------------
1 YEAR 3 YEARS 5 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 33.4% 31.2% 20.3%
Russell 2000 Index 22.4 22.3 16.4
MSCI EAFE Index 2.1 6.6 11.7
- --------------------------------------------------------------------------------
FIXED INCOME
Lehman Aggregate Bond Index 9.7% 10.4% 7.5%
Lehman 10-Year Municipal Bond Index 9.2 10.2 7.6
Salomon Brothers Three-Month
U.S. Treasury Bill Index 5.3 5.4 4.7
- --------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.7% 2.5% 2.6%
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</TABLE>
U.S. FIXED-INCOME MARKETS
In a year characterized by exceptionally low inflation, interest rates fell,
providing investors with very attractive total returns. The Lehman Aggregate
Bond Index, for example,
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posted a total return of 9.7% for 1997, comprising 7.2% in income return and
2.5% in capital appreciation. The decline in rates can be attributed largely to
better-than-expected reports about the inflation rate. Early in the year,
economists were projecting a 2.9% increase in the Consumer Price Index (CPI)
during 1997. In March, the Federal Reserve grew sufficiently concerned to boost
interest rates by 0.25% in an effort to temper economic growth and thereby ward
off inflation. By year-end, however, the worries seemed to have been
unnecessary, as the actual CPI increase was a mere 1.7%--its smallest increase
since 1986.
The bond market gradually gathered strength during the year as investors
grew more confident that four seemingly strange bedfellows--strong economic
growth, reasonable inflation, low unemployment, and stable wage growth--would
continue to coexist peacefully. In the fourth quarter, the market also was
bolstered by the "flight to quality" among investors concerned about Asia's
problems. Overall, the longest-maturity issues benefited most from the decline
in interest rates. The yield on the 30-year U.S. Treasury bond closed the year
at 5.92%, compared with 6.64% on December 31, 1996. Falling rates flattened the
yield curve considerably: Only 0.57% separated the yield on Treasury bills from
that on the 30-year issue, down from a spread of 1.47% at the end of 1996.
The best-performing sector in 1997 was long-term Treasuries, as
illustrated by the 15.1% return of the Lehman Long U.S. Treasury Index.
Investors in lower-quality securities also fared well, with the Lehman High
Yield Bond Index generating a 12.8% gain. The strength of the economy, together
with the lack of inflationary pressure, created an ideal environment for junk
bonds.
INTERNATIONAL EQUITY MARKETS
Arguably, investors' greatest disappointments were in international
markets--and, of course, Asian markets in particular. During the year, the
Morgan Stanley Capital International (MSCI) Pacific Index declined by 25.7% in
U.S. dollar terms; the index fell 20.7% in the fourth quarter alone. Among
individual markets, the fiscal year saw sharp declines (in U.S. dollar terms) in
Japan, down 23.6% (including a 19.7% drop in the fourth quarter); Thailand, down
76.8%; and Malaysia, down 68.1%. The general slump in Asian markets began in
midsummer with currency devaluations by a number of countries.
By contrast, the European markets continued to provide U.S. investors
with solid returns, although they, too, stumbled in late October and
subsequently recovered. The MSCI Europe Index posted a gain of 23.7% for the 12
months. The robust character of the European markets reflected strong corporate
earnings and optimism that the European Monetary Union would provide a solid
framework for future fiscal responsibility and economic growth.
5
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REPORT FROM THE ADVISERS
Vanguard/Morgan Growth Fund's return of +30.8% for 1997 surpassed the return of
the average growth fund by 5.5 percentage points, although it trailed the S&P
500 Index's return by 2.6 percentage points. For more detail on Fund
performance, please see the Message To Shareholders, beginning on page 1.
We note that the 25 largest stocks in the S&P 500 outperformed the Index
as a whole by more than 5 percentage points during 1997. When the market is
skewed so heavily toward the very largest stocks, it is difficult for actively
managed funds to keep up with the Index, as suggested by the
8.1-percentage-point gap between the Index return for the year and the return of
the average growth fund.
During 1997, the Fund's financial-services and retailing (consumer
discretionary) stocks did well compared with the Index, while our selections
among technology and health-care stocks lagged the Index returns from those
sectors.
ASIA'S TROUBLES AND THEIR IMPACT
What a difference a few months make! We have gone from a placid,
best-of-all-possible-worlds environment at midyear to a period of roiling
uncertainty. The economic and currency troubles in Asia have escalated to levels
unimaginable just a short time ago. In response, stock markets the world over
did a belly flop in October. Although U.S. and European financial markets pretty
much recovered by year-end, many other stock markets and currencies remained in
a tailspin.
Surprisingly, on Wall Street the Asian disruption seemed to hit hardest
among small-capitalization stocks, which limped through the final quarter after
a strong spurt in the previous quarter. Large-cap stocks held up well, although
they are much more exposed to international trade than smaller firms. The
importance of technology stocks in some of the small-cap indexes explains part
of the small-caps' difficulty. Large-cap stocks seemed to benefit from a general
flight to high-quality financial assets. Certainly, the market for U.S. Treasury
securities reflected this flight to quality, as yields on long-term Treasury
bonds fell sharply.
The exact impact of Asia's troubles on the U.S. economy is still unknown.
In 1998, most analysts expect the United States to have weaker exports and
increased imports, and slower growth in capital spending. This should lead to
somewhat slower growth in the U.S. economy and continued low inflation. However,
the U.S. dollar's strength versus other currencies and the high level of
short-term interest rates, when adjusted for inflation, prompt concern about the
economy's growth prospects in 1999.
Because of the Asian turmoil, we have tried to reduce the Fund's exposure
to companies with significant Asian operations. The Fund's weighting in the
technology sector has been reduced by nearly 5 percentage points since June 30,
in part because we have tried to reduce the Fund's exposure to companies with
significant Asian operations. Accordingly, we sold all or most of such holdings
as Nokia, Cadence Design Systems, and Cognos. Among companies
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from other sectors sold because of their large presence in Asia were Engelhard
and Fluor.
Stocks sold for other reasons included the retailers Saks Holdings and
Gymboree, which had poor operating results. We also locked in substantial
long-term profits by selling MGIC Investment and most of our State Street
shares; both stocks had risen faster than underlying business trends.
We continued to put money into regional brokerage firms, which produced
returns exceeding 50% for the Fund in 1997. After a fourth-quarter agreement by
one of the regional brokers, Piper Jaffray, to be purchased by U.S. Bancorp,
prices of the group rose on takeover speculation.
We also initiated or added to positions in companies that we found
appealing for their reasonable valuations, the steady demand for their products,
and their relative lack of exposure to Asia's problems. Among these are the
household names Nabisco, The Gap, and Disney. We added Perkin-Elmer, the world
leader in biotechnology instrumentation, and Pharmacia & Upjohn, a global
pharmaceutical maker with a great pipeline of potential drugs under development.
As you know, the Fund's advisers have a common goal of long-term capital
growth, although each selects stocks for its subportfolio independently. 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. Among the
significant additions to our portion of the Fund during 1997 were WorldCom,
which announced plans to merge with MCI; Security Capital Group, a leading real
estate services provider; and Electronic Arts, a top developer of computer
games.
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. We consider 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.
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, 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.
Wellington Management Company, LLP
Franklin Portfolio Associates
Vanguard Core Management Group
January 14, 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.
7
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PORTFOLIO PROFILE
Morgan Growth Fund
This Profile provides a snapshot of the Fund's characteristics as of December
31, 1997, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
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MORGAN S&P 500
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<S> <C> <C>
Number of Stocks 391 500
Median Market Cap $8.6B $34.1B
Price/Earnings Ratio 21.8x 21.9x
Price/Book Ratio 3.9x 4.1x
Yield 1.0% 1.6%
Return on Equity 18.3% 20.4%
Earnings Growth Rate 19.5% 17.6%
Foreign Holdings 6.0% 1.9%
Turnover Rate 76% --
Expense Ratio 0.48% --
Cash Reserves 3.4% --
</TABLE>
INVESTMENT FOCUS
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[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
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MORGAN S&P 500
- -----------------------------------------------------------
<S> <C> <C>
R-Squared 0.74 1.00
Beta 0.93 1.00
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST STOCKS (% OF TOTAL NET ASSETS)
- -----------------------------------------------------------
<S> <C>
Home Depot, Inc. 2.5%
AirTouch Communications, Inc. 1.9
Travelers Group Inc. 1.6
Compaq Computer Corp. 1.4
Fannie Mae 1.4
Ford Motor Co. 1.3
Tele-Communications Class A 1.3
Ace, Ltd. 1.3
BankAmerica Corp. 1.2
HEALTHSOUTH Corp. 1.2
- -------------------------------------------------------
Top Ten 15.1%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ---------------------------------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------------------------------
MORGAN MORGAN S&P 500
----------------------------------------
<S> <C> <C> <C>
Auto & Transportation ................. 2.9% 3.4% 3.5%
Consumer Discretionary ................ 19.2 19.1 9.8
Consumer Staples ...................... 2.6 5.1 11.5
Financial Services .................... 18.5 20.9 17.7
Health Care ........................... 12.7 12.1 11.4
Integrated Oils ....................... 1.6 1.0 7.2
Other Energy .......................... 5.1 6.2 1.4
Materials & Processing ................ 5.9 5.1 5.8
Producer Durables ..................... 4.9 5.5 4.0
Technology ............................ 19.1 12.8 11.2
Utilities ............................. 4.1 5.5 10.6
Other ................................. 3.4 3.3 5.9
- ---------------------------------------------------------------------------------
</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. The midpoint of market capitalization (market price x shares
outstanding) of the stocks in a portfolio. Half the stocks in the portfolio have
higher market capitalizations and half lower.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a portfolio, the weighted average P/E of the
stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's
future growth.
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 STOCKS. The percentage of net assets that a portfolio has invested
in its 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 are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year.
Portfolios with high turnover rates incur higher transaction costs and are more
likely to 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
Morgan Growth Fund
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Fund. Note, too, that both
share price and return can fluctuate widely, so an investment in the Fund could
lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: DECEMBER 31, 1977-DECEMBER 31, 1997
- -------------------------------------------------------------
MORGAN GROWTH FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -------------------------------------------------------------
<C> <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
- ---------------------------------------------------------
</TABLE>
See Financial Highlights table on page 18 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: DECEMBER 31, 1987-DECEMBER 31, 1997
- -------------------------------------------------------------
VANGUARD/MORGAN AVERAGE GROWTH S&P 500
GROWTH FUND INDEX
<S> <C> <C> <C>
198712 10000 10000 10000
198803 11289 10750 10569
198806 12312 11363 11273
198809 12226 11247 11312
198812 12234 11396 11661
198903 12877 12207 12488
198906 13652 13175 13590
198909 14736 14502 15045
198912 15006 14295 15356
199003 14762 13979 14894
199006 15830 14980 15831
199009 13283 12567 13655
199012 14779 13512 14879
199103 17209 15879 17040
199106 17010 15738 17001
199109 17750 16929 17910
199112 19114 18388 19412
199203 18911 18168 18922
199206 18550 17630 19282
199209 19307 18191 19890
199212 20939 19821 20891
199303 21390 20325 21803
199306 21457 20463 21910
199309 22077 21458 22476
199312 22472 21920 22997
199403 21562 21095 22125
199406 20883 20662 22218
199409 22279 21762 23304
199412 22098 21448 23300
199503 23909 22954 25569
199506 26728 25259 28010
199509 29470 27392 30236
199512 30049 28054 32056
199603 31910 29452 33777
199606 33723 30867 35293
199609 35405 31745 36384
199612 37051 33452 39416
199703 36693 32913 40473
199706 42584 38262 47539
199709 48549 42386 51099
199712 48466 41915 52,567
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1997
--------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Morgan Growth Fund 30.81% 18.28% 17.10% $48,466
Average Growth Fund 25.30 16.16 15.41 41,915
S&P 500 Index 33.36 20.27 18.05 52,567
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ----------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Morgan Growth Fund 12/31/1968 30.81% 18.28% 15.19% 1.91% 17.10%
- ----------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
FINANCIAL STATEMENTS
December 31, 1997
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 (91.3%)
- ---------------------------------------------------------
AUTO & TRANSPORTATION (3.1%)
<S> <C> <C>
Airborne Freight Corp. 34,600 $ 2,150
Burlington Northern Santa
Fe Corp. 18,300 1,701
CNF Transportation, Inc. 63,000 2,418
- - Federal Express Corp. 82,200 5,019
Ford Motor Co. 765,000 37,246
General Motors Corp. 30,700 1,861
- - Halter Marine Group, Inc. 47,814 1,381
- - Lear Corp. 4,500 214
Norfolk Southern Corp. 2,100 65
Pittston Burlington Group 95,500 2,507
Southwest Airlines Co. 286,650 7,059
- - UAL Corp. 9,900 916
- - US Airways Group, Inc. 283,700 17,731
Werner Enterprises, Inc. 325,000 6,662
----------
86,930
----------
CONSUMER DISCRETIONARY (17.4%)
Aaron Rents, Inc. Class B 6,400 122
- - AccuStaff, Inc. 719,800 16,555
- - Amazon.com, Inc. 155,000 9,339
- - America Online, Inc. 274,500 24,482
- - Anchor Gaming 10,300 572
- - AutoZone Inc. 93,500 2,711
- - Barnes & Noble, Inc. 210,000 7,009
- - Bed Bath & Beyond, Inc. 275,000 10,553
Black & Decker Corp. 16,800 656
- - Brinker International, Inc. 184,000 2,944
- - CDI Corp. 11,400 522
- - CNET, Inc. 150,000 4,313
Callaway Golf Co. 30,800 880
CanWest Global Communications
Corp. Class A 235,600 4,241
- - Carmike Cinemas, Inc. Class A 23,500 674
Carnival Corp. Class A 19,200 1,063
- - Cendant Corp. 430,875 14,811
- - Computer Horizons Corp. 12,600 573
- - Corporate Express, Inc. 85,500 1,101
Darden Restaurants Inc. 212,600 2,657
Dayton-Hudson Corp. 465,400 31,415
Deluxe Corp. 15,200 524
The Walt Disney Co. 248,544 24,621
- - Electronic Arts Inc. 150,000 5,672
Food Lion Inc. Class A 61,900 522
- - Furniture Brands International
Inc. 96,100 1,970
Gannett Co., Inc. 36,200 2,238
The Gap, Inc. 475,000 16,833
- - General Nutrition Cos., Inc. 49,100 1,663
- - Genesco, Inc. 112,300 1,432
Harcourt General, Inc. 1,600 88
Hasbro, Inc. 8,700 274
Hertz Corp. Class A 250,000 10,063
Hilton Hotels Corp. 66,100 1,966
Home Depot, Inc. 1,205,650 70,983
- - Host Marriott Corp. 103,300 2,027
International Game Technology 36,000 909
- - Jacor Communications, Inc. 155,000 8,234
- - Jones Apparel Group, Inc. 169,400 7,284
- - Just for Feet, Inc. 43,700 571
Knight-Ridder, Inc. 160,200 8,330
- - Kohls Corp. 50,000 3,406
Estee Lauder Cos. Class A 187,900 9,665
- - Lone Star Steakhouse &
Saloon, Inc. 19,800 346
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
- - MGM Grand, Inc. 3,600 $ 130
- - Mail-Well, Inc. 17,700 717
Mattel, Inc. 80,200 2,987
Maytag Corp. 30,800 1,149
McDonald's Corp. 252,900 12,076
The McGraw-Hill Cos., Inc. 18,600 1,376
Newell Co. 166,000 7,055
News Corp. Ltd. ADR 155,100 3,461
News Corp. Ltd. Pfd. ADR 300,000 5,963
New York Times Co. Class A 26,000 1,719
- - Office Depot, Inc. 313,200 7,497
- - Outdoor Systems, Inc. 325,275 12,482
Premark International, Inc. 13,200 383
- - Promus Hotel Corp. 6,012 253
- - Revlon, Inc. Class A 130,000 4,591
Ross Stores, Inc. 46,600 1,695
- - Samsonite Corp. 8,500 269
E.W. Scripps Co. Class A 70,000 3,391
Sears, Roebuck & Co. 31,400 1,421
- - Staples, Inc. 13,600 377
Sunbeam Corp. 330,000 13,901
TJX Cos., Inc. 60,400 2,076
- - Tele-Communications Liberty
Media Group Class A 950,000 34,438
The Times Mirror Co. Class A 22,000 1,353
Time Warner, Inc. 17,900 1,110
The Toro Co. 103,800 4,424
Tribune Co. 78,800 4,905
- - Ugly Duckling Corp. 25,200 214
- - Universal Outdoor Holdings, Inc. 82,000 4,264
- - Valassis Communications, Inc. 244,400 9,043
- - Viacom Inc. Class B 330,000 13,674
Wal-Mart Stores, Inc. 144,100 5,683
Washington Post Co. Class B 3,200 1,557
Whirlpool Corp. 67,500 3,712
Windmere-Durable Holdings Inc. 15,800 356
- - Woolworth Corp. 54,900 1,119
----------
487,635
----------
CONSUMER STAPLES (4.7%)
CVS Corp. 205,000 13,133
Campbell Soup Co. 4,000 232
Coca-Cola Enterprises, Inc. 450,000 16,003
ConAgra, Inc. 28,000 919
Adolph Coors Co. Class B 99,500 3,296
Dean Foods Corp. 182,700 10,871
Dial Corp. 38,800 808
Dimon Inc. 353,000 9,266
General Mills, Inc. 8,700 623
Gillette Co. 112,800 11,329
Great Atlantic & Pacific Tea
Co., Inc. 21,600 641
H.J. Heinz Co. 31,000 1,575
Interstate Bakeries Corp. 404,200 15,107
McCormick & Co., Inc. 126,900 3,553
Nabisco Holdings Corp. Class A 150,000 7,266
PepsiCo, Inc. 265,700 9,681
Philip Morris Cos., Inc. 280,900 12,728
RJR Nabisco Holdings Corp. 324,600 12,173
- - Safeway, Inc. 30,100 1,904
----------
131,108
----------
FINANCIAL SERVICES (19.1%)
AFLAC, Inc. 23,600 1,207
Ace, Ltd. 370,000 35,705
H.F. Ahmanson & Co. 64,100 4,291
Allstate Corp. 37,200 3,381
American Express Co. 321,200 28,667
American International
Group, Inc. 114,048 12,403
- - Amresco, Inc. 81,300 2,409
- - BISYS Group, Inc. 180,000 5,985
BankAmerica Corp. 474,600 34,646
Bankers Trust New York Corp. 16,800 1,889
Bear Stearns Co., Inc. 610,674 29,007
CIGNA Corp. 10,700 1,852
- - CNA Financial Corp. 51,800 6,617
Chase Manhattan Corp. 23,568 2,581
Citicorp 13,000 1,644
Conseco Inc. 448,900 20,397
- - Consumer Portfolio Services, Inc. 83,000 794
- - DST Systems, Inc. 180,000 7,684
Dime Bancorp, Inc. 135,400 4,096
Donaldson, Lufkin & Jenrette, Inc. 25,900 2,059
Dow Jones & Co., Inc. 167,200 8,977
A.G. Edwards & Sons, Inc. 376,400 14,962
The Equitable Cos. 130,500 6,492
Fannie Mae 676,600 38,608
First Data Corp. 390,000 11,407
First Empire State Corp. 3,400 1,581
First Union Corp. 275,000 14,094
- - FIserv, Inc. 37,100 1,823
Franchise Finance Corp. of
America REIT 84,900 2,292
Freddie Mac 13,300 558
- - Golden State Bancorp Inc. 67,800 2,534
Golden West Financial Corp. 17,300 1,692
Green Tree Financial Corp. 425,800 11,151
Household International, Inc. 119,000 15,180
Interra Financial, Inc. 60,005 4,140
Legg Mason Inc. 113,333 6,340
Lehman Brothers Holdings, Inc. 176,000 8,976
Loews Corp. 18,500 1,963
McDonald and Co. Investments 120,000 3,405
Mercury General Corp. 4,600 254
Merrill Lynch & Co., Inc. 109,000 7,950
J.P. Morgan & Co., Inc. 6,000 677
Morgan Keegan, Inc. 310,000 7,847
Morgan Stanley, Dean Witter,
Discover and Co. 91,500 5,410
NationsBank Corp. 42,200 2,566
Ohio Casualty Corp. 150,700 6,725
Old Republic International Corp. 155,900 5,798
Piper Jaffray Cos., Inc. 215,000 7,834
- - Policy Management
Systems Corp. 150,000 10,434
Providian Financial Corp. 20,400 922
SLM Holding Corp. 123,500 17,182
St. Paul Cos., Inc. 95,400 7,829
- - Security Capital Group Inc.
Class B 323,700 10,520
State Street Corp. 13,200 768
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
Summit Bancorp. 29,000 $ 1,544
Transatlantic Holdings, Inc. 20,100 1,437
Travelers Property Casualty
Corp. 79,500 3,498
Travelers Group Inc. 847,700 45,670
U.S. Bancorp 140,000 15,671
Washington Mutual, Inc. 160,000 10,200
----------
534,225
----------
HEALTH CARE (11.1%)
Abbott Laboratories 325,900 21,367
- - Agouron Pharmaceuticals, Inc. 1,900 56
American Home Products Corp. 23,300 1,782
- - Amgen, Inc. 44,600 2,414
- - Beverly Enterprises, Inc. 1,054,400 13,707
Biomet, Inc. 225,000 5,737
Bristol-Myers Squibb Co. 16,400 1,552
Cardinal Health, Inc. 85,700 6,438
- - Centocor, Inc. 17,000 565
Columbia/HCA Healthcare Corp. 500,000 14,812
- - Coram Healthcare Corp. 11,083 37
- - Dura Pharmaceuticals, Inc. 66,500 3,051
- - Elan Corp. PLC ADR 71,600 3,665
- - Express Scripts 10,900 654
- - FPA Medical Management, Inc. 112,600 2,097
- - Genzyme Corp. 350,000 9,669
Guidant Corp. 32,100 1,998
HBO & Co. 391,500 18,768
- - Health Management Associates
Class A 476,887 12,041
- - HealthCare COMPARE Corp. 17,100 874
- - HEALTHSOUTH Corp. 1,193,600 33,122
- - Immunex Corp. 125,000 6,750
Integrated Health Services, Inc. 226,420 7,061
- - Interneuron Pharmaceutical, Inc. 3,900 37
Johnson & Johnson 337,900 22,259
- - Magellan Health Services, Inc. 135,000 2,903
Manor Care Inc. 14,900 521
McKesson Corp. 24,800 2,683
- - MedPartners, Inc. 296,000 6,623
Merck & Co., Inc. 28,100 2,986
Olsten Corp. 536,800 8,052
Omnicare, Inc. 84,900 2,632
Pfizer, Inc. 280,000 20,877
Pharmacia & Upjohn, Inc. 175,000 6,409
- - PharMerica, Inc. 206,797 2,146
- - PhyCor, Inc. 298,000 8,046
- - Physician Sales & Service, Inc. 63,100 1,357
Schering-Plough Corp. 32,700 2,031
ServiceMaster Co. 124,500 3,642
- - Sierra Health Services 7,600 256
- - Sybron International Corp. 23,800 1,117
- - Tenet Healthcare Corp. 67,400 2,233
- - Utah Medical Products, Inc. 49,600 338
- - Vencor, Inc. 300,000 7,331
Warner-Lambert Co. 160,000 19,840
- - Wellpoint Health Networks Inc.
Class A 115,600 4,884
Zeneca Group PLC ADR 115,800 12,506
----------
309,926
----------
INTEGRATED OILS (1.0%)
Chevron Corp. 18,400 1,417
Imperial Oil Ltd. 20,300 1,298
Mobil Corp. 3,600 260
Pennzoil Co. 101,400 6,775
Phillips Petroleum Co. 32,400 1,575
Sun Co., Inc. 137,300 5,775
Texaco Inc. 23,273 1,265
Unocal Corp. 200,000 7,763
YPF SA ADR 6,000 205
----------
26,333
----------
OTHER ENERGY (5.6%)
- - BJ Services Co. 259,800 18,689
Burlington Resources, Inc. 247,200 11,078
Camco International, Inc. 140,500 8,948
- - Cooper Cameron Corp. 131,800 8,040
Diamond Offshore Drilling, Inc. 17,600 847
ENSCO International, Inc. 683,600 22,901
- - Global Marine, Inc. 215,800 5,287
Helmerich & Payne, Inc. 40,900 2,776
- - Nabors Industries, Inc. 430,600 13,537
- - Reading & Bates Corp. 17,300 724
- - Rowan Cos., Inc. 48,900 1,491
Santa Fe International Corp. 219,500 8,931
Schlumberger Ltd. 254,400 20,479
Tidewater, Inc. 46,900 2,585
Transocean Offshore, Inc. 513,800 24,759
Valero Energy Corp. 18,200 572
Vastar Resources, Inc. 166,100 5,938
----------
157,582
----------
MATERIALS & PROCESSING (4.6%)
Air Products & Chemicals, Inc. 125,000 10,281
Archer-Daniels-Midland Co. 326,260 7,076
Banta Corp. 40,100 1,083
- - Bethlehem Steel Corp. 230,900 1,992
Centex Corp. 172,100 10,832
Corning, Inc. 33,500 1,244
Crompton & Knowles Corp. 99,900 2,647
Dexter Corp. 33,700 1,455
Dow Chemical Co. 72,300 7,338
E.I. du Pont de Nemours & Co. 50,200 3,015
Fort James Corp. 40,700 1,557
W.R. Grace & Co. 11,600 933
M.A. Hanna Co. 183,400 4,631
Harsco Corp. 8,600 371
Illinois Tool Works, Inc. 13,300 800
Kimberly-Clark Corp. 526,100 25,943
Lindberg Corp. 1,600 23
Lubrizol Corp. 40,800 1,504
Morton International, Inc. 312,000 10,725
Norsk Hydro AS ADR 104,300 5,319
- - Owens-Illinois, Inc. 39,500 1,499
Phelps Dodge Corp. 14,600 909
Precision Castparts Corp. 58,200 3,510
RPM Inc. (Ohio) 276,125 4,211
Sigma-Aldrich Corp. 31,200 1,232
Terra Industries, Inc. 22,400 293
Texas Industries, Inc. 26,800 1,206
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
The Timken Co. 25,200 $ 866
USX-U.S. Steel Group, Inc. 491,100 15,347
Witco Chemical Corp. 50,900 2,077
----------
129,919
----------
PRODUCER DURABLES (5.0%)
- - Allied Waste Industries, Inc. 75,900 1,769
- - American Power Conversion Corp. 23,100 546
AMP, Inc. 60,000 2,520
- - Applied Materials, Inc. 40,800 1,227
Caterpillar, Inc. 216,500 10,514
Danaher Corp. 13,600 858
Deere & Co. 132,700 7,738
- - Detroit Diesel Corp. 105,000 2,494
Dover Corp. 34,800 1,257
General Motors Corp. Class H 100,000 3,694
- - Gulfstream Aerospace Corp. 310,000 9,067
Honeywell, Inc. 175,000 11,987
Ingersoll-Rand Co. 258,600 10,473
- - KLA-Tencor Corp. 54,400 2,098
- - Lexmark International Group,
Inc. Class A 103,900 3,948
Herman Miller, Inc. 17,900 971
Molex, Inc. 113,400 3,629
Northern Telecom Ltd. 12,500 1,113
Parker Hannifin Corp. 54,900 2,519
Perkin-Elmer Corp. 115,400 8,201
Philips Electronics NV ADR 232,200 14,048
Pitney Bowes, Inc. 20,800 1,871
Pulte Corp. 35,600 1,489
- - Republic Industries, Inc. 84,700 1,975
Sundstrand Corp. 29,200 1,471
Technitrol, Inc. 103,800 3,114
Tektronix, Inc. 36,900 1,464
- - Thermo Instrument Systems, Inc. 294,250 10,133
Thomas & Betts Corp. 43,179 2,040
- - U.S. Office Products Co. 74,250 1,439
United Technologies Corp. 186,300 13,565
----------
139,232
----------
TECHNOLOGY (11.7%)
AVX Corp. 50,300 927
- - Adaptec, Inc. 165,000 6,126
Adobe Systems, Inc. 60,700 2,496
- - Analog Devices, Inc. 267,000 7,393
- - Ascend Communications, Inc. 1,800 44
- - Avid Technology, Inc. 98,900 2,646
- - BMC Software, Inc. 354,300 23,207
- - Bay Networks, Inc. 152,900 3,909
- - Cabletron Systems, Inc. 400 6
- - Cadence Design Systems, Inc. 59,100 1,448
- - Cambridge Technology Partners 80,500 3,351
- - CIENA Corp. 57,700 3,527
- - Cisco Systems, Inc. 213,900 11,925
Compaq Computer Corp. 693,050 39,114
Computer Associates
International, Inc. 197,900 10,464
- - Computer Sciences Corp. 295,000 24,632
- - Comverse Technology, Inc. 38,500 1,492
- - Creative Technology Ltd. 44,000 962
- - Dell Computer Corp. 81,500 6,846
- - EMC Corp. 815,200 22,367
- - Esterline Technologies Corp. 9,300 335
- - Hadco Corp. 27,300 1,235
Hewlett-Packard Co. 125,000 7,813
Innovex, Inc. 19,000 436
Intel Corp. 25,600 1,797
International Business
Machines Corp. 3,600 376
- - KEMET Corp. 19,500 375
- - LSI Logic Corp. 14,000 276
- - Loral Space & Communications 240,000 5,145
Lucent Technologies, Inc. 34,600 2,764
- - Microage, Inc. 21,900 330
- - Microsoft Corp. 127,500 16,471
- - National Semiconductor Corp. 339,600 8,808
- - Oracle Corp. 20,400 454
- - Parametric Technology Corp. 391,400 18,494
- - PeopleSoft, Inc. 260,000 10,075
- - Quantum Corp. 54,400 1,091
- - Read Rite Corp. 71,800 1,131
- - SCI Systems, Inc. 572,800 24,953
- - Silicon Graphics, Inc. 166,500 2,071
Sony Corp. ADR 148,000 13,431
- - Sterling Software, Inc. 220,000 9,020
- - Storage Technology Corp. 300 19
- - Sun Microsystems, Inc. 57,000 2,273
- - Systemsoft Corp. 19,300 123
- - Tech Data Corp. 242,200 9,416
- - 3Com Corp. 250,000 8,719
- - Xilinx, Inc. 200,000 7,000
----------
327,313
----------
UTILITIES (5.1%)
AT&T Corp. 146,300 8,961
- - AirTouch Communications, Inc. 1,259,600 52,352
ALLTEL Corp. 4,900 201
Ameritech Corp. 12,300 990
Bell Atlantic Corp. 87,402 7,954
British Telecommunications
PLC ADS 114,800 9,220
Edison International 32,200 875
GPU, Inc. 15,800 666
Houston Industries, Inc. 359,232 9,587
- - NTL Inc. 180,000 4,995
- - NEXTEL Communications, Inc. 441,800 11,376
PG&E Corp. 900 27
Public Service Enterprise
Group, Inc. 305,400 9,677
SBC Communications Inc. 19,900 1,458
- - Tele-Communications, Inc.
Class A 100,000 2,787
Telefonica de Espana ADR 82,700 7,531
- - Teleport Communications
Group Inc. 80,000 4,390
- - WorldCom, Inc. 275,000 8,319
----------
141,366
----------
OTHER (2.9%)
- - Berkshire Hathaway Class A 22 1,012
Canadian Pacific Ltd. 342,500 9,333
Carlisle Co., Inc. 27,700 1,184
- - Ceridian Corp. 49,700 2,277
Dresser Industries, Inc. 300,000 12,581
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
Eisai Co., Ltd. ADR 600,000 $ 9,225
General Electric Co. 363,900 26,701
Harris Corp. 29,000 1,330
Johnson Controls, Inc. 10,400 497
Minnesota Mining &
Manufacturing Co. 34,400 2,823
Ogden Corp. 78,600 2,216
Raytheon Co. Class A 1,957 97
Select Appointments Holdings
Public Ltd. Co. PLC ADR 200,000 3,650
- - Thermo Electron Corp. 31,400 1,397
Trinity Industries, Inc. 92,000 4,105
Tyco International Ltd. 59,800 2,695
----------
81,123
----------
- ---------------------------------------------------------
TOTAL COMMON STOCKS
(COST $1,801,150) 2,552,692
- ---------------------------------------------------------
FACE
AMOUNT
(000)
- ---------------------------------------------------------
TEMPORARY CASH INVESTMENTS (11.2%)
- ---------------------------------------------------------
U.S. TREASURY BILLS
(1)5.02%, 1/22/1998 $ 200 199
(1)5.12%, 4/16/1998 6,000 5,910
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.54%, 1/2/1998 246,582 246,582
6.50%, 1/2/1998--Note F 59,454 59,454
- ---------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $312,145) 312,145
- ---------------------------------------------------------
TOTAL INVESTMENTS (102.5%)
(COST $2,113,295) 2,864,837
- ---------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.5%)
- ---------------------------------------------------------
Other Assets--Note C 17,513
Liabilities--Note F (87,047)
----------
(69,534)
- ---------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------
Applicable to 159,388,440 outstanding
$.10 par value shares
(authorized 350,000,000 shares) $2,795,303
=========================================================
NET ASSET VALUE PER SHARE $17.54
=========================================================
</TABLE>
*See Note A in Notes to Financial Statements.
-Non-Income-Producing Security.
(1) Securities with an aggregate value of $6,109,000 have been segregated as
initial margin for open futures contracts.
ADR--American Depositary Receipt.
ADS--American Depositary Share.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- -------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------
AT DECEMBER 31, 1997, NET ASSETS CONSISTED OF:
- -------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,985,635 $12.46
Undistributed Net
Investment Income 117 --
Accumulated Net Realized Gains 55,747 .35
Unrealized Appreciation--Note E
Investment Securities 751,542 4.72
Futures Contracts 2,262 .01
- -------------------------------------------------------
NET ASSETS $2,795,303 $17.54
=======================================================
</TABLE>
15
<PAGE> 18
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If the
Fund invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
MORGAN GROWTH FUND
YEAR ENDED DECEMBER 31, 1997
(000)
- --------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 22,592
Interest 11,508
---------
Total Income 34,100
---------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 3,656
Performance Adjustment 245
The Vanguard Group--Note C
Management and Administrative 6,897
Marketing and Distribution 465
Taxes (other than income taxes) 179
Custodian Fees 69
Auditing Fees 10
Shareholders' Reports 98
Annual Meeting and Proxy Costs 35
Directors' Fees and Expenses 6
---------
Total Expenses 11,660
Expenses Paid Indirectly--Note C (185)
---------
Net Expenses 11,475
- --------------------------------------------------------------------
NET INVESTMENT INCOME 22,625
- --------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 344,720
Futures Contracts 302
- --------------------------------------------------------------------
REALIZED NET GAIN 345,022
- --------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 273,699
Futures Contracts 2,276
- --------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 275,975
- --------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 643,622
====================================================================
</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
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 22,625 $ 17,400
Realized Net Gain 345,022 206,577
Change in Unrealized Appreciation (Depreciation) 275,975 152,463
------------------------------
Net Increase in Net Assets Resulting from Operations 643,622 376,440
------------------------------
DISTRIBUTIONS
Net Investment Income (22,504) (16,973)
Realized Capital Gain (352,704) (182,231)
------------------------------
Total Distributions (375,208) (199,204)
------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 413,455 453,288
Issued in Lieu of Cash Distributions 360,202 191,528
Redeemed (300,535) (239,383)
------------------------------
Net Increase from Capital Share Transactions 473,122 405,433
- -------------------------------------------------------------------------------------------------
Total Increase 741,536 582,669
- -------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 2,053,767 1,471,098
------------------------------
End of Year $ 2,795,303 $ 2,053,767
=================================================================================================
(1)Shares Issued (Redeemed)
Issued 23,640 30,100
Issued in Lieu of Cash Distributions 21,663 12,544
Redeemed (17,290) (15,693)
------------------------------
Net Increase in Shares Outstanding 28,013 26,951
=================================================================================================
</TABLE>
17
<PAGE> 20
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the Fund;
and the extent to which the Fund tends to distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in the
Fund for one year. Finally, the table lists the Fund's Average Commission Rate
Paid, a disclosure required by the Securities and Exchange Commission beginning
in 1996. This rate is calculated by dividing total commissions paid on portfolio
securities by the total number of shares purchased and sold on which commissions
were charged.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
MORGAN GROWTH FUND
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $15.63 $14.09 $11.36 $12.01 $12.65
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .160 .14 .15 .14 .18
Net Realized and Unrealized Gain (Loss) on Investments 4.435 3.07 3.89 (.34) .71
-------------------------------------------------------------
Total from Investment Operations 4.595 3.21 4.04 (.20) .89
-------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.160) (.14) (.15) (.14) (.18)
Distributions from Realized Capital Gains (2.525) (1.53) (1.16) (.31) (1.35)
-------------------------------------------------------------
Total Distributions (2.685) (1.67) (1.31) (.45) (1.53)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $17.54 $15.63 $14.09 $11.36 $12.01
=========================================================================================================================
TOTAL RETURN 30.81% 23.30% 35.98% -1.67% 7.32%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $2,795 $2,054 $1,471 $1,075 $1,135
Ratio of Total Expenses to Average Net Assets 0.48% 0.51% 0.49% 0.50% 0.49%
Ratio of Net Investment Income to Average Net Assets 0.93% 0.97% 1.10% 1.15% 1.36%
Portfolio Turnover Rate 76% 73% 76% 84% 72%
Average Commission Rate Paid $.0430 $.0362 N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
Vanguard/Morgan Growth Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally
accepted accounting principles for mutual funds. The Fund consistently
follows such policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities not listed on an exchange are valued at
the latest quoted bid prices. Temporary cash investments acquired over 60 days
to maturity are valued using the latest bid prices or using valuations based on
a matrix system (which considers such factors as security prices, yields,
maturities, and ratings), both as furnished by independent pricing services.
Other temporary cash investments are valued at amortized cost, which
approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The Fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. FUTURES: The Fund uses S&P 500 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.
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.
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 $219,000
for the year ended December 31, 1997.
For the year ended December 31, 1997, the aggregate investment advisory
fee represented an effective annual basic rate of 0.15% of average net assets of
the Fund before an increase of $245,000 (0.01%) based on performance.
19
<PAGE> 22
On December 12, 1997, the Board of Directors approved a change in the
Fund's investment advisers. Effective February 1, 1998, Husic Capital Management
will cease to serve as an adviser to the Fund; assets managed by Husic Capital
Management will be reallocated to Franklin Portfolio Associates and Vanguard.
C. The Vanguard Group furnishes at cost corporate management,
administrative, marketing, and distribution services. The costs of such services
are allocated to the Fund under methods approved by the Board of Directors. At
December 31, 1997, the Fund had contributed capital of $182,000 to Vanguard
(included in Other Assets), representing 0.9% of Vanguard's capitalization. The
Fund's Directors and officers are also Directors and officers of Vanguard.
Vanguard has asked the Fund's investment advisers to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate to the Fund part of the commissions generated. Such
rebates are used solely to reduce the Fund's administrative expenses. For the
year ended December 31, 1997, these arrangements reduced the Fund's expenses by
$185,000 (0.01% of average net assets).
D. During the year ended December 31, 1997, the Fund purchased
$1,766,111,000 of investment securities and sold $1,695,923,000 of investment
securities, not counting temporary cash investments.
E. At December 31, 1997, net unrealized appreciation of investment
securities for financial reporting and federal income tax purposes was
$751,542,000, consisting of unrealized gains of $796,698,000 on securities that
had risen in value since their purchase and $45,156,000 in unrealized losses on
securities that had fallen in value since their purchase.
At December 31, 1997, the aggregate settlement value of open futures
contracts expiring in March 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 500 429 $105,009 $1,153
S&P Midcap 400 258 43,234 1,109
-----------------------------------------------------------------------------------------------
</TABLE>
F. The market value of securities on loan to brokers/dealers at December
31, 1997, was $58,120,000, for which the Fund held cash collateral of
$59,454,000. Cash collateral received is invested in repurchase agreements.
20
<PAGE> 23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Vanguard/Morgan Growth Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard/Morgan Growth Fund (the "Fund") at December 31, 1997, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the five years in the period then ended, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1997 by
correspondence with the custodian and the application of alternative auditing
procedures where securities purchased had not been settled, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 6, 1998
21
<PAGE> 24
SPECIAL 1997 TAX INFORMATION (UNAUDITED) FOR VANGUARD/MORGAN GROWTH FUND
This information for the fiscal year ended December 31, 1997, is included
pursuant to provisions of the Internal Revenue Code.
The Fund designates $280,850,000 as capital gain dividends (from net
long-term capital gains), of which $227,285,000 was distributed to shareholders
in December 1997 and $53,565,000 will be distributed in March 1998. Of the
$280,850,000 capital gain dividends, the Fund designates $133,303,000 as a 20%
rate gain distribution.
For corporate shareholders, 22.0% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
22
<PAGE> 25
HONORARY CHAIRMAN
WALTER L. MORGAN, Founder.
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 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 500," "S&P 500(R)," "Standard & Poor's(R),"
"S&P(R)," 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> 26
VANGUARD FAMILY OF FUNDS
STOCK FUNDS
Convertible Securities Fund
Equity Income Fund
Explorer Fund
Growth and Income Portfolio
Horizon Fund
Aggressive Growth Portfolio
Capital Opportunity Portfolio
Global Equity Portfolio
Index Trust
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Small Capitalization Stock
Portfolio
Total Stock Market Portfolio
Value Portfolio
Institutional Index Fund
International Equity Index Fund
Emerging Markets Portfolio
European Portfolio
Pacific Portfolio
International Growth Portfolio
International Value Portfolio
Morgan Growth Fund
PRIMECAP Fund
Selected Value Portfolio
Specialized Portfolios
Energy Portfolio
Gold & Precious Metals
Portfolio
Health Care Portfolio
REIT Index Portfolio
Utilities Income Portfolio
Tax-Managed Fund
Capital Appreciation
Portfolio
Growth and Income Portfolio
Total International Portfolio
Trustees' Equity Fund
U.S. Portfolio
U.S. Growth Portfolio
Windsor Fund
Windsor II
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Horizon Fund
Global Asset Allocation
Portfolio
LifeStrategy Portfolios
Conservative Growth
Portfolio
Growth Portfolio
Income Portfolio
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STAR Portfolio
Tax-Managed Fund
Balanced Portfolio
Wellesley Income Fund
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BOND FUNDS
Admiral Funds
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Treasury Portfolio
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Portfolio
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Portfolio
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Intermediate-Term Bond
Portfolio
Long-Term Bond Portfolio
Short-Term Bond Portfolio
Total Bond Market Portfolio
Fixed Income Securities Fund
GNMA Portfolio
High Yield Corporate Portfolio
Intermediate-Term Corporate
Portfolio
Intermediate-Term U.S.
Treasury Portfolio
Long-Term Corporate
Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term Corporate
Portfolio
Short-Term Federal Portfolio
Short-Term U.S. Treasury
Portfolio
Municipal Bond Fund
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Preferred Stock Fund
State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
MONEY MARKET FUNDS
Admiral Funds
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Portfolio
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State Tax-Free Funds
(CA, NJ, NY, OH, PA)
[THE VANGUARD GROUP LOGO]
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
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 you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
Q260-12/1997
(C) 1998 Vanguard Marketing
Corporation, Distributor
