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VANGUARD
MORGAN GROWTH
FUND
[PHOTO]
SEMIANNUAL
REPORT
JUNE 30, 1999
[THE VANGUARD GROUP LOGO]
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AT VANGUARD, WE BELIEVE
THAT TRADITION MATTERS
Our 9,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August
1, 1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto-- "Leading the way"--serves as a guiding principle
for our company.
- - The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped
to shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with
clients; and a focus on long-term investing. To our great regret, Mr.
Morgan died on September 2, 1998.
- - The 70th anniversary, on December 28, 1998, of the incorporation of
Vanguard Wellington Fund. It is the nation's oldest balanced mutual fund,
and one of only a handful of funds created in the 1920s that are still in
operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
CONTENTS
A MESSAGE TO OUR SHAREHOLDERS
1
THE MARKETS IN PERSPECTIVE
3
REPORT FROM THE ADVISERS
5
PERFORMANCE SUMMARY
7
FUND PROFILE
8
FINANCIAL STATEMENTS
10
FOR AN UPDATE ON OUR YEAR 2000
PREPAREDNESS, SEE PAGE 20.
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
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FELLOW SHAREHOLDER,
[PHOTO]
JOHN J. BRENNAN JOHN C. BOGLE
CHAIRMAN & CEO SENIOR CHAIRMAN
During a prosperous six-month period for equities, Vanguard Morgan Growth Fund
posted a hearty +14.3% return for the first half of its fiscal year. As shown in
the table below, its gain handily exceeded those of the average growth fund and
its unmanaged benchmarks, the Standard & Poor's 500 Index and the Growth Fund
Stock Index.
The fund's return is based on an increase in net asset value from
$19.72 per share on December 31, 1998, to $21.87 per share on June 30, 1999, and
is adjusted for a distribution of $0.60 per share paid from net realized capital
gains.
THE PERIOD IN REVIEW
The key influences on financial markets during the first half of 1999 were the
surprising strength of the U.S. economy's long-running expansion, promising
corporate earnings, and the increasing signs that a number of shaky foreign
economies were on firmer footing. These factors were responsible for both
broad-based gains in U.S. stocks and increases in interest rates, which sent
bond prices lower.
The overall U.S. stock market, as measured by the Wilshire 5000 Equity
Index, gained +11.8%--equivalent to more than a full year's return based on
historical norms. But the half-year saw a sharp rotation in market leadership.
As the outlook for global economic growth kept improving, there was a notable
revival in cyclical stocks--commodity-related companies, machinery makers, and
other firms whose profit prospects are most closely tied to the economy's ups
and downs. This was a welcome change for the cyclicals and other "value" stocks
that had lagged the market not just in the first quarter but for much of the
last five years. During the first quarter, the growth stocks in the S&P 500
Index outpaced the value stocks--those characterized by above-average dividend
yields and below-average price/earnings ratios. However, the situation reversed
during the second quarter, and for the half-year, while growth stocks were up
+11.0%, value stocks carried the day with a gain of +14.0%.
Also rebounding vigorously were small-capitalization stocks, which had
trailed far behind large-caps in recent years. The small-cap Russell 2000 Index
nicely outpaced the S&P 500 during the second quarter, although it trailed the
large-cap index for the half-year, +9.3% to +12.4%.
Interest rates held steady in January, but rose throughout the rest of
the period. By June 30, yields on U.S. Treasury notes and bonds were higher by
roughly 1 percentage point from their year-end 1998 levels. The benchmark
30-year Treasury bond's yield increased 86 basis points (0.86 percentage point),
from 5.10% to 5.96%.
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TOTAL RETURNS
SIX MONTHS ENDED
JUNE 30, 1999
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Vanguard Morgan Growth Fund +14.3%
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Average Growth Fund +11.7%
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S&P 500 Index +12.4%
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Growth Fund Stock Index* +12.8
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*Reflects the average common stock holdings of the
50 largest growth-oriented mutual funds.
1
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PERFORMANCE OVERVIEW
Despite the stock market's slight tilt toward value over growth stocks during
the period, Morgan Growth Fund and its peers fared well. Your fund returned
+14.3%, compared with +11.7% for the average growth fund and +12.4% for the S&P
500 Index. Our return also outpaced the +12.8% return of the Growth Fund Stock
Index, an unmanaged measure that we believe is more representative of the stocks
in which we invest than is the S&P 500.
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TOTAL ASSETS MANAGED
JUNE 30, 1999
-----------------------------
$ MILLION PERCENTAGE
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Franklin Portfolio Associates $1,690 41%
Wellington Management 1,644 39
Vanguard Core Management 615 15
Cash Reserve* 220 5
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Total $4,169 100%
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*Cash reserve is invested in equity index futures to simulate
investment in stocks; each adviser also maintains a modest cash
reserve.
Morgan Growth's return was propelled by deft stock selection by our three
advisers in several sectors, especially in the utilities and technology
categories, where we earned returns of nearly +31%. Strong stock picks lifted
our return in the consumer- discretionary arena to +22.6%, versus +14.6% for
those stocks in the S&P 500. Conversely, at -14.9%, the fund's performance in
the consumer-staples category was disappointing, as was our showing in the
health-care sector (-11.5%). The table above shows the allocation of assets
among our three advisers as of June 30.
IN SUMMARY
With different market segments jockeying back and forth for supremacy, the first
six months of 1999 provided a telling example of the fickle nature of stocks.
And on a grander scale, the disparity between stock and bond returns reflected
the uncertainty that is part and parcel of the financial markets.
Sticking with a balanced investment program can be trying at times,
particularly when one market segment runs ahead of the others and seems to be
"the only game in town." But in the long run, such a program--including stock
funds, bond funds, and short-term reserves--helps investors to ride out the
inevitable fluctuations that are encountered en route to your financial goals.
So once you've decided on an investment plan suited to your time horizon, goals,
and tolerance for risk, we urge you to "stay the course."
/S/ /S/
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
July 16, 1999
2
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THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 1999
A markedly improved global economic outlook during the first half of 1999 led to
mostly positive stock market returns and lower bond prices.
As the year began, many observers expected that severe economic crises
in Asia, Russia, and some Latin American nations would restrain business
activity worldwide, even in the United States, which has been the world's
economic locomotive. By spring, however, a consensus emerged that global
economic activity was likely to be solid, if not robust. This change in
sentiment stemmed from several factors, including further vigorous growth in the
U.S. economy, a belief that Asia's slump had bottomed out, and moves in Europe
to ease monetary policy to encourage growth.
Interest rates rose as investors stopped wondering whether the Federal
Reserve Board would lower interest rates--as it had three times in autumn
1998--and began to wonder when the Fed would increase rates to slow growth and
thereby forestall inflation. Indeed, on the final day of the period, the Fed
boosted short-term rates by 0.25 percentage point. In the stock market, the
brighter economic outlook led to a change in leadership from glamorous
large-capitalization growth stocks to value stocks and small-cap stocks, both of
which had been among Wall Street's wallflowers in recent years.
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TOTAL RETURNS
PERIODS ENDED JUNE 30, 1999
---------------------------------
6 MONTHS 1 YEAR 5 YEARS*
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STOCKS
S&P 500 Index 12.4% 22.8% 27.9%
Russell 2000 Index 9.3 1.5 15.4
Wilshire 5000 Index 11.8 19.5 25.7
MSCI EAFE Index 4.1 7.9 8.5
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BONDS
Lehman Aggregate Bond Index -1.4% 3.2% 7.8%
Lehman 10 Year Municipal Bond Index -1.7 2.3 6.8
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.7 5.2
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OTHER
Consumer Price Index 1.4% 2.0% 2.3%
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*Annualized.
U.S. STOCK MARKETS
The rise in stock prices reflected the healthy domestic economy and improving
prospects for corporate earnings. The overall market, as measured by the
Wilshire 5000 Index, rose 11.8% during the period, while the S&P 500 Index, a
yardstick for large-cap stocks, gained 12.4%.
Large-cap growth stocks, which are generally perceived as less
vulnerable than other stocks to economic slowdowns, continued to lead the
market's climb during the first quarter of the year. During the second quarter,
however, value stocks--especially producers of commodity products such as oil,
aluminum, and chemicals--moved to the front of the pack. Providing support were
generally upbeat corporate profit reports. Indeed, earnings gains were
sufficient to send prices higher despite rising interest rates, which often
depress stock prices as well as bond prices. For the six months, the S&P 500
Index's value stocks posted a 14.0% return while its growth stocks gained 11.0%
as a group.
3
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Small-cap stocks, as measured by the Russell 2000 Index, gained 9.3%,
although that fact masks a remarkable turnaround: Small-caps declined 5.4%
during the first quarter of 1999, then advanced 15.6% during the second quarter.
Even so, the cumulative return of the Russell 2000 over the past three years
lags the S&P 500 Index by nearly 80 percentage points (+37.6% for the Russell
2000 versus +115.2% for the S&P 500).
Four of the top-performing sectors within the S&P 500 Index during the
half-year were solidly in the value camp--the "other energy" group (+40%);
producer durables (+26%); materials & processing (+25%); and integrated-oils
(+17%). The strongest growth-oriented sector was the irrepressible technology
group (+24%). The poor performance of the consumer staples sector (-8%) was due
in part to the gains of the U.S. dollar against most foreign currencies, which
reduced the value of earnings from overseas operations.
U.S. BOND MARKETS
The powerful economic expansion that buoyed corporate profits and stock prices
was too much of a good thing for the bond market. Inflation was well
behaved--consumer prices rose 1.4% for the six months and 2.0% for the twelve
months ended June 30--but investors and Fed policymakers clearly were concerned
that an overheated economy might yet trigger significant increases in wages and
overall prices. Certainly, there was no evidence of the "natural slowing" that
many analysts expected for the economy, which is in the longest peacetime
expansion ever.
Yields on U.S. Treasury bonds rose by approximately 1 percentage
point--a significant rise for a six-month period. The yield of the 30-year
Treasury bond rose 86 basis points, to 5.96% on June 30 from 5.10% on December
31, 1998. The yield of the 10-year Treasury rose 113 basis points, to 5.78% from
4.65%. Money market rates didn't rise as far: Yields on 3-month T-bills
increased on balance by only 33 basis points, to 4.78% on June 30. Bond prices,
which move in the opposite direction from interest rates, fell. The Lehman
Aggregate Bond Index, a benchmark for investment-grade taxable bonds, declined
1.4% on a total-return basis, as bond prices declined an average of 4.4%,
outweighing the 3.0% in interest income for the period.
INTERNATIONAL STOCK MARKETS
Led by sharp recoveries in stock prices in Japan and many emerging markets,
international stock prices generated positive returns in local currencies during
the six months. However, a pervasive rise in the value of the U.S. dollar
against other currencies reduced returns for U.S. investors (returns from abroad
are augmented when the dollar falls in value against other currencies).
Overall, the developed markets outside the United States gained 4.1% in
U.S.-dollar terms, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. The biggest increases were in the
Pacific region--up 27.3% in local-currency terms and 21.1% when measured in U.S.
dollars. Europe, which accounts for the lion's share of EAFE's market
capitalization, was up 8.2% in local currencies. But in U.S. dollars, the return
from European stocks was a negative 2.3%, as weakness in European
currencies--notably in the euro, the new 11-nation common currency--lopped more
than 10 percentage points from the local-currency returns. The MSCI Select
Emerging Markets Free Index shot up 31.5% in dollar terms, led by Asian markets
that rebounded from severe losses suffered in 1997 and 1998.
4
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REPORT FROM THE ADVISERS
[PHOTO]
The first half of 1999 was a rewarding period for Vanguard Morgan Growth Fund.
Our 14.3% return during the six months ended June 30 exceeded the returns of the
average growth stock fund and the Growth Fund Stock Index by 2.6 and 1.5
percentage points, respectively.
The rise in stock prices and in interest rates during the past
half-year has put stocks at stretched valuations, and we continue to be
surprised by the market's resiliency. In such an environment, it is hard to find
many bargains.
Historically, periods of tightening by the Federal Reserve Board, such
as we appear to be entering, have not been good for the financial-services
sector, the housing market, and highly leveraged companies. On the other hand,
the improving global growth picture should benefit areas that are more sensitive
to ups and downs in economic activity, including the industrial sector and some
parts of the technology sector.
A broadening in the stock market, especially during the second quarter,
was helpful. Before this expansion of investors' focus, the market's performance
had been dominated by the very largest stocks within the S&P 500. Although many
of these issues were growth stocks--and several were holdings of Morgan Growth
Fund--our stake in this group of very large stocks was smaller than their
weighting in the index.
The industry groups where our stock selections added the most value
versus our benchmarks during the half-year were consumer discretionary (up about
23% versus 15% for the S&P 500 Index), utilities (a return of about 31% versus
14% for the index), and technology (up about 31% for the fund, 24% for the
index). Our relative performance was also aided by our lighter stake (4% of fund
assets, on average, versus nearly 9% for the index) in consumer-staples stocks,
the worst-performing major industry group within the S&P 500 during the period.
An area in which our stock selections performed poorly was health care, where
our holdings returned about -12%, versus -2% for the index's health-care stocks.
There have been no large changes in our industry weightings since we
last reported to you six months ago. The biggest shifts, as a percentage of our
stock holdings, were in technology (up 2.9 percentage points); the catch-all
"other" category (up 2.3 percentage points); and in the health-care and
consumer-staples sectors (down 2.0 percentage points each).
Among our ten largest holdings, AT&T and Tele-Communications merged,
and we trimmed our positions in The Gap and Fannie Mae. New to the list of the
fund's ten largest holdings are Lucent Technologies, MCI WorldCom, and Tyco
International. Other significant purchases included the additions of Corning,
whose big fiber-optics business makes it a telecommunications play; Illinois
Tool Works, a superbly run global manufacturer with leadership positions in many
niche markets; and Boston Scientific, a fast-growing maker of medical devices.
America Online, which had been our second-largest holding
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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 fund
should provide gross returns that parallel those of other large, growth-oriented
mutual funds and net returns that exceed the group average.
- --------------------------------------------------------------------------------
5
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six months ago, is now number four. We reduced our AOL stake to lower the fund's
overall risk profile. Given the stock's hot performance during the half-year
(up 42%), the cutback hurt our performance relative to our benchmark index.
We sold a number of stocks in the consumer-discretionary and
consumer-staples groups. Volume growth has been sluggish, at best, for Coca-Cola
and PepsiCo. We eliminated our position in Barnes & Noble, reasoning that its
being a distant number two on the Internet to Amazon.com, while being saddled
with a lot of bricks and mortar, might not augur success. We sold CVS, which had
been a great long-term winner for us but whose momentum might be slowing. Whole
Foods Market, an interesting concept as an alternative to traditional
supermarkets, was sold because of concerns about the capability of its
management. We eliminated our stake in Papa John's, which had done well for us
but may be headed toward long-term saturation.
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 ranks 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
fundamentalchanges. The investment process is supported by in-depth, company
- -by-company examinations and evaluations by more than 30 global industry
analysts.
VANGUARD CORE MANAGEMENT GROUP
Vanguard Core Management Group uses computer models to rank some 3,000 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 14, 1999
6
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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.
TOTAL INVESTMENT RETURNS: DECEMBER 31, 1978-JUNE 30, 1999
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MORGAN GROWTH FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------------------
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
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MORGAN GROWTH FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------------------
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 21.1 1.2 22.3 28.6
1999* 14.3 0.0 14.3 12.4
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*Six months ended June 30, 1999.
See Financial Highlights table on page 17 for dividend and capital gains
information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1999
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10 YEARS
INCEPTION -----------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Morgan Growth Fund 12/31/1968 20.25% 26.53% 15.59% 1.78% 17.37%
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7
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FUND PROFILE
MORGAN GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of June 30,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
PORTFOLIO CHARACTERISTICS
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MORGAN S&P 500
- -----------------------------------------------------
Number of Stocks 332 500
Median Market Cap $22.3B $70.1B
Price/Earnings Ratio 28.6x 29.6x
Price/Book Ratio 4.7x 5.2x
Yield 0.6% 1.2%
Return on Equity 18.0% 22.4%
Earnings Growth Rate 19.0% 14.8%
Foreign Holdings 5.8% 1.6%
Turnover Rate 73%* --
Expense Ratio 0.44%* --
Cash Reserves 1.7% --
*Annualized.
INVESTMENT FOCUS
- ----------------
[GRID]
STYLE GROWTH
MARKET CAP LARGE
VOLATILITY MEASURES
- -----------------------------------------------------
MORGAN S&P 500
- -----------------------------------------------------
R-Squared 0.90 1.00
Beta 1.11 1.00
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -----------------------------------------------------
AT&T Corp.-Liberty Media Class A 2.4%
Home Depot, Inc. 2.1
Vodafone AirTouch PLC ADR 2.0
America Online, Inc. 2.0
Microsoft Corp. 1.9
Lucent Technologies, Inc. 1.7
American International Group, Inc. 1.6
Cisco Systems, Inc. 1.5
MCI WorldCom, Inc. 1.4
Tyco International Ltd. 1.3
- -----------------------------------------------------
Top Ten 17.9%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- --------------------------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1999
-------------------------------------------------
MORGAN MORGAN S&P 500
-------------------------------------------------
Auto & Transportation ............. 2.2% 1.7% 2.5%
Consumer Discretionary............. 21.6 23.3 12.8
Consumer Staples................... 5.2 3.6 7.8
Financial Services................. 21.6 16.7 16.5
Health Care........................ 12.7 11.3 11.1
Integrated Oils.................... 0.7 0.5 5.1
Other Energy....................... 3.2 1.1 1.4
Materials & Processing............. 5.3 3.1 3.5
Producer Durables.................. 5.3 5.4 3.5
Technology......................... 13.0 20.0 18.9
Utilities.......................... 6.3 8.6 11.3
Other.............................. 2.9 4.7 5.6
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8
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BETA. A measure of the magnitude of a fund'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 fund 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 fund'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 fund.
EXPENSE RATIO. The percentage of a fund'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 fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
INVESTMENT FOCUS. This grid indicates the focus of a fund 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 fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund'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 fund 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 fund, 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 fund, 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 fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund'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 fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund'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 that a fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 30%.) As
this percentage rises, a fund'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. Fund 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 fund's income from interest and dividends. The yield,
expressed as a percentage of the fund'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.
9
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FINANCIAL STATEMENTS
JUNE 30, 1999 (UNAUDITED)
[PHOTO]
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, 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.
- ------------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- ------------------------------------------------------------------------------
COMMON STOCKS (93.0%)(1)
- ------------------------------------------------------------------------------
Auto & Transportation (1.6%)
General Motors Corp. 203,900 $ 13,457
Delta Air Lines, Inc. 160,000 9,220
Werner Enterprises, Inc. 406,250 8,430
o Ryanair Holdings PLC 128,300 6,800
Delphi Automotive
Systems Corp. 278,733 5,174
Ford Motor Co. 73,000 4,120
o Navistar International Corp. 75,800 3,790
Burlington Northern
Santa Fe Corp. 116,100 3,599
PACCAR, Inc. 47,000 2,509
Meritor Automotive, Inc. 97,100 2,476
o UAL Corp. 28,900 1,879
Fleetwood Enterprises, Inc. 51,900 1,372
Tidewater Inc. 25,200 769
o Alaska Air Group, Inc. 10,200 426
Arctic Cat, Inc. 27,300 244
------
64,265
------
CONSUMER DISCRETIONARY (21.7%)
o AT&T Corp.-Liberty Media
Class A 2,720,000 99,960
Home Depot, Inc. 1,344,200 86,617
o America Online, Inc. 753,800 83,295
The Gap, Inc. 1,093,725 55,096
o Viacom Inc. Class B 1,214,800 53,451
Kimberly-Clark Corp. 734,700 41,878
Knight Ridder 675,300 37,099
Wal-Mart Stores, Inc. 735,900 35,507
o Federated Department
Stores, Inc. 510,500 27,025
o Outdoor Systems, Inc. 685,000 25,002
Dayton Hudson Corp. 379,000 24,635
- ------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ------------------------------------------------------------------------------
o Bed Bath & Beyond, Inc. 550,000 $ 21,175
o Univision Communications Inc. 246,900 16,295
Hasbro, Inc. 581,350 16,241
R.R. Donnelley & Sons Co. 420,700 15,592
o Tricon Global Restaurants, Inc. 276,300 14,955
Gannett Co., Inc. 198,000 14,132
The Walt Disney Co. 450,000 13,866
Premark International, Inc. 334,100 12,529
o Chancellor Media Corp. 225,000 12,403
Whirlpool Corp. 164,000 12,136
E.W. Scripps Co. Class A 225,000 10,702
Darden Restaurants Inc. 402,100 8,771
o Electronic Arts Inc. 148,500 8,056
May Department Stores Co. 191,700 7,836
o Clear Channel
Communications, Inc. 100,000 6,894
News Corp. Ltd. Pfd. ADR 205,000 6,470
McDonald's Corp. 151,000 6,238
TJX Cos., Inc. 182,000 6,063
Stewart Enterprises, Inc.
Class A 415,000 6,043
Time Warner, Inc. 81,000 5,954
o Valassis Communications, Inc. 157,050 5,752
Central Newspapers, Inc. 150,000 5,644
o Capstar Broadcasting Corp. 200,000 5,475
o AnnTaylor Stores Corp. 120,700 5,431
o Furniture Brands
International Inc. 187,400 5,224
o TV Guide, Inc. 139,000 5,091
o Best Buy Co., Inc. 74,300 5,015
o Brinker International, Inc. 184,000 5,002
o Yahoo!, Inc. 27,600 4,754
Tiffany & Co. 48,200 4,651
o AutoNation, Inc. 229,300 4,084
10
<PAGE>
- ------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ------------------------------------------------------------------------------
o Select Appointments
(Holdings) PLC 168,000 $ 4,032
Eastman Kodak Co. 58,300 3,950
Sears, Roebuck & Co. 88,000 3,922
o Iron Mountain, Inc. 128,300 3,673
o HomeBase, Inc. 556,800 3,515
Hertz Corp. Class A 55,600 3,447
o Snyder Communications, Inc. 105,200 3,445
o Kmart Corp. 204,400 3,360
o Office Depot, Inc. 141,000 3,111
Ethan Allen Interiors, Inc. 80,850 3,052
Maytag Corp. 40,300 2,808
American Greetings Corp.
Class A 90,500 2,726
Tandy Corp. 55,200 2,698
Ross Stores, Inc. 46,600 2,347
ServiceMaster Co. 112,800 2,115
o Flextech PLC 121,911 1,980
o World Color Press, Inc. 66,100 1,818
Carnival Corp. 26,300 1,276
o General Nutrition Cos., Inc. 49,100 1,145
Liz Claiborne, Inc. 26,400 964
o Neiman Marcus Group Inc. 33,900 871
o CDI Corp. 11,400 388
o Anchor Gaming 1,000 48
-------
904,730
-------
CONSUMER STAPLES (3.3%)
Philip Morris Cos., Inc. 826,200 33,203
IBP, Inc. 672,500 15,972
H.J. Heinz Co. 306,000 15,338
ConAgra, Inc. 560,300 14,918
o Safeway, Inc. 286,700 14,192
Albertson's, Inc. 253,800 13,087
Anheuser-Busch Cos., Inc. 167,000 11,847
Unilever NV ADR 129,464 9,030
SuperValu Inc. 157,600 4,048
Universal Corp. 102,200 2,906
Universal Foods Corp. 87,000 1,838
Interstate Bakeries Corp. 47,600 1,068
Food Lion Inc. Class A 61,900 735
o The Kroger Co. 25,600 715
Brown-Forman Corp. Class B 1,000 65
-------
138,962
-------
FINANCIAL SERVICES (15.7%)
American International
Group, Inc. 553,222 64,762
Citigroup, Inc. 1,145,850 54,428
Morgan Stanley Dean
Witter & Co. 338,200 34,666
Freddie Mac 579,100 33,588
Marsh & McLennan Cos., Inc. 427,250 32,257
First Data Corp. 650,000 31,809
Ace, Ltd. 950,000 26,838
Associates First Capital Corp. 592,000 26,233
Bank of America Corp. 351,274 25,753
The Equitable Cos. 359,300 24,073
Fannie Mae 346,100 23,665
Golden West Financial Corp. 232,500 22,785
Providian Financial Corp. 215,500 20,149
Fleet Financial Group, Inc. 452,400 20,075
J.P. Morgan & Co., Inc. 125,200 17,591
- ------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ------------------------------------------------------------------------------
American General Corp. 213,600 $ 16,100
Countrywide Credit
Industries, Inc. 335,000 14,321
Allstate Corp. 382,300 13,715
SunTrust Banks, Inc. 170,300 11,825
o BISYS Group, Inc. 180,000 10,530
Merrill Lynch & Co., Inc. 124,600 9,960
Heller Financial, Inc. 350,000 9,734
Dime Bancorp, Inc. 474,400 9,547
o Policy Management
Systems Corp. 275,000 8,250
National City Corp. 121,500 7,958
The Chase Manhattan Corp. 85,736 7,427
Cullen/Frost Bankers, Inc. 224,200 6,180
o Security Capital Group Inc. REIT
Class B 405,700 5,908
Legg Mason Inc. 136,666 5,262
Bear Stearns Co., Inc. 106,800 4,993
BankBoston Corp. 94,300 4,821
MBNA Corp. 150,000 4,594
Charter One Financial 160,200 4,456
FINOVA Group, Inc. 69,900 3,678
Deluxe Corp. 92,300 3,594
City National Corp. 83,500 3,126
Travelers Property Casualty Corp. 74,000 2,895
T. Rowe Price 74,300 2,851
The PMI Group Inc. 44,300 2,783
PNC Bank Corp. 48,200 2,778
AMBAC Financial Group Inc. 42,000 2,399
Hartford Life, Inc. 37,600 1,979
Franchise Finance Corp. of
America REIT 84,900 1,868
M & T Bank Corp. 3,300 1,815
MGIC Investment Corp. 32,400 1,575
Morgan Keegan, Inc. 77,000 1,458
KeyCorp 43,200 1,388
A.G. Edwards & Sons, Inc. 41,600 1,342
Sovereign Bancorp, Inc. 102,600 1,244
Old Republic International Corp. 60,300 1,044
UnionBanCal Corp. 28,800 1,040
o Alleghany Corp. 2,500 462
-------
653,572
-------
HEALTH CARE (10.5%)
Cardinal Health, Inc. 616,150 39,511
Abbott Laboratories 691,500 31,463
AstraZeneca PLC 760,000 29,783
Johnson & Johnson 269,500 26,411
Warner-Lambert Co. 376,675 26,132
PE Corp-PE Biosystems Group 215,000 24,671
o Pacificare Health Systems, Inc. 329,300 23,689
Pharmacia & Upjohn, Inc. 389,000 22,100
o Immunex Corp. 164,600 20,976
Baxter International, Inc. 335,000 20,309
o Genzyme Corp. 405,000 19,642
American Home Products Corp. 280,000 16,100
o Boston Scientific Corp. 284,700 12,509
Aetna Inc. 122,700 10,974
Bergen Brunswig Corp. Class A 590,000 10,177
o Gilead Sciences, Inc. 180,000 9,405
o AmeriSource Health Corp. 348,400 8,884
United Healthcare Corp. 106,400 6,663
11
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
o Covance, Inc. 260,300 $ 6,231
o Amgen, Inc. 100,200 6,100
Merck & Co., Inc. 82,300 6,090
o Millennium
Pharmaceuticals, Inc. 158,400 5,702
o Human Genome Sciences, Inc. 140,000 5,530
o MedImmune Inc. 74,700 5,061
Columbia/HCA Healthcare Corp. 214,200 4,886
Bristol-Myers Squibb Co. 66,400 4,677
Pfizer, Inc. 39,200 4,302
Omnicare, Inc. 307,500 3,882
Alpharma, Inc. Class A 109,100 3,880
C.R. Bard, Inc. 74,600 3,567
Mallinckrodt, Inc. 96,200 3,499
Mylan Laboratories, Inc. 127,100 3,368
o Express Scripts 52,600 3,166
o Genset ADR 175,000 2,734
o Sybron International Corp. 73,400 2,023
o Tenet Healthcare Corp. 69,500 1,290
o Trigon Healthcare, Inc. 32,900 1,197
Schering-Plough Corp. 13,700 726
o First Health Group Corp. 17,300 373
o Triad Hospitals, Inc. 14,315 193
o LifePoint Hospitals, Inc. 14,315 192
-------
438,068
-------
INTEGRATED OILS (0.5%)
USX-Marathon Group 314,100 10,228
Phillips Petroleum Co. 74,300 3,738
Mobil Corp. 31,600 3,128
Exxon Corp. 22,000 1,697
------
18,791
------
OTHER ENERGY (1.0%)
Halliburton Co. 300,000 13,575
Transocean Offshore, Inc. 475,000 12,469
Enron Corp. 142,700 11,666
Ashland, Inc. 66,400 2,664
Sunoco, Inc. 51,200 1,546
------
41,920
------
MATERIALS & PROCESSING (2.7%)
Engelhard Corp. 962,900 21,786
Louisiana-Pacific Corp. 841,600 19,988
Air Products & Chemicals, Inc. 475,000 19,119
Owens Corning 319,200 10,972
Sherwin-Williams Co. 354,800 9,846
Dow Chemical Co. 71,200 9,034
Lafarge Corp. 179,800 6,372
Archer-Daniels-Midland Co. 331,400 5,116
RPM Inc. (Ohio) 262,725 3,727
Fluor Corp. 91,100 3,690
USG Corp. 48,100 2,694
The Timber Co. 52,300 1,321
Homestake Mining Co. 138,900 1,137
Georgia Pacific Group 8,400 398
-------
115,200
-------
PRODUCER DURABLES (5.0%)
o Lexmark International Group,
Inc. Class A 622,000 41,091
United Technologies Corp. 350,502 25,127
Koninklijke (Royal) Philips
Electronics NV 184,000 18,561
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
Centex Corp. 453,100 $ 17,020
Nokia Corp. A ADR 170,000 15,566
Ingersoll-Rand Co. 234,450 15,151
o American Tower Corp. Class A 500,000 12,000
o LAM Research Corp. 223,200 10,421
o Alcatel SA ADR 300,000 8,512
o Crown Castle International Corp. 400,000 8,325
o Applied Materials, Inc. 107,200 7,919
Kaufman & Broad Home Corp. 204,800 5,094
Caterpillar, Inc. 72,200 4,332
o RF Micro Devices, Inc. 50,100 3,739
o Andrew Corp. 181,851 3,444
Herman Miller, Inc. 108,500 2,278
o Uniphase Corp. 11,500 1,909
o Gulfstream Aerospace Corp. 25,900 1,750
Pulte Corp. 71,200 1,642
The BFGoodrich Co. 36,000 1,530
o Dionex Corp. 26,977 1,093
Molex, Inc. 22,000 814
o Esterline Technologies Corp. 18,600 267
-------
207,585
-------
TECHNOLOGY (18.5%)
o Microsoft Corp. 874,100 78,833
Lucent Technologies, Inc. 1,028,600 69,366
o Cisco Systems, Inc. 955,100 61,425
Texas Instruments, Inc. 326,500 47,343
o General Instrument Corp. 880,900 37,438
Intel Corp. 540,300 32,148
Corning, Inc. 420,000 29,453
Motorola, Inc. 295,000 27,951
o Analog Devices, Inc. 530,000 26,599
o BMC Software, Inc. 455,000 24,570
o ADC Telecommunications, Inc. 508,000 23,146
o NCR Corp. 446,200 21,780
o Rational Software Corp. 657,200 21,647
o Tech Data Corp. 550,200 21,045
o Sterling Software, Inc. 712,100 19,004
o QUALCOMM, Inc. 125,000 17,938
o Adaptec, Inc. 497,600 17,571
o Apple Computer, Inc. 370,700 17,168
o Ceridian Corp. 490,000 16,017
o Computer Sciences Corp. 225,000 15,567
o Unisys Corp. 367,900 14,325
International Business
Machines Corp. 92,600 11,969
o Flextronics International Ltd. 175,000 9,713
o Solectron Corp. 138,800 9,256
o Comverse Technology, Inc. 118,200 8,924
Hewlett-Packard Co. 70,600 7,095
STMicroelectronics NV 100,000 6,937
o Oracle Corp. 177,650 6,595
o Seagate Technology Inc. 239,100 6,127
o Xilinx, Inc. 106,700 6,109
Computer Associates
International, Inc. 110,800 6,094
EG&G, Inc. 169,100 6,024
Adobe Systems, Inc. 56,800 4,666
o Symantec Corp. 170,300 4,343
o General Motors Corp. Class H 75,000 4,219
o Synopsys, Inc. 72,900 4,023
12
<PAGE>
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
o The SABRE Group Holdings, Inc. 57,600 $ 3,960
o American Management
Systems, Inc. 122,100 3,915
Electronic Data Systems Corp. 51,300 2,902
Harris Corp. 70,900 2,778
o Infoseek Corp. 50,000 2,397
o Gateway, Inc. 38,900 2,295
o Sun Microsystems, Inc. 29,000 1,997
o EMC Corp. 35,000 1,925
o Micron Technology, Inc. 34,500 1,391
o Arrow Electronics, Inc. 57,800 1,098
o Parametric Technology Corp. 66,000 916
o Adtran, Inc. 15,000 546
o Dell Computer Corp. 11,700 433
o Actel Corp. 28,800 425
o Electronics for Imaging, Inc. 6,000 308
Innovex, Inc. 19,000 266
o QLogic Corp. 1,500 198
o Computer Horizons Corp. 12,600 174
-------
770,352
-------
UTILITIES (8.0%)
Vodafone AirTouch PLC ADR 427,500 84,217
o MCI WorldCom, Inc. 660,100 56,810
Comcast Corp. Class A Special 1,248,900 48,005
o Intermedia
Communications Inc. 725,600 21,768
Reliant Energy, Inc. 520,732 14,385
o COLT Telecom Group PLC 680,800 14,284
o NTL Inc. 121,200 10,446
AT&T Corp. 185,057 10,328
Sempra Energy 401,000 9,073
o Western Wireless Corp. Class A 328,600 8,872
o MediaOne Group, Inc. 108,400 8,062
Swisscom AG ADR 155,000 5,948
Bell Atlantic Corp. 87,400 5,714
BellSouth Corp. 112,200 5,259
o McLeodUSA, Inc. Class A 95,000 5,225
o United International Holdings,
Inc. Class A 75,000 5,072
o United Pan-Europe
Communications NV 55,000 3,039
Public Service Enterprise
Group, Inc. 70,500 2,882
ALLTEL Corp. 39,900 2,853
Northern States Power Co. 100,700 2,436
Sprint Corp. 43,000 2,271
CenturyTel, Inc. 50,850 2,021
DTE Energy Co. 49,000 1,960
Ameritech Corp. 12,900 948
Edison International 32,200 861
GPU, Inc. 15,800 667
Southern Co. 24,600 652
-------
334,058
-------
OTHER (4.5%)
Tyco International Ltd. 593,304 56,216
General Electric Co. 275,300 31,109
Johnson Controls, Inc. 323,700 22,436
Illinois Tool Works, Inc. 230,000 18,860
Crane Co. 408,100 12,830
Monsanto Co. 290,000 11,437
Teleflex Inc. 139,100 6,042
- ------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ------------------------------------------------------------------------------
Norsk Hydro AS ADR 155,300 $ 5,940
AlliedSignal Inc. 79,400 5,002
Brunswick Corp. 170,700 4,758
Minnesota Mining &
Manufacturing Co. 49,300 4,286
Raytheon Co. Class B 57,100 4,018
Ogden Corp. 130,000 3,502
o Berkshire Hathaway Class A 37 2,549
Raytheon Co. Class A 1,957 135
o Berkshire Hathaway Inc. Class B 22 49
-------
189,169
-------
- ------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $2,640,484) 3,876,672
- ------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- ------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (7.2%)(1)
- ------------------------------------------------------------------------------
FEDERAL HOME LOAN
MORTGAGE CORP.
(2) 4.77%, 7/28/1999 $ 4,000 3,984
FEDERAL NATIONAL MORTGAGE ASSN.
(2) 4.75%, 7/22/1999 7,000 6,979
U.S. TREASURY BILL
(2) 4.53%, 8/5/1999 700 697
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.87% 7/1/1999 269,697 269,697
4.96%, 7/1/1999--Note F 18,661 18,661
- ------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $300,022) 300,018
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.2%)
(COST $2,940,506) 4,176,690
- ------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.2%)
- ------------------------------------------------------------------------------
Other Assets--Note C 30,563
Liabilities--Note F (38,718)
--------
(8,155)
- ------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------
Applicable to 190,588,103 outstanding
$.001 par value shares of beneficial
interest (unlimited authorization) $4,168,535
==============================================================================
NET ASSET VALUE PER SHARE $21.87
==============================================================================
*See Note A in Notes to Financial Statements.
oNon-Income-Producing Security.
(1)The fund invests a portion of its cash reserve in equity markets through the
use of index futures contracts. After giving effect to futures investments,
the fund's effective common stock and temporary cash investment positions
represent 98.3% and 1.9%, respectively, of net assets. See Note E in Notes
to Financial Statements.
(2)Securities with an aggregate value of $11,660,000 have been segregated as
initial margin for open futures contracts.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
13
<PAGE>
- ------------------------------------------------------------------------------
AMOUNT PER
MORGAN GROWTH FUND (000) SHARE
- ------------------------------------------------------------------------------
AT JUNE 30, 1999, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------
Paid in Capital $2,577,191 $13.51
Undistributed Net
Investment Income 13,033 .07
Accumulated Net
Realized Gains 333,517 1.75
Unrealized Appreciation--
Note E
Investment Securities 1,236,184 6.49
Futures Contracts 8,610 .05
- ------------------------------------------------------------------------------
NET ASSETS $4,168,535 $21.87
================================================================================
14
<PAGE>
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.
- ------------------------------------------------------------------------------
MORGAN GROWTH FUND
SIX MONTHS ENDED JUNE 30, 1999
(000)
- ------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $16,084
Interest 5,869
Security Lending 211
------
Total Income 22,164
------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 2,084
Performance Adjustment 90
The Vanguard Group--Note C
Management and Administrative 5,806
Marketing and Distribution 278
Custodian Fees 51
Auditing Fees 5
Shareholders' Reports 63
Trustees' Fees and Expenses 3
------
Total Expenses 8,380
Expenses Paid Indirectly--Note C (239)
------
Net Expenses 8,141
- ------------------------------------------------------------------------------
NET INVESTMENT INCOME 14,023
- ------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 328,102
Futures Contracts 13,143
- ------------------------------------------------------------------------------
REALIZED NET GAIN 341,245
- ------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 160,042
Futures Contracts 1,836
- ------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 161,878
- ------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $517,146
==============================================================================
15
<PAGE>
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, 1999 DEC. 31, 1998
<S> <C> <C>
(000) (000)
- --------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $14,023 $29,623
Realized Net Gain 341,245 286,705
Change in Unrealized Appreciation (Depreciation) 161,878 329,112
------------------------------
Net Increase in Net Assets Resulting from Operations 517,146 645,440
------------------------------
DISTRIBUTIONS
Net Investment Income -- (30,730)
Realized Capital Gain (109,269) (240,911)
------------------------------
Total Distributions (109,269) (271,641)
------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 372,504 622,565
Issued in Lieu of Cash Distributions 105,030 260,711
Redeemed (272,049) (497,205)
------------------------------
Net Increase from Capital Share Transactions 205,485 386,071
- --------------------------------------------------------------------------------------------------------
Total Increase 613,362 759,870
- --------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 3,555,173 2,795,303
------------------------------
End of Period $4,168,535 $3,555,173
========================================================================================================
1Shares Issued (Redeemed)
Issued 18,277 33,834
Issued in Lieu of Cash Distributions 5,329 13,960
Redeemed (13,341) (26,859)
------------------------------
Net Increase in Shares Outstanding 10,265 20,935
========================================================================================================
</TABLE>
16
<PAGE>
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, 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $19.72 $17.54 $15.63 $14.09 $11.36 $12.01
- ------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .07 .18 .160 .14 .15 .14
Net Realized and Unrealized Gain (Loss)
on Investments 2.68 3.61 4.435 3.07 3.89 (.34)
--------------------------------------------------------
Total from Investment Operations 2.75 3.79 4.595 3.21 4.04 (.20)
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.18) (.160) (.14) (.15) (.14)
Distributions from Realized Capital Gains (.60) (1.43) (2.525) (1.53) (1.16) (.31)
--------------------------------------------------------
Total Distributions (.60) (1.61) (2.685) (1.67) (1.31) (.45)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $21.87 $19.72 $17.54 $15.63 $14.09 $11.36
==================================================================================================================
TOTAL RETURN 14.28% 22.26% 30.81% 23.30% 35.98% -1.67%
==================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $4,169 $3,555 $2,795 $2,054 $1,471 $1,075
Ratio of Total Expenses to
Average Net Assets 0.44%* 0.44% 0.48% 0.51% 0.49% 0.50%
Ratio of Net Investment Income to
Average Net Assets 0.74%* 0.96% 0.93% 0.97% 1.10% 1.15%
Portfolio Turnover Rate 73%* 81% 76% 73% 76% 84%
==================================================================================================================
*Annualized.
</TABLE>
17
<PAGE>
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 CONTRACTS: 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, LLC
provide investment advisory services to the fund for fees calculated at an
annual percentage rate of average net assets. The basic fee is subject to
quarterly adjustments based on performance for the preceding three years,
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
$258,000 for the six months ended June 30, 1999.
18
<PAGE>
For the six months ended June 30, 1999, the advisory fee represented an
effective annual basic rate of 0.11% of the fund's average net assets before an
increase of $90,000 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. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At June 30, 1999, the fund had contributed capital of $609,000 to
Vanguard (included in Other Assets), representing 0.01% of the fund's net assets
and 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
security 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 management and administrative
expenses. For the six months ended June 30, 1999, these arrangements reduced the
fund's expenses by $239,000 (an annual rate of 0.01% of average net assets).
D. During the six months ended June 30, 1999, the fund purchased $1,298,521,000
of investment securities and sold $1,311,037,000 of investment securities, other
than temporary cash investments.
E. At June 30, 1999, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $1,236,184,000,
consisting of unrealized gains of $1,296,973,000 on securities that had risen in
value since their purchase and $60,789,000 in unrealized losses on securities
that had fallen in value since their purchase.
At June 30, 1999, the aggregate settlement value of open futures
contracts expiring in September 1999 and the related unrealized appreciation
were:
- --------------------------------------------------------------------------------
(000)
-------------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE APPRECIATION
- --------------------------------------------------------------------------------
S&P 500 430 $148,533 $6,265
S&P Midcap 400 338 70,870 2,345
- --------------------------------------------------------------------------------
F. The market value of securities on loan to broker/dealers at June 30, 1999,
was $21,121,000, for which the fund held cash collateral of $21,950,000. Cash
collateral received is invested in repurchase agreements.
19
<PAGE>
NOTICE TO SHAREHOLDERS ABOUT Y2K
As is well known by now, the approaching calendar change to 2000 has posed a
challenge to many computer systems worldwide. Computers that are not modified
could interpret "00" as 1900 rather than 2000 and produce errors in
date-dependent calculations, including bond interest payments, stock trade
settlements, retirement benefits, and other financial transactions.
OUR APPROACH
Vanguard has taken this challenge seriously. We have had a Year 2000 Project
under way since 1996 to fulfill our responsibility to safeguard our business
relationships and the security of our investors' accounts.
Our internal systems are Year 2000-compliant. They have been renovated
and thoroughly tested and are ready for the date change. As for the external
systems that connect with ours, we have been working for many months with
clients, business partners, and providers of products and services to assess
their compliance. We have analyzed the external services we require and have
developed contingency plans--including provision for alternative providers where
appropriate.
On New Year's Day, our telephone centers will be staffed and ready for
shareholder calls. However, we expect the volume of inquiries over the New
Year's weekend to be high, and we encourage shareholders to check their accounts
via our website or automated telephone systems, which offer much greater service
capacity and efficiency. This will also help our live representatives to provide
a higher level of service to those with specific transaction or other
service-related needs.
WHAT YOU CAN DO
We assure you we will protect our shareholders' records, so account records will
not be lost. Nevertheless, keeping copies of current records is always
advisable. You should keep at least your third-quarter statement and any
confirmations you receive from us between October 1, 1999, and year-end.
If you are a registered user of Access Vanguard(TM) (www.vanguard.com),
you can retrieve this information through the secure "Your Accounts" section and
print copies for your files. If you are not registered for Access Vanguard and
wish to have this flexibility, you should register as soon as possible so that
you can receive your password and become familiar with this service before the
New Year's weekend. Likewise, you may need personal identification numbers to
use our automated telephone services: Vanguard Tele-Account(R) for individual
investors (1-800-662-6273) and The VOICE(TM) Network for participants in
employer-sponsored retirement plans (1-800-523-1188).
Our Year 2000 Project's primary goal from the start has been to prepare
our systems for business as usual on behalf of our shareholders into 2000 and
beyond. We remain confident we will meet that goal, and we look forward to
serving you in the years to come.
20
<PAGE>
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and
Director/Trustee of The Vanguard Group, Inc.,
and each of the investment companies in The
Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer,
and Director/Trustee of The Vanguard Group, Inc.,
and each of the investment companies in
The Vanguard Group.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson &
Johnson; Director of Johnson & JohnsonoMerck
Consumer Pharmaceuticals Co., Women First
HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and
Women's Research and Education Institute.
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, Banco Bilbao
Gestinova, 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., NACCO Industries, and Newfield
Exploration Co.
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.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.;
Treasurer 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>
VANGUARD
MILESTONES
[PHOTO]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[PHOTO]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[PHOTO]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr.Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[SHIP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's
shareholders. It may not be distributed
to prospective investors unless it
is preceded or accompanied by the
current fund prospectus.
Q262-08/17/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
