<PAGE> 1
VANGUARD
MORGAN GROWTH
FUND
[PHOTO]
ANNUAL
REPORT
DECEMBER 31, 1998
[THE VANGUARD GROUP LOGO]
<PAGE> 2
AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 8,000 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.
This year, 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, 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.
- The 70th anniversary, on December 28, 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.
[GRAPHIC]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
4
REPORT FROM
THE ADVISERS
6
FUND PROFILE
8
PERFORMANCE SUMMARY
10
FINANCIAL STATEMENTS
11
REPORT OF
INDEPENDENT ACCOUNTANTS
21
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
[PHOTO]
JOHN J. BRENNAN
CHAIRMAN & CEO
[PHOTO]
JOHN C. BOGLE
SENIOR CHAIRMAN
In a year in which the U.S. stock market saw enough turbulence to keep
investors perched on their toes, large-capitalization growth stocks ultimately-
and brightly-shined. For the year, Vanguard Morgan Growth Fund earned +22.3%.
Our record was virtually equal to that of the average growth fund, as
both we and our peers provided returns that were more than double the long-term
average for stocks. However, we both fell well short of our unmanaged
benchmark, the Standard & Poor's 500 Composite Stock Price Index. The adjacent
table presents the twelve-month total returns (capital change plus reinvested
dividends) of Morgan Growth Fund, the average growth fund, and the S&P 500
Index.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
TOTAL RETURNS
YEAR ENDED
DECEMBER 31, 1998
- ---------------------------------------------------------
<S> <C>
Vanguard Morgan Growth Fund +22.3%
- ---------------------------------------------------------
Average Growth Fund +22.9%
- ---------------------------------------------------------
S&P 500 Index +28.6%
- ---------------------------------------------------------
</TABLE>
The fund's return is based on an increase in net asset value from $17.54
per share on December 31, 1997, to $19.72 per share on December 31, 1998,
adjusted for dividends totaling $0.18 per share paid from net investment income
and distributions totaling $1.43 per share from net realized capital gains. We
estimate that the fund will make a supplemental distribution of capital gains
of about $0.60 per share in March.
FINANCIAL MARKETS IN REVIEW
The U.S. economy grew at a robust pace--more than 3%--during 1998 as it
shrugged off the effects of serious financial problems in Asia, Russia, and
Latin America. Troubles abroad slowed demand for American exports and boosted
demand for imported goods, widening the U.S. trade deficit. But the domestic
economy got a powerful push from higher consumer spending, which was encouraged
by low unemployment (4.3% at year-end) and higher wages (up about 4%, well
above the 1.6% inflation rate).
The optimism that kept shopping malls and automobile showrooms busy was
also a factor in the financial markets. Stock prices shot up during the first
half of the year, despite news that corporate earnings actually dipped
slightly, and by July 17 the S&P 500 Index had gained +23.3%. But fears that
Asia's financial troubles were spreading worldwide touched off a sharp decline:
Over the following six weeks, the S&P 500 Index fell -19.2%. Declines were much
steeper for smaller stocks: The Russell 2000 Index of small-cap stocks fell
nearly -40% from its mid-April peak to its low in October.
The stock market then revived with remarkable speed and vigor. By
year-end, the S&P 500 Index was again in record territory, having gained +28.6%
for the year. This result, however, masked weakness elsewhere in the market.
The Wilshire 4500 Equity Index, which comprises stocks not included in the S&P
500, increased just +8.6%, while the Russell 2000 Index declined -2.5%. In all,
more stocks declined in price than rose. Among large-cap stocks, there was a
huge gap between returns on growth and value stocks: The S&P 500's growth
component gained +42.2% during the year, nearly three times the +14.7% return
on its value stocks.
1
<PAGE> 4
Interest rates declined on balance during 1998. Bond prices, which move in
the opposite direction from interest rates, generally rose. Price appreciation
accounted for 2 percentage points of the +8.7% total return of the Lehman
Brothers Aggregate Bond Index. Rates fell furthest--roughly 1 percentage
point--for U.S. Treasury securities. Treasury bond prices benefited from a
"flight to quality" as many investors shunned riskier securities.
1998 PERFORMANCE OVERVIEW
Large-capitalization growth stocks were way out in front of the stock market's
advance during 1998. Within the large-cap S&P 500 Index, performance was skewed
toward the very biggest stocks--the 50 largest within the index gained over
40%, while the remaining 450 earned less than 17%. The index is weighted
according to the market capitalization (stock price times number of shares
outstanding) of its component stocks, so the heftiest securities always have
the greatest influence--for good or ill--on its direction.
With gains so heavily concentrated in the very largest stocks, few mutual
funds could keep up with the index during 1998, when it outpaced all but 17% of
the nation's general equity funds. Morgan Growth Fund was not one of the select
few. Although our +22.3% return nearly matched the average growth fund's +22.9%
gain, we fell more than 6 percentage points behind the S&P 500's +28.6% return.
The primary reason for our shortfall versus the index was that our holdings,
while firmly in the large-growth category, were not as heavily concentrated in
the behemoth stocks that led the way. The median market capitalization of our
stocks is $17.8 billion, or about 30% as large as the S&P 500's median market
cap of $60.3 billion.
The fund's best-performing group was consumer-discretionary stocks,
including retailers, which represented about 22% of our assets during the year,
roughly double the index weighting. Our gain within this sector was +57% versus
+33% for the index group. The two sectors in which our performance most lagged
the index were health care and technology, where we earned fine absolute
returns of +23% and +48%, respectively. Even those hefty gains were far
outweighed by index returns of +44% for health-care stocks and +83% for
technology stocks.
As you know, during 1998 the fund reduced its lineup of investment
advisers from four to three. The reallocation of the portion of the fund that
Husic Capital Management had managed was completed last January. The adjacent
table shows the proportion of fund assets managed by each adviser as of
December 31, 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
TOTAL ASSETS MANAGED
DECEMBER 31, 1998
--------------------------
$ MILLION PERCENT
- ---------------------------------------------------------------
<S> <C> <C>
Franklin Portfolio Associates $1,515 43%
Wellington Management 1,390 39
Vanguard Core Management 541 15
Cash Reserve* 109 3
- ---------------------------------------------------------------
Total $3,555 100%
- ---------------------------------------------------------------
</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
As the table on page 3 shows, Morgan Growth Fund's +17.1% average annual return
over the past ten years outpaced the average growth fund's +16.3% return, but
trailed the S&P 500 Index's +19.2% gain. The table also shows the results--over
the past ten years--of hypothetical $10,000 investments made in the fund and in
its comparative benchmarks.
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Our 0.8-percentage-point annual margin over the average growth fund
translated into a difference of more than $3,200 in the amount earned over the
decade--or almost one-third of the original $10,000 investment. The shortfall
of more than 2 percentage points in comparison with the index was disappointing
but not particularly surprising, for a couple of reasons. First, the large-cap
growth stocks that dominated the S&P 500 Index are, on average, larger than
Morgan Growth Fund's typical holdings, since we hold some mid-cap growth stocks
along with the large-caps. Second, the index is a theoretical construct that,
unlike "flesh and blood" funds, incurs no operating costs, giving it an
advantage over even our low-cost funds. During 1998, our expenses amounted to
0.44% of average net assets, more than a percentage point lower than the 1.53%
expense ratio charged by the average growth fund.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
TOTAL RETURNS
10 YEARS ENDED
DECEMBER 31, 1998
-------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- ---------------------------------------------------------------
<S> <C> <C>
Vanguard Morgan Growth Fund +17.1% $48,434
- ---------------------------------------------------------------
Average Growth Fund +16.3% $45,189
- ---------------------------------------------------------------
S&P 500 Index +19.2% $57,963
- ---------------------------------------------------------------
</TABLE>
Morgan Growth Fund's total return surpassed 30% in two of the past ten
years, and exceeded 20% in four others. In only two years throughout this
period have our returns been negative, and then only slightly so: -1.5% in 1990
and -1.7% in 1994. While we are grateful for these results, they create two
potential dangers. The first is that investors may have unrealistic
expectations for future returns. Investors who base their plans on such
assumptions may fall well short of their financial goals if returns revert to
lower levels, as we would expect. The second danger is that investors may
underestimate the risks that are part of investing in growth stocks. Investors
who understand that downturns will occur, and are a risk that must be endured
in pursuit of investment rewards, may find it easier to stay on an even keel
when the seas get stormy.
IN SUMMARY
The past year demonstrated both the impressive rewards that the stock market
can provide and the sharp downturns that can sweep the market. Indeed, even
greater volatility--up and down--comes with the territory when investing in
growth stocks.
To help weather such uncertainty--and as a hedge against the possibility
that stocks won't be the best-performing asset class over any particular future
period--we recommend a balanced approach to investing. Select a mix of stock
funds, bond funds, and money market funds in proportions suited to your own
investment time horizon, financial situation, and tolerance for market
fluctuations. Once you've made such a plan, stick with it through the markets'
ups and downs. Morgan Growth Fund will "stay the course" by continuing to
invest in stocks with strong long-term growth potential.
<TABLE>
<S> <C>
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
January 22, 1999
</TABLE>
3
<PAGE> 6
THE MARKETS IN PERSPECTIVE
YEAR ENDED DECEMBER 31, 1998
[PHOTO]
Financial markets continued to produce solid overall gains during 1998. After
overcoming a sharp, six-week setback in July and August, the S&P 500 Index
gained 28.6% for the year, marking the first time the index had produced
returns of 20% or more in four consecutive years. Bond prices rose as interest
rates generally declined over the year. Returns from overseas stock markets
varied widely, with big gains in Europe, small gains in the Pacific, and losses
in most emerging markets.
U.S. STOCK MARKETS
Large-capitalization stocks--especially those of large growth companies--were
the best performers during 1998. The 50 largest stocks within the S&P 500 Index
earned more than 40%, while the return of the other 450 stocks was less than
17%. The stock market as a whole, as measured by the Wilshire 5000 Equity
Index, earned 23.4%. Small-cap stocks, represented by the Russell 2000 Index,
declined 2.5% for the year.
The huge gap between returns of large and small stocks was not the only
oddity during the year. Among large stocks there also was a large disparity in
performance between growth and value stocks. Within the S&P 500 Index, growth
stocks rose 42.2%, while value stocks were up 14.7%. The gap of 27.5 percentage
points is the largest in the 23 years that the growth and value components have
been tracked.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1998
--------------------------------------
1 YEAR 3 YEARS 5 YEARS
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 28.6% 28.2% 24.1%
Russell 2000 Index -2.5 11.6 11.9
MSCI EAFE Index 20.3 9.3 9.5
- ---------------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 8.7% 7.3% 7.3%
Lehman 10 Year Municipal Bond Index 6.8 6.8 6.4
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.1 5.2 5.1
- ---------------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.6% 2.2% 2.4%
- ---------------------------------------------------------------------------------------
</TABLE>
Stocks rose strongly during the first half of the year. But after hitting
a then-record high on July 17, the S&P 500 Index fell by 19.2% during the
following six weeks. Declines were steeper for most smaller stocks. The Russell
2000 Index fell nearly 40% from its peak in April before climbing back during
the fourth quarter.
The summer slump in stock prices reflected several factors that raised
anxiety among investors and prompted a reconsideration of risk that extended
past stocks to bonds. Among these factors were deteriorating corporate
earnings; Russia's default on its debts; sharp swings in currency exchange
rates; and lingering economic weakness in Asia.
Although these sources of uncertainty remained as the year went on, many
investors reacted not by abandoning stocks, but by selecting large, well-known
stocks they perceived as reliable vehicles for long-term growth. The strong
rebound in prices during the fourth quarter was due in large part to the
calming influence on jittery markets of the Federal Reserve Board's decision to
cut short-term interest rates by 0.75 percentage point.
4
<PAGE> 7
Technology stocks led the market's advance during 1998, rising 83%.
Investors were attracted by rapid revenue growth and a belief that consumers
and businesses will keep spending freely on computers, software, and computer
services. Speculation also played a role in the surge. Burgeoning activity on
the Internet sent many stocks, even those with no hint of profitability,
skyrocketing. The bulge in Internet stock prices prompted comparisons with such
historic asset "bubbles" as Japan's stock market in the late 1980s and the
tulip-bulb mania in Holland in the 1630s.
Health care and utilities, especially telecommunications providers, also
soared, achieving returns of more than 43%. Both sectors benefited from rising
demand for their products and a perception that they are somewhat protected
from foreign economic troubles and foreign competition. Consumer-related stocks
such as retailers also did well, reflecting strength in consumer spending.
Americans spent almost every after-tax dollar they earned during 1998. Jobs
were abundant; unemployment fell to 4.3% by year-end.
The worst-performing groups were two directly harmed by falling commodity
prices: oil drilling and services firms in the "other energy" category (-36%)
and materials & processing firms (-1%), such as paper, steel, and chemical
makers. Producer-durables companies, such as machinery and aircraft makers,
eked out a 2% return as companies saw falling sales abroad and rising
competition at home from foreign firms.
U.S. BOND MARKETS
The fall in interest rates during 1998 was steepest for U.S. Treasury
securities, which benefited from heightened aversion to risk among investors
and from a slight decrease in supply, thanks to a $70 billion federal budget
surplus. The low inflation rate--consumer prices were up just 1.6%--gave the
Federal Reserve the flexibility to cut short-term rates even though economic
growth was strong.
Yields on long-term Treasury issues fell by roughly 1 percentage point,
and the 30-year Treasury bond's yield was 5.09% on December 31. Lower rates
mean higher bond prices, and the Lehman Brothers Long U.S. Treasury Index
earned a total return of 13.5%, an astounding margin of nearly 12 percentage
points over the inflation rate.
Bonds lacking the unquestioned credit quality of Treasuries did not fare
as well, reflecting a repricing of risk and a "flight to quality" by investors
who began to feel they had been underestimating risk. One result was price
declines that nearly offset the interest earned on high-yield "junk" bonds.
However, high-quality corporate bonds and mortgage-backed securities generally
held up well. The Lehman Aggregate Bond Index, which encompasses Treasury,
mortgage, and high-quality corporate securities and has an intermediate-term
average maturity, earned a solid 8.7%.
Yields on long-term municipal bonds declined only slightly during the
year, and by December 31 were only a tad lower than yields on long-term
Treasuries. This was striking because the interest on municipals is exempt from
federal income tax.
INTERNATIONAL STOCK MARKETS
Europe's stock markets beat even the S&P 500 Index's gaudy return, gaining
28.7% in U.S.-dollar terms, with about 5% of the gain due to a fall in the
dollar versus most European currencies. Pacific-region stocks rose 2.6%,
although it took a fall in the dollar's value versus the Japanese yen to
overcome losses in local-currency terms. Overall, developed international
markets, as measured by the MSCI EAFE Index, earned 20.3%.
Investors' confidence in emerging markets continued to evaporate in 1998,
and stocks in these markets fell about 25% as a group. The few bright spots
included South Korea (+141%) and the Philippines (+13%), which had suffered big
declines in 1997.
5
<PAGE> 8
REPORT FROM THE ADVISERS
[PHOTO]
Vanguard Morgan Growth Fund earned 22.3% During 1998, slightly less than the
22.9% return of the average growth fund and well behind the returns of 28.2%
For the Growth Fund Stock Index and 28.6% for the S&P 500 Index.
Relatively poor stock selection--especially in the technology and
health-care sectors--was the principal reason that the fund underperformed our
comparative benchmarks. Part of the shortfall was due to the stocks we did
select--many of which registered gains that were robust, but not as strong as
those achieved by the overall market sectors. Our technology stocks, for
example, gained about 48% for the year, versus about 83% for the tech stocks in
the S&P 500 Index. Our health-care holdings returned about 23%, roughly 20
percentage points behind the 44% return for this sector within the index.
One reason that the fund, along with most of its peers, lagged the indexes
is that we held relatively small stakes in some of the very largest stocks
whose performances propelled the market. For example, we held on average less
than half the index weighting in the four largest tech stocks within the S&P
500 (Microsoft, Intel, IBM, and Cisco Systems). The gains of these four stocks,
which at year-end accounted for 8.6% of the S&P 500's market capitalization,
were 115%, 69%, 78%, and 150%, respectively. When the very largest stocks in
the index so dominate its performance, it is very difficult for diversified
funds to keep up.
Morgan Growth Fund's best-performing group was consumer discretionary, a
sector that benefited from the robust spending by consumers during the year.
Our stocks in this group gained 57%, led by our two largest holdings, America
Online, which rose nearly 600%, and Home Depot, which more than doubled during
1998.
CHANGES TO OUR HOLDINGS
Partly because of the sector's strong performance, the share of fund assets
invested in consumer-discretionary stocks rose to about 23% as of December 31,
1998, from 17% a year before. Other sectors where the fund meaningfully
increased its holdings during the year were technology (about 16% of net assets
versus 12% a year ago), utilities (9% versus 5%), and health care (13% versus
11%). Among stocks we added or increased our stake in were ADC
Telecommunications and Texas Instruments from the technology group; Abercrombie
& Fitch and Albertson's among consumer stocks; DTE Energy and MediaOne Group
from the utilities; and American Home Products and Baxter International from
the health-care sector.
The biggest reduction in the fund's aggregate weightings occurred in the
"other energy" category, where we went from about 6% of assets a year ago to
1%. This was due both to the sales of several holdings (including ENSCO
International and BJ Services) and to the sector's -54% return in our portfolio
6
<PAGE> 9
during 1998. The sector was devastated by falling oil prices, which resulted in
huge cutbacks in oil exploration and other capital expenditures.
We also cut back our holdings in the financial-services group (from about
19% of assets to 15%), with most of the reduction occurring after midyear, when
we decided to take profits on some of our biggest winners and to sell some
underperforming stocks. We significantly reduced our American Express holdings
and eliminated Bear Stearns and SLM Holding, while adding Associates First
Capital, Fleet Financial, and Marsh & McLennan.
As you know, Morgan Growth Fund uses three advisers to select its stocks.
Each chooses securities independently, according to its own methods, but they
share a common goal: long-term capital appreciation through investments in
growth stocks. Brief descriptions of each adviser's strategy follow.
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 seeks to identify companies with above-average prospects
for growth, especially in industries undergoing fundamental changes. The
investment process is supported by in-depth, company-by-company examinations by
more than 30 industry analysts with global expertise.
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 market
recognition. 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
January 13, 1999
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.
7
<PAGE> 10
FUND PROFILE
MORGAN GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of December
31, 1998, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on page 9.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -------------------------------------------
MORGAN S&P 500
- -------------------------------------------
<S> <C> <C>
Number of Stocks 338 500
Median Market Cap $17.8B $60.3B
Price/Earnings Ratio 28.1x 28.0x
Price/Book Ratio 4.5x 4.9x
Yield 0.6% 1.3%
Return on Equity 18.3% 22.5%
Earnings Growth Rate 18.9% 17.2%
Foreign Holdings 3.8% 1.6%
Turnover Rate 81% --
Expense Ratio 0.44% --
Cash Reserves 1.0% --
</TABLE>
INVESTMENT FOCUS
- -------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -------------------------------------------
MORGAN S&P 500
- -------------------------------------------
<S> <C> <C>
R-Squared 0.89 1.00
Beta 1.11 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -----------------------------------------------
<S> <C>
Home Depot, Inc. 3.2%
America Online, Inc. 2.8
AirTouch Communications, Inc. 2.0
Tele-Communications-TCI Group A 2.0
AT&T Corp. 2.0
Microsoft Corp. 1.7
The Gap, Inc. 1.5
Fannie Mae 1.5
American International Group, Inc. 1.4
Cisco Systems, Inc. 1.2
- -----------------------------------------------
Top Ten 19.3%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ----------------------------------------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1998
--------------------------------------------
MORGAN MORGAN S&P 500
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation ................ 3.4% 1.5% 2.5%
Consumer Discretionary................ 18.9 23.7 12.0
Consumer Staples...................... 5.1 5.6 9.8
Financial Services.................... 21.0 15.8 16.2
Health Care .......................... 12.2 13.3 12.5
Integrated Oils ...................... 1.0 1.3 5.2
Other Energy.......................... 6.2 1.1 0.9
Materials & Processing................ 5.2 2.9 3.7
Producer Durables .................... 5.3 6.1 3.2
Technology............................ 13.0 17.1 16.6
Utilities ............................ 5.6 9.2 11.7
Other ................................ 3.1 2.4 5.7
- ----------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
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. Funds
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
<PAGE> 12
PERFORMANCE SUMMARY
MORGAN GROWTH FUND
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely, so an investment in the fund
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: DECEMBER 31, 1978-DECEMBER 31, 1998
- -------------------------------------------------------------
MORGAN GROWTH FUNDS&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
1979 15.3% 3.5% 18.8% 18.4%
1980 30.5 4.2 34.7 32.4
1981 -7.1 2.3 -4.8 -4.9
1982 24.1 3.6 27.7 21.5
1983 25.8 2.6 28.4 22.5
1984 -8.1 2.0 -6.1 6.3
1985 27.5 2.8 30.3 31.8
1986 4.2 3.6 7.8 18.7
1987 3.3 1.7 5.0 5.3
1988 19.8 2.5 22.3 16.6
1989 19.9 2.8 22.7 31.7
1990 -4.4 2.9 -1.5 -3.1
1991 26.3 3.0 29.3 30.5
1992 8.1 1.4 9.5 7.6
1993 5.9 1.4 7.3 10.1
1994 -2.9 1.2 -1.7 1.3
1995 34.6 1.4 36.0 37.6
1996 22.3 1.0 23.3 23.0
1997 29.7 1.1 30.8 33.4
1998 21.1 1.2 22.3 28.6
- -------------------------------------------------------------
</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, 1988-DECEMBER 31, 1998
- ------------------------------------------------------------------------------------
Morgan Growth Fund Average Growth Fund S&P 500 Index
<S> <C> <C> <C> <C>
1988 12 10000 10000 10000
1989 03 10526 10687 10709
1989 06 11159 11529 11654
1989 09 12045 12706 12902
1989 12 12266 12544 13169
1990 03 12066 12239 12772
1990 06 12939 13108 13576
1990 09 10858 11011 11710
1990 12 12080 11857 12760
1991 03 14067 13902 14613
1991 06 13904 13772 14580
1991 09 14509 14833 15359
1991 12 15624 16136 16647
1992 03 15457 15907 16227
1992 06 15163 15427 16535
1992 09 15781 15938 17057
1992 12 17115 17393 17916
1993 03 17484 17795 18698
1993 06 17538 17906 18789
1993 09 18045 18800 19275
1993 12 18368 19234 19721
1994 03 17625 18469 18973
1994 06 17070 18080 19053
1994 09 18211 19067 19985
1994 12 18062 18821 19982
1995 03 19543 20096 21927
1995 06 21847 22103 24020
1995 09 24088 24000 25929
1995 12 24562 24618 27490
1996 03 26083 25786 28966
1996 06 27565 27010 30266
1996 09 28939 27814 31202
1996 12 30285 29354 33802
1997 03 29992 28815 34708
1997 06 34808 33481 40768
1997 09 39683 37137 43821
1997 12 39615 36781 45080
1998 03 44833 41177 51368
1998 06 46031 41979 53064
1998 09 38478 36602 47786
1998 12 48434 45189 57963
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1998
--------------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Morgan Growth Fund 22.26% 21.40% 17.09% $48,434
Average Growth Fund 22.86 18.63 16.28 45,189
S&P 500 Index 28.58 24.06 19.21 57,963
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------
10 YEARS
INCEPTION --------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Morgan Growth Fund 12/31/1968 22.26% 21.40% 15.32% 1.77% 17.09%
- ---------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
FINANCIAL STATEMENTS
DECEMBER 31, 1998
[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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- ------------------------------------------------------------------------
COMMON STOCKS (95.7%)(1)
- ------------------------------------------------------------------------
AUTO & TRANSPORTATION (1.4%)
<S> <C> <C>
- - AMR Corp. 161,600 $ 9,595
Airborne Freight Corp. 78,200 2,820
- - Alaska Air Group, Inc. 10,200 451
Arctic Cat, Inc. 27,300 278
Burlington Northern
Santa Fe Corp. 116,100 3,918
Delta Air Lines, Inc. 171,600 8,923
Fleetwood Enterprises, Inc. 155,800 5,414
Ford Motor Co. 73,000 4,284
Meritor Automotive, Inc. 97,100 2,057
- - Navistar International Corp. 77,100 2,197
PACCAR, Inc. 47,000 1,933
Skywest, Inc. 25,000 817
Tidewater Inc. 25,200 584
- - UAL Corp. 13,500 806
Werner Enterprises, Inc. 406,250 7,186
----------
51,263
----------
CONSUMER DISCRETIONARY (22.7%)
- - ADVO, Inc. 54,300 1,432
- - Abercrombie & Fitch Co. 140,000 9,905
- - America Online, Inc. 625,000 100,000
American Greetings Corp.
Class A 55,000 2,258
- - Anchor Gaming 1,000 56
- - Barnes & Noble, Inc. 101,400 4,309
- - Bed Bath & Beyond, Inc. 550,000 18,769
- - Brinker International, Inc. 184,000 5,313
- - CDI Corp. 11,400 230
- - CDW Computer Centers, Inc. 31,400 3,012
CanWest Global Communications
Corp. Class A 193,100 2,365
- - Capstar Broadcasting Corp. 250,000 5,719
Carnival Corp. 26,300 1,262
- - Chancellor Media Corp. 225,000 10,772
- - Clear Channel
Communications, Inc. 100,000 5,450
Darden Restaurants Inc. 346,200 6,232
Dayton Hudson Corp. 521,900 28,313
DELUXE CORP. 92,300 3,375
The Walt Disney Co. 375,000 11,250
R.R. Donnelley & Sons Co. 120,000 5,257
Eastman Kodak Co. 143,700 10,346
- - Electronic Arts Inc. 95,000 5,332
Ethan Allen Interiors, Inc. 53,900 2,210
- - Federated Department
Stores, Inc. 565,500 24,635
- - Furniture Brands
International Inc. 187,400 5,107
Gannett Co., Inc. 313,000 20,188
The Gap, Inc. 954,750 53,705
- - General Nutrition Cos., Inc. 49,100 798
- - Genesco, Inc. 86,100 490
Hasbro, Inc. 65,900 2,381
Hertz Corp. Class A 194,400 8,869
Home Depot, Inc. 1,876,100 114,794
- - Infinity Broadcasting Corp. 171,800 4,703
International Game Technology 36,000 875
- - Just for Feet, Inc. 43,700 759
- - Kmart Corp. 204,400 3,130
Kimberly-Clark Corp. 587,200 32,002
Knight Ridder 290,200 14,836
Liz Claiborne, Inc. 26,400 833
- - Lone Star Steakhouse &
Saloon, Inc. 19,800 182
Maytag Corp. 40,300 2,509
McDonald's Corp. 27,900 2,138
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- ------------------------------------------------------------------------
<S> <C> <C>
- - Michaels Stores, Inc. 43,900 $ 794
- - Neiman Marcus Group Inc. 61,600 1,536
News Corp. Ltd. ADR 295,400 7,810
News Corp. Ltd. Pfd. ADR 300,000 7,406
- - Office Depot, Inc. 221,400 8,178
- - Outdoor Systems, Inc. 610,000 18,300
- - Papa John's International, Inc. 98,400 4,342
Premark International, Inc. 314,100 10,876
- - Republic Industries, Inc. 229,300 3,382
- - Robert Half International, Inc. 62,300 2,784
Ross Stores, Inc. 46,600 1,835
E.W. Scripps Co. Class A 200,000 9,950
Sears, Roebuck & Co. 81,600 3,468
Select Appointments
(Holdings) PLC 325,000 6,988
- - Snyder Communications, Inc. 105,200 3,550
Stewart Enterprises, Inc. Class A 290,000 6,452
TJX Cos., Inc. 141,200 4,095
Tandy Corp. 68,800 2,834
- - Tele-Communications Liberty
Media Group Class A 1,400,000 64,487
- - Tele-Communications TCI
Ventures Group Series A 123,200 2,903
Tiffany & Co. 48,200 2,500
Time Warner, Inc. 30,000 1,862
- - U.S. Office Products Co. 14,249 55
- - Univision Communications Inc. 346,900 12,553
- - Valassis Communications, Inc. 58,400 3,015
- - Venator Group, Inc. 93,400 601
- - Viacom Inc. Class B 457,400 33,848
Wal-Mart Stores, Inc. 387,500 31,557
Waste Management, Inc. 6,000 280
Whirlpool Corp. 164,000 9,081
- - World Color Press, Inc. 66,100 2,012
----------
805,435
----------
CONSUMER STAPLES (5.4%)
Albertson's, Inc. 253,800 16,164
Anheuser-Busch Cos., Inc. 167,000 10,959
Bestfoods 64,000 3,408
Brown-Forman Corp. Class B 1,000 76
CVS Corp. 410,000 22,550
Coca-Cola Enterprises, Inc. 200,000 7,150
ConAgra, Inc. 78,000 2,457
Food Lion Inc. Class A 61,900 658
H.J. Heinz Co. 306,000 17,327
IBP, Inc. 418,900 12,200
Interstate Bakeries Corp. 404,200 10,686
- - The Kroger Co. 12,800 774
PepsiCo, Inc. 215,000 8,802
Philip Morris Cos., Inc. 383,200 20,501
Procter & Gamble Co. 69,200 6,319
- - Safeway, Inc. 191,000 11,639
SuperValu Inc. 157,600 4,413
- - Twinlab Corp. 65,600 861
Unilever NV ADR 130,000 10,782
Universal Corp. 377,600 13,263
Universal Foods Corp. 117,000 3,210
- - Whole Foods Market, Inc. 160,000 7,740
----------
191,939
----------
FINANCIAL SERVICES (15.1%)
Ace, Ltd. 950,000 32,716
- - Alleghany Corp. 13,400 2,518
Allstate Corp. 388,400 15,002
AMBAC FINANCIAL GROUP INC. 42,000 2,528
American Express Co. 45,000 4,601
American General Corp. 51,000 3,978
American International
Group, Inc. 518,522 50,102
Associates First Capital Corp. 449,654 19,054
- - BISYS Group, Inc. 180,000 9,292
Bank One Corp. 26,070 1,331
BankAmerica Corp. 471,505 28,349
BankBoston Corp. 94,300 3,672
The CIT Group, Inc. 150,000 4,772
Capital One Financial Corp. 157,500 18,112
The Chase Manhattan Corp. 105,936 7,210
Citigroup, Inc. 418,900 20,736
Comdisco, Inc. 89,000 1,502
Conseco Inc. 616,600 18,845
Dime Bancorp, Inc. 474,400 12,542
A.G. Edwards & Sons, Inc. 41,600 1,550
The Equitable Cos. 359,300 20,794
Freddie Mac 351,500 22,650
Fannie Mae 701,600 51,918
First Data Corp. 798,100 25,290
Fleet Financial Group, Inc. 452,400 20,217
Franchise Finance Corp. of
America REIT 84,900 2,038
Golden West Financial Corp. 17,300 1,586
Heller Financial, Inc. 350,000 10,281
KeyCorp 43,200 1,382
Legg Mason Inc. 326,066 10,291
M & T Bank Corp. 3,300 1,712
MBNA Corp. 190,200 4,743
MGIC Investment Corp. 32,400 1,290
Marsh & McLennan Cos., Inc. 377,250 22,046
Merrill Lynch & Co., Inc. 130,000 8,677
Morgan Keegan, Inc. 175,000 3,292
Morgan Stanley Dean
Witter & Co. 182,100 12,929
National City Corp. 49,600 3,596
Old Republic International Corp. 60,300 1,357
The PMI Group Inc. 44,300 2,187
PNC Bank Corp. 48,200 2,609
- - Policy Management
Systems Corp. 300,000 15,150
Providian Financial Corp. 30,600 2,295
Ryder System, Inc. 16,800 437
SunTrust Banks, Inc. 33,300 2,547
Transamerica Corp. 27,500 3,176
Travelers Property Casualty Corp. 74,000 2,294
U.S. Bancorp 445,000 15,797
UnionBanCal Corp. 28,800 981
Wachovia Corp. 34,500 3,017
Washington Mutual, Inc. 41,496 1,585
----------
536,576
----------
HEALTH CARE (12.7%)
Abbott Laboratories 580,000 28,420
- - Agouron Pharmaceuticals, Inc. 150,000 8,813
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ------------------------------------------------------------------------
<S> <C> <C>
Allegiance Corp. 11,600 $ 541
Alpharma, Inc. Class A 60,100 2,122
American Home Products Corp. 557,700 31,405
- - AmeriSource Health Corp. 174,200 11,323
- - Amgen, Inc. 56,700 5,929
Baxter International, Inc. 323,200 20,786
Bristol-Myers Squibb Co. 33,200 4,443
Cardinal Health, Inc. 502,550 38,131
Columbia/HCA Healthcare Corp. 613,200 15,177
- - Covance, Inc. 190,000 5,534
- - Express Scripts 52,600 3,531
- - First Health Group Corp. 17,300 287
- - Genentech, Inc. 195,900 15,611
- - Genzyme Corp. 350,000 17,413
- - Gilead Sciences, Inc. 180,000 7,391
Guidant Corp. 32,100 3,539
HBO & Co. 374,200 10,735
- - Human Genome Sciences, Inc. 115,000 4,090
- - Immunex Corp. 90,000 11,323
Johnson & Johnson 184,300 15,458
McKesson Corp. 527,600 41,713
- - MedImmune Inc. 12,800 1,273
Merck & Co., Inc. 28,100 4,150
Mylan Laboratories, Inc. 245,100 7,721
Omnicare, Inc. 547,400 19,022
- - PacifiCare Health Systems, Inc.
Class B 219,700 17,466
Pharmacia & Upjohn, Inc. 370,000 20,951
Pfizer, Inc. 24,200 3,036
Schering-Plough Corp. 73,700 4,072
- - Sierra Health Services 11,400 240
- - Tenet Healthcare Corp. 217,400 5,707
- - Total Renal Care Holdings, Inc. 480,000 14,190
- - Trigon Healthcare, Inc. 32,900 1,228
Warner-Lambert Co. 262,800 19,759
Zeneca Group PLC ADR 660,000 29,618
----------
452,148
----------
INTEGRATED OILS (1.3%)
Ashland, Inc. 66,400 3,212
Enron Corp. 299,800 17,107
Exxon Corp. 52,700 3,854
Mobil Corp. 51,700 4,504
Phillips Petroleum Co. 74,300 3,167
Sunoco, Inc. 51,200 1,846
USX-Marathon Group 380,000 11,448
----------
45,138
----------
OTHER ENERGY (1.0%)
- - AES Corp. 99,200 4,700
Halliburton Co. 300,000 8,888
- - Rowan Cos., Inc. 48,900 489
Schlumberger Ltd. 160,000 7,380
Transocean Offshore, Inc. 513,800 13,776
- - Veritas DGC Inc. 161,100 2,094
----------
37,327
----------
MATERIALS & PROCESSING (2.8%)
Air Products & Chemicals, Inc. 300,000 12,000
Dow Chemical Co. 111,000 10,094
Eastman Chemical Co. 5,400 242
Engelhard Corp. 711,300 13,870
Fluor Corp. 254,600 10,836
Fort James Corp. 40,700 1,628
The Timber Co. 52,300 1,245
Louisiana-Pacific Corp. 680,500 12,462
Millennium Chemicals, Inc. 103,700 2,061
Norsk Hydro AS ADR 155,300 5,309
Owens Corning 277,100 9,820
PPG Industries, Inc. 51,800 3,017
Precision Castparts Corp. 31,100 1,376
RPM Inc. (Ohio) 262,725 4,204
Rayonier Inc. 22,900 1,052
Reynolds Metals Co. 1,000 53
- - Security Capital Group Inc.
Class B 355,700 4,824
The Timken Co. 25,200 476
USG Corp. 48,100 2,450
USX-U.S. Steel Group 90,600 2,084
----------
99,103
----------
PRODUCER DURABLES (5.9%)
Alcatel SA ADR 765,000 18,695
- - Andrew Corp. 129,451 2,136
Caterpillar, Inc. 171,100 7,871
Centex Corp. 453,100 20,418
- - Champion Enterprises, Inc. 178,900 4,897
- - Dionex Corp. 26,977 988
- - Esterline Technologies Corp. 18,600 405
- - General Motors Corp. Class H 75,000 2,977
- - Gulfstream Aerospace Corp. 239,500 12,753
Ingersoll-Rand Co. 600,750 28,198
Kaufman & Broad Home Corp. 204,800 5,888
- - Lexmark International Group,
Inc. Class A 234,100 23,527
Herman Miller, Inc. 108,500 2,916
Molex, Inc. 22,000 839
Northern Telecom Ltd. 8,500 426
Perkin-Elmer Corp. 135,000 13,171
Philips Electronics NV 342,200 23,163
Pitney Bowes, Inc. 64,600 4,268
Pulte Corp. 71,200 1,980
Sundstrand Corp. 33,400 1,733
Technitrol, Inc. 103,800 3,309
United Technologies Corp. 218,600 23,773
Xerox Corp. 40,700 4,803
----------
209,134
----------
TECHNOLOGY (16.3%)
- - ADC Telecommunications, Inc. 1,176,000 40,866
- - Actel Corp. 28,800 576
Adobe Systems, Inc. 36,000 1,683
- - Adtran, Inc. 15,000 275
- - Advanced Micro Devices, Inc. 36,000 1,042
- - Altera Corp. 42,000 2,557
- - American Tower Corp. Class A 450,000 13,303
- - Apple Computer, Inc. 695,700 28,480
- - Ascend Communications, Inc. 325,000 21,369
- - BMC Software, Inc. 400,000 17,825
- - Cadence Design Systems, Inc. 116,600 3,469
- - Cisco Systems, Inc. 470,650 43,682
Compaq Computer Corp. 237,291 9,951
Computer Associates
International, Inc. 117,000 4,987
- - Computer Horizons Corp. 12,600 335
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- ------------------------------------------------------------------------
<S> <C> <C>
Computer Sciences Corp. 477,900 $ 30,795
- - Compuware Corp. 53,800 4,203
- - Comverse Technology, Inc. 78,800 5,595
- Creative Technology Ltd. 44,000 660
- - Crown Castle International Corp. 310,000 7,285
- - Dell Computer Corp. 127,800 9,353
EG&G, Inc. 201,100 5,593
- - EMC Corp. 450,000 38,250
Electronic Data Systems Corp. 232,400 11,678
- - FORE Systems, Inc. 195,400 3,578
- - Flextronics International Ltd. 80,500 6,893
- - Gateway 2000, Inc. 38,900 1,991
- - General Instrument Corp. 440,900 14,963
Hewlett-Packard Co. 27,500 1,879
- - Ingram Micro, Inc. 398,200 13,887
Innovex, Inc. 19,000 261
Intel Corp. 252,600 29,949
International Business
Machines Corp. 42,200 7,796
- - Learning Co., Inc. 569,200 14,764
- - Littelfuse, Inc. 100 2
- - Microsoft Corp. 424,400 58,859
- - NCR Corp. 255,200 10,655
- - Oracle Corp. 180,500 7,784
- - Parametric Technology Corp. 66,000 1,073
- - Rational Software Corp. 200,000 5,300
- - SCI Systems, Inc. 101,500 5,862
- - The SABRE Group Holdings, Inc. 13,400 596
- - Seagate Technology 149,100 4,510
- - Sterling Software, Inc. 506,800 13,715
- - STMicroelectronics N.V. 15,500 1,210
- - Storage Technology Corp. 600 21
- - Sun Microsystems, Inc. 70,700 6,054
- - Tech Data Corp. 161,100 6,484
- - Tellabs, Inc. 219,100 15,022
Texas Instruments, Inc. 320,000 27,380
- - Unisys Corp. 281,500 9,694
- - Yahoo!, Inc. 26,700 6,326
----------
580,320
----------
UTILITIES (8.8%)
AT&T Corp. 923,800 69,516
- - AirTouch Communications, Inc. 1,007,400 72,659
ALLTEL Corp. 39,900 2,387
BellSouth Corp. 131,200 6,544
Century Telephone
Enterprises, Inc. 33,900 2,288
- - COLT Telecom Group PLC ADR 876,600 13,075
- - Cox Communications Class A 72,000 4,977
DTE Energy Co. 289,600 12,417
Edison International 32,200 898
GPU, Inc. 15,800 698
GTE Corp. 45,300 2,945
Houston Industries, Inc. 468,132 15,039
- - Intermedia Communications Inc. 664,500 11,463
- - MCI WorldCom, Inc. 434,500 31,175
- - MediaOne Group, Inc. 342,400 16,093
- - NTL Inc. 121,200 6,840
- - Northeast Utilities 126,400 2,022
Public Service Enterprise
Group, Inc. 305,400 12,216
Sempra Energy 642,800 16,311
Southern Co. 24,600 715
- - Swisscom AG ADR 185,000 7,874
- - Tele-Communications-TCI
Group A 82,900 4,585
----------
312,737
----------
OTHER (2.3%)
- - Berkshire Hathaway Class A 71 4,952
- - Ceridian Corp. 320,000 22,340
Crane Co. 314,700 9,500
General Electric Co. 275,300 28,098
Harris Corp. 54,800 2,007
Ogden Corp. 272,100 6,820
Raytheon Co. Class A 1,957 101
Raytheon Co. Class B 6,600 351
Trinity Industries, Inc. 79,600 3,065
Tyco International Ltd. 43,204 3,259
----------
80,493
----------
- ------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $2,325,472) 3,401,613
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (6.2%)
- ------------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY BILLS
(2) 3.887%, 1/21/1999 $ 7,700 7,684
(2) 4.429%, 1/7/1999 1,000 1,000
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.76%, 1/4/1999 163,499 163,499
4.77%, 1/4/1999--Note G 49,747 49,747
- ------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $221,929) 221,930
- ------------------------------------------------------------------------
TOTAL INVESTMENTS (101.9%)
(COST $2,547,401) 3,623,543
- ------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.9%)
- ------------------------------------------------------------------------
Other Assets--Note C 32,047
Liabilities--Note G (100,417)
----------
(68,370)
- ------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------
Applicable to 180,322,761 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $3,555,173
========================================================================
NET ASSET VALUE PER SHARE $19.72
========================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
-Non-Income-Producing Security.
(1)The fund invests a portion of its cash reserves 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 99.0% and 2.9%, respectively, of net assets.
See Note F in Notes to Financial Statements.
(2)Securities with an aggregate value of $8,684,000 have been segregated as
initial margin for open futures contracts.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
14
<PAGE> 17
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------
AT DECEMBER 31, 1998, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $2,371,706 $13.15
Overdistributed Net
Investment Income (990) --
Accumulated Net
Realized Gains 101,541 .56
Unrealized Appreciation--Note F
Investment Securities 1,076,142 5.97
Futures Contracts 6,774 .04
- ------------------------------------------------------------------------
NET ASSETS $3,555,173 $19.72
========================================================================
</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, 1998
(000)
- -------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 29,713
Interest 12,374
Security Lending 890
----------
Total Income 42,977
----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 3,611
Performance Adjustment 423
The Vanguard Group--Note C
Management and Administrative 8,626
Marketing and Distribution 594
Taxes (other than income taxes) 116
Custodian Fees 95
Auditing Fees 9
Shareholders' Reports 102
Annual Meeting and Proxy Costs 16
Trustees' Fees and Expenses 6
----------
Total Expenses 13,598
Expenses Paid Indirectly--Notes C & D (244)
----------
Net Expenses 13,354
- -------------------------------------------------------------------------------------
NET INVESTMENT INCOME 29,623
- -------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 266,070
Futures Contracts 20,635
- -------------------------------------------------------------------------------------
REALIZED NET GAIN 286,705
- -------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 324,600
Futures Contracts 4,512
- -------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 329,112
- -------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $645,440
=====================================================================================
</TABLE>
16
<PAGE> 19
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
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,
-----------------------------
1998 1997
(000) (000)
- -------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 29,623 $ 22,625
Realized Net Gain 286,705 345,022
Change in Unrealized Appreciation (Depreciation) 329,112 275,975
---------------------------
Net Increase in Net Assets Resulting from Operations 645,440 643,622
---------------------------
DISTRIBUTIONS
Net Investment Income (30,730) (22,504)
Realized Capital Gain (240,911) (352,704)
---------------------------
Total Distributions (271,641) (375,208)
---------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 622,565 413,455
Issued in Lieu of Cash Distributions 260,711 360,202
Redeemed (497,205) (300,535)
---------------------------
Net Increase from Capital Share Transactions 386,071 473,122
- -------------------------------------------------------------------------------------
Total Increase 759,870 741,536
- -------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 2,795,303 2,053,767
---------------------------
End of Year $3,555,173 $2,795,303
=====================================================================================
(1)Shares Issued (Redeemed)
Issued 33,834 23,640
Issued in Lieu of Cash Distributions 13,960 21,663
Redeemed (26,859) (17,290)
---------------------------
Net Increase in Shares Outstanding 20,935 28,013
=====================================================================================
</TABLE>
17
<PAGE> 20
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the
fund; and the extent to which the fund tends to distribute capital gains. The
table also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
MORGAN GROWTH FUND
YEAR ENDED DECEMBER 31,
----------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $17.54 $15.63 $14.09 $11.36 $12.01
- ----------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .18 .160 .14 .15 .14
Net Realized and Unrealized Gain (Loss) on Investments 3.61 4.435 3.07 3.89 (.34)
----------------------------------------------------
Total from Investment Operations 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 (1.43) (2.525) (1.53) (1.16) (.31)
----------------------------------------------------
Total Distributions (1.61) (2.685) (1.67) (1.31) (.45)
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $19.72 $17.54 $15.63 $14.09 $11.36
================================================================================================================
TOTAL RETURN 22.26% 30.81% 23.30% 35.98% -1.67%
================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $3,555 $2,795 $2,054 $1,471 $1,075
Ratio of Total Expenses to Average Net Assets 0.44% 0.48% 0.51% 0.49% 0.50%
Ratio of Net Investment Income to Average Net Assets 0.96% 0.93% 0.97% 1.10% 1.15%
Portfolio Turnover Rate 81% 76% 73% 76% 84%
================================================================================================================
</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: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid
and asked prices. Prices are taken from the primary market in which each
security trades. Temporary cash investments acquired over 60 days to maturity
are valued using the latest bid prices or using valuations based on a matrix
system (which considers such factors as security prices, yields, maturities,
and ratings), both as furnished by independent pricing services. Other
temporary cash investments are valued at amortized cost, which approximates
market value. Securities for which market quotations are not readily available
are valued by methods deemed by the Board of Trustees to represent fair value.
2. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.
4. FUTURES: The fund uses S&P 500 and S&P Midcap 400 Index futures
contracts to a limited extent, with the objective of maintaining full exposure
to the stock market while maintaining liquidity. The fund may purchase or sell
futures contracts to achieve a desired level of investment, whether to
accommodate portfolio turnover or cash flows from capital share transactions.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of stocks held by the fund and the
prices of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Wellington Management Company, and Franklin Portfolio Associates provide
investment advisory services to the fund for fees calculated at an annual
percentage rate of average net assets. The basic 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 $317,000
for the year ended December 31, 1998.
19
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS (continued)
Prior to February 1, 1998, Husic Capital Management served as an adviser to
the fund; effective February 1, 1998, assets managed by Husic Capital
Management were reallocated to Franklin Portfolio Associates and Vanguard.
For the year ended December 31, 1998, the advisory fee represented an
effective annual basic rate of 0.12% of the fund's average net assets before an
increase of $423,000 (0.01%) 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 December 31, 1998, the fund had contributed capital of $588,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net
assets and 0.8% 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 administrative expenses. For the
year ended December 31, 1998, directed brokerage arrangements reduced the
fund's expenses by $241,000 (an annual rate of 0.01% of average net assets).
D. The fund's custodian bank has agreed to reduce its fees when the fund
maintains cash on deposit in the noninterest-bearing custody account. For the
year ended December 31, 1998, custodian fee offset arrangements reduced
expenses by $3,000.
E. During the year ended December 31, 1998, the fund purchased $2,703,409,000
of investment securities and sold $2,313,206,000 of investment securities,
other than temporary cash investments.
F. At December 31, 1998, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $1,076,142,000,
consisting of unrealized gains of $1,147,086,000 on securities that had risen
in value since their purchase and $70,944,000 in unrealized losses on
securities that had fallen in value since their purchase.
At December 31, 1998, 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 500 294 $91,544 $4,011
S&P Midcap 400 139 27,227 2,763
--------------------------------------------------------------------
</TABLE>
G. The market value of securities on loan to broker/dealers at December 31,
1998, was $48,219,000, for which the fund held cash collateral of $49,747,000.
Cash collateral received is invested in repurchase agreements.
20
<PAGE> 23
REPORT OF INDEPENDENT
ACCOUNTANTS
[PHOTO]
To the Shareholders and Trustees 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, 1998, 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, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 2, 1999
21
<PAGE> 24
SPECIAL 1998 TAX INFORMATION (UNAUDITED) FOR VANGUARD MORGAN GROWTH FUND
This information for the fiscal year ended December 31, 1998, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $236,103,000 as capital gain dividends (from net
long-term capital gains) to shareholders during the fiscal year ended
December 31, 1998, all of which is designated as a 20% rate gain
distribution.
For corporate shareholders, 93.9% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received
deduction.
22
<PAGE> 25
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.
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.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & Johnson * Merck 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.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company
is the owner of trademarks and copyrights relating to the Russell Indexes.
"Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire Associates.
<PAGE> 26
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.
[PHOTO]
[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.
Q260-02/17/1999
(C) 1999 Vanguard Marketing
Corporation, Distributor.
All rights reserved.
